Todd Kehrli - EVC Group Joshua Levine - President, CEO & Director Shig Hamamatsu - Interim CFO

Brooks O'Neil - Lake Street Capital Markets Anthony Petrone - Jefferies Brandon Henry - RBC Capital Markets Joshua Jennings - Cowen and Company Tycho Peterson - JPMorgan Chase & Co.

Good day, ladies and gentlemen, and welcome to the Q1 2019 Accuray Incorporated Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference Todd Kehrli with EVC Group. Please go ahead.

Thank you, Operator. Good afternoon, and welcome to Accuray's fiscal first quarter earnings conference call. With me on today's call are Josh Levine, Accuray's President and Chief Executive Officer; and Shig Hamamatsu, Accuray's Interim Chief Financial Officer. Before we begin, I'd like to remind everyone that on today's call, management will make forward-looking statements that involve risks and uncertainties, including statements regarding our future results as well as 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 our products, our ability to develop new products or enhance existing products, commercial execution, future order growth, future revenue growth, future margin expansion, and macroeconomic factors outside the company's control. These and other risk factors are more fully described in the press release we issued 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 of our forward-looking statements. Two housekeeping items: first, during the question-and-answer session we request that questioners limit themselves to two questions and then requeue with any follow-up's. Second, all references we make to a specific quarter in the prepared remarks are to our fiscal quarters. For example, statements regarding our fiscal first quarter refer to our fiscal first quarter ended September 30, 2018. With that said, I'll now turn the call over to Accuray's President and Chief Executive Officer, Josh Levine.

