Todd Kehrli - EVC Group Joshua Levine - President, CEO & Director Kevin Waters - SVP & CFO

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

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Accuray Incorporated Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Todd Kehrli of the EVC Group. Sir, you may begin.

Thank you, Operator. Good afternoon, and welcome to Accuray's fourth quarter and fiscal year-end earnings conference call. With me on today's call are Josh Levine, Accuray's President and Chief Executive Officer; and Kevin Waters, Accuray's Senior Vice President and 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 the 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 Q&A session please we request that each questioner 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 year quarters. For example, statements regarding our fourth quarter refer to our fiscal fourth quarter ended June 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 thanks for joining us on today's call. We had a solid finish to fiscal 2018. Fourth quarter gross orders of $96 million were up 12% over the prior year period. We finished the year with gross orders of $305 million, representing a 2% increase over fiscal 2017. On a full year basis, we more than doubled the number of Radixact orders taken into backlog, and we have now received approximately 100 orders since launching the device. From a regional growth standpoint, our Europe, Americas and Japan regions all experienced full-year gross order growth between 8% and 12%, while APAC declined 24% year-over-year. Take a deeper look some of the regional order highlights for fiscal 2018, starting with the Americas region. The infrastructure investments we made in fiscal 2018 in the U.S. commercial organization, which were designed to improve our sales coverage and overall win rates generated solid year-over-year growth in the fourth quarter, resulting in our Americas region gross orders up 12% for the full year. We also shifted our selling emphasis in the region to focus on integrated delivery networks that represented growing opportunity related to multisystem orders. The large multisystem order we were awarded from the Mercy system in St. Louis in the fourth quarter is evidence of our improving commercial competitiveness with this customer segment. This order included both our CyberKnife and Radixact platforms and covers multiple geographic locations and institutions. It was roughly a 50-50 mix of competitive replacements and replacements of our earlier generation devices and represents the largest dollar value order in Accuray's history. With that said, our ongoing order momentum continues to be subject to quarter-to-quarter variability, resulting from the selling complexity and longer closing time lines related to the multisystem opportunities in our sales funnel. Turning to our EMEA region, which continued its strong performance with gross orders increasing 10% over the prior fiscal year, we saw strength in distributed markets in the region during fiscal 2018, including Turkey, Russia, Romania and Egypt. From a product mix perspective, we saw strong contribution from CyberKnife system orders in Europe, which were double the level of our internal plan for the region. Additionally, in late June, we received regulatory approval from India to sell our Radixact X9 system, which will continue to expand availability of our precision treatment solutions in this important market. We continue to grow our installed base in India and have a strong presence in the leading hospitals. Several of our systems are in health care global enterprises whose oncology centers currently treat the largest volume of cancer patients in India. Transitioning to our Japan region, we had a strong contribution in fiscal 2018 with gross orders increasing 8%. Additionally, Japan has contributed 30 Radixact orders since that device was launched in the third quarter of fiscal 2017. Japan also reached an important milestone in fiscal 2018. We now have over 100 devices installed in that market. We have seen solid funnel growth since receiving Shonin approval last December for our integrated data management system and our Accuray Precision Treatment Planning Software. Those upgrades significantly improved our treatment planning capabilities, oncology department workflow and overall connectivity of our systems. And as a result, we see Japan being a source of continued growth. Turning to our Asia Pacific region. Fiscal 2018 was a challenging year with gross orders declining 24% year-over-year, primarily due to the continued lack -- delay and lack of availability of type A radiotherapy licenses in China. Despite that, we've been pushing forward with the selling process at the provincial level with our Onrad and TomoH devices, which as a result of China's National Health Commission announcement on April 9, we now know our definitively outside of the scope of type A radiotherapy category. The timing of the announcement provided a fourth quarter boost in China with APAC gross orders increasing 26% in the fourth quarter over prior year led by a combination of 5 orders for our Onrad and TomoH systems. We believe that the value products market segment represents the biggest source of future growth in China and continues to be the principal driver of our interest in establishing a joint venture opportunity with a local manufacturing partner. To that end, we're continuing to make progress in this negotiation process. This is an important strategic initiative and we will continue to provide updates as we work toward achieving this objective. While Kevin will provide an update on the revenue and margin performance of the company in his prepared remarks, I'd like to highlight some of the impact we're already seeing as a result of the investments we made to our R&D infrastructure during the year. We've noted on previous calls that as we began fiscal 2018, we made the decision to incrementally invest in R&D, which resulted in a higher operating expense run rate in this last fiscal cycle. We believe these investments are critical to ensuring that the timelines for release of our important development programs remain on track. During the fourth quarter, we launched new imaging software for Radixact, which was introduced in April at the ASTRO Conference in Barcelona and the customer feedback has been very positive. This software improves -- offers significant improvement in soft tissue resolution with up to 50% decrease in the image noise from the previous generation software. This drives improved low-contrast resolution for organs and anatomical structures that might have been difficult to visualize previously with no increased imaging dosing or the imaging time. This represents the first of several imaging improvements, including conversion to kVCT imaging that we're making on the Radixact platform. Another important development program for our Radixact System is the launch of our intra-fraction motion tracking and correction capability. We currently have the only system on the market with this unique target motion tracking and correction capability, which is already available on our CyberKnife System. With the additional resource additions in R&D during fiscal 2018, we have a high degree of confidence that we are on track to submit our 510(k) application for motion tracking and correction by the end of September for our Radixact System. Based on this, we would estimate the first customer installation resulting in treating patients by the end of the third fiscal quarter of 2019. I'd like to take a moment to comment on the topic of reimbursement. While there've been some changes in reimbursement rates proposed for calendar year 2019, they're mainly related to SBRT treatments in freestanding centers. While this doesn't impact Accuray to a great degree because we have minimal exposure in that customer segment, we are proactively working with ASTRO and the other major companies in the radiation therapy space to address changes to the proposed cuts prior to the scheduled implementation. It's worthy of mention in the hospital setting, which is the majority of our customer mix, the CMS proposed rates for 2019 show no decline in reimbursement compared to '18. In fact, reimbursement for our products, if finalized, will be up 1% to 3%. Maximizing coverage of reimbursement remains an area of focus as we believe our products are well positioned for the likely evolution in payment models, which we believe will be characterized by an episodic payment approach. This model will likely require a shorter duration of overall treatment delivery, high-quality precise courses of treatment that minimize side effects and complications and treatment platforms capable of supporting highly-efficient workflow. We believe that all of these requirements position Accuray's delivery systems very well for the future. In a few moments, Kevin is going to provide more details regarding our fiscal 2018 financial results and our fiscal 2019 guidance. In developing our guidance for next year, we evaluated a number of factors