Thank you, Todd. Good afternoon, everyone, and thank you for joining us on today's call. Before we begin, I would like to introduce Shig Hamamatsu, our interim CFO was is joining me on the call today. Shig was our VP of Finance and Chief Accounting Officer before assuming the role of interim CFO on October 1. Shig has done a great job as the Interim CFO during this transition. With regards to Q1 performance, we had a solid start to our fiscal year 2019. First quarter gross orders of $61.4 million were up 10% year-over-year with a specially strong demand for our Radixact System. Gross orders for our Radixact System were more than doubled year-over-year receiving approximately 25 system orders, highlighting the growing market interest and adoption of our newest generation treatment offering. The strength in Radixact orders also highlights our expanding customer base with more orders coming from community and regional-based hospitals. Breaking down gross orders by type, approximately half of our Q1 orders were for new vaults. We also had a strong quarter for competitive replacements, which more than doubled year-over-year and represented approximately 40% of our gross orders for the quarter. Again, this activity was driven by our Radixact product line. It is important to note that these orders from both new and competitive vaults represent positive indications for future installed base growth. Lastly, 10% of our gross orders were replacement sales for existing Accuray systems. We believe that the success we're seeing with Radixact in new vaults as well as with competitive replacements is because of improved performance characteristics related to treatment speed and overall throughput. These characteristics have positioned Radixact as a highly efficient and versatile platform exceedingly capable of treating routine cases with great speed and efficiency, while allowing for complex case treatment capability. Radixact's functional performance and efficiency improvements early positive customer feedback and our upgrade roadmap have all contributed to a much stronger product position for Radixact across all customer profiles. Gross orders for our CyberKnife platform were down year-over-year primarily due to quarterly variability in order timing. As a reminder, we reported historically high CyberKnife orders in the fourth quarter of fiscal year 2018. Regardless of the quarter-to-quarter variability, given the positive -- positively receive launch of our CyberKnife mobile optimizer software last week at the ASTRO meeting which substantially improved system productivity with both increased patient throughput and reduced treatment planning time, we still expect to see full order growth on the CyberKnife platform. Turning to our regional performance, we saw continued growth from our EMEA region which accounted for almost half of our gross order dollars for the quarter with a significant contribution from our distributor managed markets. While we continue to gain traction in our distributed markets, we also continue to see successes in India where we’re selling direct. Overall, the EMEA region grew 10% last fiscal year and continues to perform very well for us, generating double-digit order growth again in the first quarter of fiscal 2019 relative to the prior fiscal year. In our Asia Pacific region, while we continue to generate orders in China in Q1, the big China related news is the long-awaited announcement regarding Type A and Type B radiotherapy quotas and licenses which were released by the Chinese Ministry of Health last evening at roughly 7:30 PM Pacific Standard Time. The announcement confirmed that there will be licenses issued between now and the end of calendar 2020 for 188 Type A radiotherapy systems and 1,208 licenses issued for Type B radiotherapy systems. While we are very pleased that we’ve final confirmation on this topic based on both the timing of this late breaking news and the depth of analysis required, we will not be giving any details on this call regarding estimates or guidance adjustments for FY '19 related to last evenings announcement from China. We expect that when our analysis is complete, we will be communicating in great detail about the potential benefits to Accuray from the release of Type A and B radiotherapy licenses. Additionally, nothing related to last night's announcement regarding quotas and licenses has changed our strategy regarding establishing the joint venture in China with a local partner and we're continuing to advance our efforts related to this objective. As we continue to work towards achieving this goal, we will provide updates as developments merit. Regarding tariffs in China, we saw a modest pricing impact based on orders received in the first quarter, but generally we don't expect significant margin erosion from a system standpoint given historically high end-user pricing levels. In our Japan region, we continue to see solid order generation for our Radixact System is in Q1 with a strong contribution this quarter from competitive replacements representing half of the orders we received in Japan. We were down a few orders in Japan year-over-year primarily due to quarterly variability and timing and we expect our orders will increase from this region for the remainder of the year. Since receiving Shonin approval last year for our integrated data management system and our precision treatment planning software, our funnel in this region has continued to expand. In our Americas region, our initiatives to improve our growth in the U.S market yielded positive results in fiscal 2018. We continue to focus on key initiatives including increased attention on replacement of Accuray systems, existing Accuray systems, multisystem opportunities and competitive wins. While Shig will provide a detailed review of the P&L in his prepared remarks, I wanted to provide a few financial highlights for the quarter. Total revenue for the fiscal first quarter increased 5% year-over-year to $96 million. Product revenue for the first fiscal quarter increased 7% year-over-year driven primarily by the increased adoption of our Radixact System. In the first quarter, we also generated adjusted EBITDA of $4 million. As noted in today's earnings press release, we announced that we’ve initiated a strategic organizational restructuring that will reduce the overall cost structure of the company, while preserving our ability to continue our product innovation objectives and generate higher levels of sales growth going forward. The workforce reduction actions taken which were focused primarily across noncommercial functions will make Accuray a leaner and more market responsive organization. We estimate that these actions will result in annual savings of approximately $15 million. We expect the full benefit of these cost reductions will be realized in the current year fiscal fourth quarter and we believe these actions will give us a clear path to GAAP net income while we continue to focus on top line growth. We believe that achieving a positive GAAP net income position will allow Accuray to generate improved levels of cash, continue to pay down debt, and unlock business development and investment opportunities that were previously unavailable to us. Before I turn the call over to Shig, I want to touch briefly on the innovation and product advancements we highlighted at the annual ASTRO meeting last week in San Antonio. As I mentioned last quarter, one of the most important development programs for our Radixact System is the launch of our motion tracking, correction and beam synchronization capability, which is similar to the Synchrony System on the CyberKnife platform. We are pleased to announce that during the quarter, we submitted our 510(k) application for similar functionality on our Radixact System. Last week at ASTRO, we previewed how this proprietary technology will work in our Radixact System and the reception from existing and prospective customers was outstanding. Similar to our CyberKnife platform, our proprietary Synchrony Target Tracking and Motion Correction Capability for Radixact corrects the target during respiration and ensures the beam is synchronized with movement of the target. Based on the projected turnaround timing on our 510(k) submission, we estimate that the first customer installation of Radixact with motion tracking correction and beam synchronization capability will be treating patients by the end of our fiscal year. As mentioned earlier in my remarks, at last week's ASTRO meeting we also previewed the CyberKnife VOLO Optimizer. Those who had a chance to see -- use the software have been very impressed. The CyberKnife VOLO Optimizer reduces treatment delivery time by as much as 50% and reduces plan -- treatment planning development time by as much as 90%. Plans created using the CyberKnife VOLO Optimizer are also reported to improve plan quality even further than observed in earlier generations. In conjunction with our precision treatment planning software, we believe that CyberKnife VOLO Optimizer is the latest in a long line of next-generation functionality and performance improvements that position the CyberKnife as a fast, efficient and remarkably precise full body treatment platform for stereotactic radiosurgery and stereotactic body radiotherapy. We expect these improvements will be catalysts in driving continued installed base upgrades and full-year order growth for our CyberKnife platform. Lastly, on the topic of products and innovation, we recently announced the published data from two of the largest multicenter studies we referenced in the past, focused on SBRT prostate treatment utilizing CyberKnife. The published data reinforces the CyberKnife System provides excellent prostate cancer survival rates in five or fewer treatment sessions. In fact, for low-risk patients, the disease-free survival rates were between 97% and 100%, which was superior to the 92% to 94% from historical conventional radiotherapy data. These studies also reported superior survival rates for intermediate risk patients. We believe that the results of these studies further validate the superior clinical utility and efficacy of our CyberKnife Systems in treating prostate cancer patients. I will now turn the call over to Shig to provide more details regarding our fiscal first quarter results as well as update our fiscal 2019 annual guidance in light of the cost reductions I just discussed. With that said, I will turn the call over to Shig.

Thank you, Josh, and good afternoon, everyone. As Josh highlighted, we had $61.4 million of gross orders in the quarter, representing an increase of 10% over prior year. Included in our gross order a $1.1 million of upgrade orders purchased through our service contracts, which as we previously communicated, are included in our gross orders beginning in fiscal year 2019. Excluding these upgrade orders, we had $60.3 million of gross orders, representing an increase of 8% over prior year. Both the APAC and EMEA regions were the drivers of this strong gross order growth. On a product mix basis, the first quarter was highlighted by continued momentum for the Radixact System, which more than doubled year-over-year. Additionally, Radixact represented approximately 85% of TomoTherapy platform orders. On a net basis, we generated $24.9 million of orders, which included adjustments of $26.5 million were age-outs, $6.6 million of cancellations and $3.4 million for other adjustments. In the first quarter, we had four cancellations, which by geography were in Japan, Latin America, and Europe. Net age-outs for the quarter were primarily driven by orders related to China Taipei Systems, which represented more than 40% of the age-outs. Based on the Type A quota that was announced in China just yesterday, we believe we will start converting these orders to revenue in age-in, although we do expect 3 to 6 months of lag time between the announcement of the quota and our revenue conversion as the end-user hospitals are required to go through the regulatory license application process for these devices. We anticipate second quarter net age-outs to be approximately $31 million, of which 20% is represented by an additional amount of China Taipei Systems. This does not reflect the benefit of the quota announcement from yesterday as we are still in the process of evaluating such benefit. Due to the higher level of age-outs, we ended our first quarter with backlog of $461.9 million, representing a decrease of 1% over prior year. We do expect our backlog to grow in Q2 and for the full-year. Turning now to our income statement. Total revenue for the first quarter was $95.8 million, representing a 5% increase over prior year. APAC and Japan were the primary drivers of our revenue growth. Product revenue for the quarter was $41.5 million, an increase of 7% over prior year. The product revenue increase was driven by strong demand for our Radixact System which more than doubled year-over-year. Since its introduction, we have now recognized revenue for approximately 60 Radixact Systems. Service revenue for the quarter was $54.3 million, an increase of 4% over prior year. The growth in service revenue was primarily driven by an increase in treatment planning and connectivity software upgrades, purchased through service contracts. Turning now to gross margin. Our overall gross margin for the first quarter was 39.5% compared to 41.9% in the prior year. Product gross margin was 40.9% in the quarter compared to 43.2% in the prior year. The decrease in product gross margin was primarily driven by the product mix with a larger percentage of our overall sales attributable to the TomoTherapy platform compared to the prior year. We do continue to see a premium being paid for latest generation of Radixact Systems compared with a older generation TomoTherapy Systems. Service gross margin in the first quarter was 38.5% compared to 40.9% in the prior year. Prior year Q1 service margin represented the highest single quota service margins in the company's history driven by low part assumption and other costs. Our fiscal 2018 service margin was 36.6% and our fourth quarter of fiscal 2018 service margin was 37.4%. Therefore the current quarter service margin of 38.5% represents continuous improvement in liability and service efficiency. Moving down to the income statement, operating expenses for the quarter were $42.6 million, an increase of 6% from $40.2 million in prior year. The first quarter G&A expense included a one-time $3.7 million accounts receivable impairment charge related to one particular customer. Excluding this one-time charge, the first quarter operating expenses were $38.9 million, representing a decrease of 3% over prior year. On a sequential basis, operating expenses decreased approximately $2 million from $44.9 million in our four fiscal quarter of 2018. Excluding the impact of the one-time impairment charge, operating expenses decreased $6 million sequentially. The sequential decrease in our operating expenses was primarily due to three reasons: first, we had tradeshow related expenses in the prior quarter that did not recur in the current quarter. Second, lower compensation costs related to the headcount management and commission associated with revenue levels. Third, lower R&D costs as we near the release of motion synchronization for Radixact System. First quarter operating loss was $4.7 million compared to a loss of $2.1 million from a year-ago. Adjusted EBITDA for the first quarter was $4 million compared to $3.1 million in the prior year. First quarter adjusted EBITDA of $4 million excludes the impact of a one-time $3.7 million impairment charge discussed earlier. We ended the first quarter with $71 million of cash and short-term restricted cash. The decrease in cash from the prior quarter was primarily driven by the payout in employee bonus earned in the prior fiscal year as well as procurement of inventory in anticipation of fulfilling customer orders for the remainder over this fiscal year, both of which are seasonal in nature. We expect to generate positive operating cash flow for the remainder of this fiscal year. Before I move on to update our fiscal 2019 guidance, I would like to discuss the targeted financial impact of the cost reduction initiatives Josh discussed earlier. We anticipate taking a one-time charge of approximately $1.5 million to $2 million in the second quarter related to the reduction in workforce. The total annualized savings from this action is expected to be approximately $15 million and we expect to start realizing the full benefit of this cost reduction in the fourth quarter of this fiscal year. Of the expected savings, approximately 30% will benefit gross margin, while the remainder will benefit operating expenses. Turning now to our guidance for fiscal 2019. The following guidance for fiscal 2019 does not reflect the potential benefits of the China Ministry of Health announcement yesterday of Type A and B quota and license as we are still in the process of analyzing such benefits. As josh mentioned earlier, we will communicate the potential benefits of this development when our analysis is complete. We are reaffirming the revenue guidance provided back in August, which is for annual revenue in the range of $415 million to $425 million, representing growth of approximately 3% to 5% over fiscal 2018. The guidance includes 4% to 8% of product revenue growth. We continue to expect overall gross margin to essentially match fiscal 2018 gross margin of nearly 40%, as we anticipate TomoTherapy, Radixact platform revenue to be higher percentage of total revenue in this fiscal year. We are updating our adjusted EBITDA and operating expense guidance to reflect the impact of the cost reduction initiatives as follows: we now expect our adjusted EBITDA to be in the range of $23 million to $29 million, excluding the impact of the $3.7 million impairment charge in the first quarter and the $1.5 million to $2 million severance charge in the second quarter. The updated EBITDA range would represent year-over-year growth between 35% and 70%. This is an increase from our previous EBITDA guidance range of $21 million to $27 million and reflects the direct impact of our cost reduction initiatives. As previously mentioned, the updated guidance reflects our expectation that the full benefit of cost initiatives, which is approximately $50 million on an annualized basis, will be realized in full starting in the fourth fiscal quarter. We now expect operating expenses to be down approximately 1% year-over-year, excluding the impact of one-time impairment and severance charges discussed earlier. And with that, I would like to hand the call back to Josh.

Thanks, Shig. Before we open-up the call to your questions, I’d like to thank the entire Accuray team for their continued focus, commitment and improving execution, supporting the important work that’s making a difference in patients lives. Operator, we're now ready to open the line for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Brooks O'Neil with Lake Street Capital Markets. Your line is now open. Brooks O'Neil: Thank you. Good afternoon and congratulations on the terrific start to the year. I understand that you are with delaying comments on the China situation, but guys could you just say whether the gross numbers are consistent with what you had expected previously?

Brooks, this is Josh. Yes, very definitely in line and consistent with our expectations. 188 Type A licenses, 1,208 Type B licenses. Again, very consistent with what we were expecting. And we're -- while we are not going to be commenting in detail on what it translates into relative to potential benefit or positive impact, we're very -- obviously very pleased. It's been a long wait for us and as you might imagine, we are pretty excited about it. Brooks O'Neil: It's fantastic. I’m excited too. So, hopefully that will begin the flow-through maybe even later this year. So that will be good. Secondly, I was hoping you understand I think that I am not a clinician and hence all the noise out there related to adaptive radiotherapy and the differences between MRI guidance and CT guidance admittedly generally go right through my ears and out from one side to the other. So I was hoping you might be able to describe your high-level feeling about your capabilities, particularly as it relates to the motion synchronization with Radixact and CyberKnife relative to the capabilities that are being touted by some of your competitors in the field.

Yes, that's a mouthful kind of a question, but let me take a stab [ph] at it. So to start with, Brooks, we have never said that we don't believe better image resolution is important. Quite frankly, we believe absolutely that it's important on what we’ve been saying from the very beginning is that there's really a balance and a trade-off between improved image resolution on the one hand and especially soft tissue resolution, and both product economics which is the cost side of that equation and the functionality or that the speed and the throughput, if you will, of the MR based systems because they kind of by their very design they are going to be more difficult devices to generate large volume patient treatment schedules and support large volume patient treatment schedules on a given daily basis. Our view, in general, is that as we -- if we look at our roadmap and we have made improvements already and are continuing to advance our imaging capabilities to KV cone beam CT capability, we believe along with the -- that the synchrony software technology in terms of our devices CyberKnife already and soon-to-be Radixact, our devices being able to track motion, correct for motion and ensure beam synchronization automatically in the form that we deliver it will allow for real-time adaptive therapy capability. And, again, there's no question that everyone would like to see improved soft tissue resolution and imaging improvements and we’re -- in our view we're advancing our pipeline in the ways that provides the best balance between again enhanced resolution, improved imaging and the other elements that I just described, the economics on one hand and the overall efficiency or throughput of the device platforms on the other. Brooks O'Neil: That’s very, very helpful. I just -- as a one quick follow-on, you were talking about the efficiency, the throughput efficiency, and my sense in talking with you and others is that your ability to adjust the beam in relation to what you see is quick and efficient, if I understand it correctly. Do I have that right?

Yes, yes. There's also what we’re doing is being done by the software algorithm and the hardware and there's no -- essentially there's no gating involved. There's no -- we're not making either adjustments to or the position of the patient treatment couch or turning beam on and off. So all of those elements again create just better throughput vis-à-vis efficiency. Brooks O'Neil: That’s excellent. Thank you very much and congratulations again on the progress.

Thanks, Brooks.

Thank you. Our next question comes from the line of Anthony Petrone with Jefferies. Your line is now open.

Thanks and good afternoon and also congratulations on the announcement of the China last night. It's been a long road on that front. Maybe just, Josh, we can start there a bit and again realize that the information is going to be limited here. But when we look at the number 180 and 1,200, can you maybe crosswalk where Accuray left off I think if our memory node service correctly. Accuray already had about 39 Class A licenses secured, may be going back a year or so, I'm not sure the Class B licenses were ever disclosed. But maybe just a crosswalk on where Accuray stood in all of this?

Sure. So if you go back to when Type A radiotherapy licenses were actually still being issued, Anthony, 37 -- a total of 37 had actually been issued. They had authorized actually more than that. I think that the number was somewhere in the 55 or 60 range. Only 37 of that 55 to 60 had actually been issued and 34 to 37 were awarded to Accuray devices, either TomoTherapy at the time or CK. So I mean that's going back now. Probably almost 3 years ago, it's a long way back clearly and I don't think we're expecting that we would going forward operate at that level of win rate. I mean, I think the calculation on 34 out of 37 is something like 87% or 88%, that’s not in our assumptions. But quite frankly, if you look at how effective we were in that space back then, we feel really -- quite frankly, really bullish about what the future holds with the licenses now starting to flow again. I think the other thing I would just reinforce we talked about in the prepared remarks is that again based on prior experience, which is really the only thing we have to go on, we would expect that you probably see a lag time between a quarter or two, in -- from -- again time of license announcement until the time that we start to see revenue impact related to those licenses starting to flow.

Now that’s helpful. And then just to be clear, taking another derivative within there would be flow of gross bookings. So now that there's an increased number of licenses available to 2020, this would also presumably reflect in quarterly bookings going forward. I mean, how should we think about the bookings impact of all of this?

It's absolutely going to impact orders as well without question. I think our distributor in China was as you might imagine was looking as forward as we were to finally getting an announcement and I think that that we would expect that we’d start to see some flow, incremental flow of orders from here now that the market has clarity around license availability. Just to provide, Anthony, just a little bit more color real quick, on -- just to kind of speak to the time -- the timeline or the lag from here to when we would start to see some activity, this process essentially starts now with the Ministry of Health establishing the number of licenses for both Class A and Class B radiotherapy. Hospitals which -- who are looking to procure or purchase devices in either Class A or Class B are in essence going through an application process submitting that application process or submitting their application which in essence will create somewhat of a bidding situation for the defined number of licenses that have been issued or that will be issued and the number of accounts or hospitals that are interested in accessing those. The criteria that will be used there will be geographic location where in the country they are, are they ready to accept devices in the Type A space that are at a higher level of specification from a facility capability standpoint, a staff training standpoint, those kind of criteria. And then once granted, they would receive an import license that will be granted to the facility itself, that would allow them to go forward with the purchase. So that kind of just ties together that one to two quarter lag time that Shig talked about in his prepared remarks.

It's great. And I’ve got one more follow-up just to go maybe on the CyberKnife side and I will get back in queue. We had good feedback on VOLO. I’m just wondering can you kind of describe what VOLO does to CyberKnife treatment times and what you think VOLO could do for CyberKnife demand going forward? Thanks again.

Sure. So, no one is ever debated or challenged the validity of the precision and accuracy of CyberKnife. What has been a challenge for people, certainly in the earlier generations of the device was the amount of time it took to develop a treatment plan and to deliver the treatment. And if you look at where we've come from over time both with the latest generation platform which is the M6, the introduction of the MLC, Multileaf Collimator for the M6. We’ve seen significant improvement over time. The VOLO optimizer really kind of takes this to a different level. It's going to reduce treatment planning times, so the time it takes to develop a treatment plan by as much as 90%. And it's going to reduce the amount of time that it takes to deliver that treatment by almost 50%. Now that may vary across the time reductions might vary across the type of cancer, prostate versus long versus spine, but in general I’d say those numbers are reasonably accurate in terms of what we’re seeing and what users of the optimizer are telling us with regards to their experience. So it takes quite frankly in an example like prostate, with organ contained cancer, it will reduce the treatment time to something that probably is sub 15 minutes, maybe 12 to 15 minutes. And that's really -- again from market experience and clinical experience with CyberKnife, that's an extraordinary leap from where we have been historically. So our optimism is high that the introduction of the VOLO optimizer allows us to have a catalyst or creates a catalyst, if you will, for trade-in, trade-off opportunities in terms of the installed base and the replacement sales opportunity, which is primarily by geographic concentration, primarily the U.S opportunity.

Thanks again.

Thank you. Our next question comes from the line of Amit Hazan with Citi. Your line is now open.

Hey, guys. This is Phil on for Amit. Can you hear me okay?

Yes.

Great, great. I want to follow-on a little bit to Anthony's questions on China. Just make sure I'm clear on the lines there between Type A and Type B, I think we talked previously about the strategy with Onrad and TomoH. Can you just clarify sort of where the lines or in terms of the product decisions between Type A and Type B licenses?

So the Type A radiotherapy category by definition are the higher-end products, higher-end both as defined by price point and by technical specification. I think you'd -- maybe not exclusively, but I think you would tend to see more of the Type A radiotherapy products in academic medical settings, maybe in the large PLA military channel hospitals and probably the larger public hospitals in the market. Type B or products that we are calling essentially the value segment of the market, capable, efficient, but probably more in line with devices that you’d see in either freestanding treatment centers or smaller facilities. It doesn't mean that they’re not effective and not good products. Just again different product for different segment of the market. But if you look at the Tier 1 hospitals, the largest hospitals, you’re talking about products that essentially requirements that would tend to lend themselves or line themselves up with Type A radiotherapy licenses. The big volume -- the unit volume opportunity here going forward is in Type B, and also really primarily and probably more of the private sector, if you look at how the market will develop and what the expectations are for growth going forward.

Okay. That’s very helpful. I think is there any additional clarity you can give on that, that breakeven price point? Is it a clear line or is it sort of a confluence of the specifications versus the price paid is, there are throughput consideration, anything along those lines?

Not that I'm aware of it at this point. We can try and get back to you, if there's something that either emerges or something that is beyond or incremental to what we currently know, but I think in general what you'd see is products from a price point standpoint in Taipei, products that are north of at the end-user level, certainly north of probably $2.5 million or $3 million.

Okay. That’s very helpful. Just one more, quick one, if I can follow-on on the financial side. Is there any clarity you could provide around the embedded foreign-exchange or currency either on your top line or maybe on top line [indiscernible] on OpEx as well for the quarter and for the year, any color there?

Yes. So our growth for the product revenue just kind of in a sense was 7%, but we feel that constant currency that was 8%. So very minimal 1% uplift. Service was a little larger, 4% growth we talked about. On a constant currency basis about 2%. So it would have been 6%.

Okay. So we saw an uplift in the first quarter. Are you expecting essentially mutual currency for the year with the reversal currency?

That's how we’re expecting.

Okay. All right. That’s very helpful. Thank you both.

Thank you.

Thank you. Our next question comes from the line of Brandon Henry with RBC Capital Markets. Your line is now open.

Yes, thanks for taking my question. Can you spend some time discussing the various areas that are contributing to the cost savings? And how should we think about the ramp of cost savings over the course of fiscal year '19? And then just on that latter point, can you also help reconcile the $2 million increase in the adjusted EBITDA guidance with the $15 million in cost savings? And I just got a couple of follow-ups. Thanks.

Sure, Brandon. So the $15 million of annualized savings, as I mentioned in my prepared remarks, 30% we expect to benefit the cost of goods lines of margin. And the remainder to be in the OpEx section and when you think about the functional areas that were affected, it's mostly support G&A type areas. Josh and we were very careful about not impacting the incremental -- ability to execute commercially. So the areas that we went up related to commercial operations. As far as how to kind of ramp the savings, I have next two quarters, the future Q3, we should see some savings but these effects are being offset by a couple of things. Number one: it does take some time to realize the savings on a personal side of things due to transition, that you’re going to expect in personals. And also there's some expectation that we would spend a little bit more on JV, China JV Type projects. So its advisory, legal, those type of costs. And so that’s why we don’t expect to have a full benefit until Q4. And I guess to your last point, so $50 million of annualized savings and I’m saying the full benefit to be in the fourth quarter. So that’s like one quarter. So it's about $3.5 million, 70% of that goes to OpEx in Q4. If you think about Q4 exit rate last year, we are about $45 million. So I think if you want to try to take down, couple of million dollars from that rate, 45 million in the last year or Q4 to project out to a Q4 exit rate this year. I think that’s what you’re looking at.

Okay. Very clear. And then on the China JV, can you just give an update on where you are at with that? When you could expect that we'll be finalized? And then how long does that really take to get fully up and running?

So Brandon, the work that we’re doing, we are in exclusive negotiations. We’ve gotten executed term sheet and we’re in exclusive negotiations with a final party, if you will, or counter party. We’ve said, we’re working hard and fast at this -- as they are, so they’re excited as we are to get going or to get to at least an executed definitive agreement. But difficult to say, I mean, obviously this is an important part of our strategic growth agenda going forward, given the opportunity in China. We want to make sure we get a right and -- I think there's a hope and aspiration that this is something that we could potentially get to around the end of the calendar year, but again impossible to predict timing on this. So it's more important that we get a right than we -- and completed in a fashion and with the elements in tact that are right for both parties. We expect it to be a long marriage and getting it right is more important than getting it done quickly. Although again, there's a lot of energy and a lot of focus on both sides related to that. On the question related to timeline or the ramp, the longest part of the ramp for the JV will be the activities related to the development of a product, a Type B product, which will essentially be a product that will be manufactured on the ground there by the partner. They would have a responsibility for the regulatory registration and approval process for the device and would essentially be considered in the eyes of the market really a true local domestic ethnic Chinese brand. So when you think about starting up a manufacturing facility, the registration process, we are probably talking about something that's, I guess, 18 to 24 months away in its timeline.

All right. And then just last question for me. Can you provide any more details on the AR impairment charge in the quarter? Thanks.

Yes, Brandon. So it is truly is a unique case that we had. It's a [indiscernible] cancer center, one customer who just got ones from us couple of years ago. Unfortunately, the cancer center never took off, so hence we took a charge this quarter. We don’t have any further exposure to this customer at this point.

Okay. Thank you.

Thank you. Our next question comes from the line of Sean Lavin with BTIG. Your line is now open.

Hi. This is [indiscernible] on for Sean. Thanks for taking the question.

Hi, [indiscernible]. How are you?

I wanted to -- hi. I wanted to start with the net orders this quarter. So the difference between growth in that was a little larger than I expected and I think a little larger in terms of age-outs that have been guided. I understand a lot of that had to do with the Type A orders in China, but I wonder if there was anything else in terms of cancellations or ages that you wanted to call out in the quarter? And I think you also mentioned other adjustments, I’m curious of that.

Yes, so thank you, [indiscernible]. Yes, so I pointed out that China being the large part of that $26.5 million age-outs. As we said, we hope to be able to promote the revenue with announcement that we heard. I think the other aspect we also pointed out that distribution revenue or orders continue to be a high percentage in the recent years, so I think we’re about 70% range exit in the Q1. So, again, we continue to focus on converting those distribution orders to revenue. But in some areas do take some time. I think from cancellation perspective, from quarter-to-quarter that can vary. But I think for the annual basis, we are comfortable that that’s still remain in the low single-digit in relation to our total backlog. The other adjustment, there is small one-time adjustment related to 606 transition, I want to point that its less than 1% adjustment of the backlog and the small FX impact in that number.

Okay, great. Thanks, Shig. And I wanted to hear a little bit about multi systems and how that order is going to look there? I know that’s a big part of kind of the U.S growth story. So I would love to hear anything anecdotal or anything new that you can give us on that front?

So I think as we talked about in the previous quarter, we have an improving funnel or a level of visibility in the funnel in the Americas and primarily U.S that looks like there are more multiunit opportunities for both CK and Radixact than we’ve had in the past. Again because of the complexity in general with those selling process or situations, Murray [ph], more -- the different -- more facilities involve more decision-makers or influencers involved. So in essence more touch points from the customer side it becomes a little bit more difficult to more -- to hone in or more accurately predict timing of some of those. But in opportunity set, we feel good about an improving situation in terms of those opportunities. I should point out though that the multiunit order situation is not the only driver in the U.S going forward. We had in the quarter, we talked about how Radixact was a contributor -- how big a contributor Radixact was in terms of gross orders. I think the other thing that’s occurring in both the U.S and in Western Europe from a direct sales standpoint is the customer profile is expanding. Our traditional strengths have been in larger academic medical centers, research-based medical centers with larger footprints in terms of Radiation Oncology Department number of vaults etcetera. Over 70% of the first quarter TomoH activity or Radixact activity was in single and dual vault settings, which is a pretty strong indication that we're operating in smaller either community or regional based hospitals to a greater extent than we have in the past. And I think that's another reason for optimism in terms of longer-term our U.S situation in the contribution we can expect from the U.S business to be playing at a bigger level.

That’s great color. I appreciate that. Thank you. One last quick one, just as we kind of think ahead with China in the licenses, can you remind us or tell us what kind of a -- is there any I guess abnormality in terms of kind of a book-to-bill time turnaround in China? Is it longer than typical cycle shorter than typical cycles, anything you can give us there?

I think if we go back to where -- again, the period of time when we were very actively taking orders and winning orders in the Type A segment, I think we are probably operating to shorter time in the backlog during that period. In a directional sense, I'd say probably shorter back then.

Great. Thank you.

Sure.

[Operator Instructions] Our next question comes from the line of Josh Jennings with Cowen. Your line is now open.

Hi. Good evening. Thanks for taking the questions. I had to hop on another call, so I missed some of the prepared remarks and some of the questions, so feel free to see if you’ve already addressed these questions if I’m -- if you’re making repeat yourselves. But maybe to start just to talk again, asking another question about the JV in China opportunity, and then maybe -- I mean, how would you have us think about the opportunity there for Accuray just from a size perspective? I mean, I think all your competitors talk about emerging markets in China, specifically as an opportunity. But having a domestic, I guess, footprint on the ground, maybe you could just update on your thoughts on what that China opportunity can actually look like once you're up and running on the manufacturing front?

So, Josh, we’ve said pretty consistently over time that the big opportunity from a growth perspective over time and in terms of unit volume is really in the value segment, which is that the Type B -- would be the Type B specification or Type B category products. We have Onrad, we have H series, TomoH, but quite frankly we don't think that that portfolio is in longer-term. And there are also we think very distinct advantages to the operating in more of a -- again, from a positioning perspective, as more of a domestic ethic brand. And when we started to do the calculus around how do we play go-to-market strategy etcetera, we pretty quickly came to the conclusion the risks to a company of our size of trying to go that alone, down that path alone was really -- it was just not a calculus that and risk profile that we felt comfortable with. Finding someone from a partnership standpoint that has a strong market presence and this partner does although not necessarily today in the radiotherapy space, but they are in the healthcare market product space in a big way, they’re market leader in their core business. They’ve strong market access, large number of existing accounts throughout the country. So it's very much a business that has infrastructure reach into the provinces, which we think is also where again growth comes from longer-term. So for all of those reasons quite frankly, we think that’s -- this is a better play for us in terms of strategy. We get to partner with someone that provides great leverage for us and our products in the core technologies and gives us a chance to kind of mitigate some of the risks that we will be taking on, if we’re trying to do all this by ourselves. So that’s, I mean, in great part that’s how we’re thinking about the JV and longer-term participation in a market that we believe is going to outpace growth quite frankly, virtually everywhere else in the world.

Thanks, Josh. And I mean would you say that this is a $500 million market opportunity, $1 billion market opportunity? I mean, I guess, maybe just to talk about the Class B opportunity in China, and then how much growth you see over the next 5 to 10 years within that segment?

So if you just think about that the sheer number of hospitals in the country and not just the existing ones, but the ones -- the projected growth rates of new facilities, I mean, there are new facilities being built, private-sector funded, private capital funded, probably not a lot more or not nearly the kind of growth on the public or PLA side, that you'll see comparatively with what the growth would look like prospect wise on the private side. There's again, I mean, the estimates are that you're talking about in the aggregate for all product types, a market that -- again, it depends on who's numbers you like today, but something that would be maybe on the conservative end of the spectrum 5,000 incremental devices if you really wanted to get very aggressive go 1 100% more than that. Say, 10,000, but there is a vast under capacity today in radiotherapy capability in the ground available to treat patients today. And you start to do the math around the demographics, the estimates are 15 years from now, Josh, they will be about a quarter of a billion people, aged 65 years or older in China. And you overlay that population, the growth in that aging population overlaid on top of what again the projections would say are some of the most aggressive projected incidences and forecasted rates of cancer diagnosis by anywhere in the world, especially in lung and liver. So, maybe take some of that -- some of those data points and kind of work your own math on it, but its -- I’m not sure that anybody can actually calibrate how high up is on this, but it's a big number.

That’s helpful. Thanks for framing that up. And then my last question, again, please feel free to tell me that you’ve already addressed it, but historically we've talked to radiation oncologist about the CyberKnife and one of the issues are hurdles that’s been treatment times. And you did kind of a launch this VOLO optimizer where planning and treatment times have come down significantly, you have the prostate data specifically, but also lung data for specific to the CyberKnife as well. But can you talk to us about the reduction in planning and treatment times that you’re going to go forward with the CyberKnife and how meaningful that can be in terms of claiming one of the adoption hurdles of prolonged treatment times? Thanks. Thanks for taking the questions.

Yes. So, I will give you the abbreviated response because we did spend some time on that in an earlier question. But we're talking about a -- an impact to treatment planning time that would be -- the time to develop a treatment plan that would be a reduction of almost 90%. So I mean, it's sea change kind of difference. And in treatment delivery time, again, you probably have some variation in terms of the location or the type of cancer, but treatment delivery time reductions of roughly 50% or higher depending on where you’re -- what kind of treatment you’re talking about. If you just use prostate as kind of proxy example, we think we’re going to be able to get with essentially a CyberKnife M6, which is the latest generation equipped with a Multileaf Collimator with CyberKnife with the VOLO optimizer, sub 15 minute treatment time on a prostate case. Probably something like 10 to 12 minutes, which would be again dramatically different than what the market has experienced over time. We've been making incremental improvements over the last four or five years, the M6 generation device first impact the MLC, the next impact -- but the optimizer really, really truly makes this a different product going forward. And one that we think as a catalyst for the trade in, trade up activity that exists or opportunity that’s out there in our installed base with the older devices that are coming into replacement.

Great. Thanks for readdressing that. Appreciate it.

Yes.

Thank you. Our next question comes from the line of Tycho Peterson with JPMorgan. Your line is now open.

Hey, thanks. Josh, actually want to follow-up your last point there on upgrading the installed fleet of CyberKnife Systems. You got the optimizer, but then obviously you’ve got the KVCT imaging coming further down the road. How much of a catalyst do you think VOLO is to upgrade customers? Or do you think they potentially wait until you put from a timeline on the KV upgrade?

Based on feedback, early feedback from people that have used optimizer and the feedback we got last week, I would say, I know that there are conversations taking place already from a trade in, trade up standpoint. The optimizer is a big -- I think it's going to be a big catalyst for us.

Okay. And then, I guess shifting over to China, and I appreciate all the color. I’m just trying to kind of reconcile, you’ve got the commentary on the Type A and B quotas, but obviously you're still waiting to announce the JV partnership. I guess, how much of the -- that quota do you think you can penetrate or you actually had a partnership up and running and actually have some new lower cost equipment coming out of the back of that?

Again, I mean, we said based on our experience from prior times, back about 3 plus years ago with -- when Type A licenses were still essentially being issued in their earliest phase, we were seeing from the time licenses became available to the time w were its starting to impact revenue and take revenue somewhere between a quarter and two quarters. So, you would think that we would start to see some impact this year of this announcement from last night. I think that again we're not going to get specific about how much impact. I think that's on the revenue side of the discussion. I also think it's -- I answered an earlier question I think it was with Anthony Petrone from Jefferies, the -- I think the order impact is going to be significant too. I mean, our distributor as you might imagine has been waiting as earnestly as we have for this announcement in their -- they are -- I’m pretty certain, they’re going to hit the ground running in terms of selling opportunity or so. Again, that's what -- again, what we know based on what our prior experience has been, the unknown on the other side of the equation based on your question is how long it takes us to get to a completed agreement, a definitive agreement on the JV side. And again, as I mentioned earlier, I don't think that we can put a stake in the ground on how long that’s going to take. It has our full attention. It has the full attention of our exclusive counterparty that we're negotiating with and I think it needs to be thought of as kind of a stay tuned discussion vis-à-vis timing.

And then in your prepared comments, you did allude to some pricing, sensitivity around the tariff dynamic in China. Are you able to kind of elaborate on that at all? And does the risk there go up with this third round of tariffs?

So, yes -- on the -- on an import basis, it wasn’t material on the import side from a China to U.S., I think it's probably $1.5 million annually, if that -- we don’t manufacture full systems in China. We manufacture a Linac, Linac Waveguide in Chengdu, and we got a flat-panel detector that we purchase from a supplier in China. But -- so it's minimal from an import standpoint. From an export perspective, in terms of devices sold into China, our distributor contracts actually are specified today that the distributor carries the burden of the tariff. I would tell you that maybe some amount of pricing negotiation took place for Q1 orders, but based on very healthy high -- user -- end user pricing in China, I think we're comfortable in saying that we’ve got line of sight to continuing healthy margins in that part of it.

Right. And then just lastly on Radixact. Can you maybe help within context the ASTRO announcements, the CTrue iterative reconstruction, and then the real-time motion sync, which is obviously pending. How important do you think those are kind of revenue adoption. Obviously, Radixact orders have been strong anyway, but I’m just curious to what type of feedback you’ve got?

I think they're very important. We’ve been talking about our roadmap and our upgrade pathway for Radixact for some time and the fact that we have motion and essentially the synchrony software and that technology submitted from a 510(k) standpoint is really meaningful. We said that we'd have -- we estimate based on kind of projected turnaround times you can never guarantee them, but we think it's a relatively straightforward regulatory submission. And based on that, we could have reference site and ramp and monitor site installation and patient treatments taking place before the end of this calendar -- I’m sorry, before the end of this fiscal year, which would be a terrific outcome from a timing standpoint. And we’ve got a large number of Radixact-based systems already installed or orders for them in the backlog that we're -- the premise for those customers placing orders was their interest in the upgrade cycle, the innovation pathway that we talked about from a pipeline standpoint. So I think these things in the aggregate are pretty material contributors to a growing level of interest in the product. Again, we took -- it was a strong quarter in general for Radixact. And the interesting thing again, I mentioned before, is that the customer types. These were not just all academic medical centers. 70% of the orders that we took for Radixact in Q1 went into single and dual vault locations, which meant in general by definition you’re talking about smaller facilities, maybe community or regional based hospitals or even freestanding centers.

Okay. Thank you.

Yes.

Thank you. There are no further questions at this time. I'd now like to turn the call back to Josh Levine for closing remarks.

Thanks, operator, and thank you everyone for your participation this afternoon. We look forward to speaking with you on our fiscal second quarter earnings call. Thanks again.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.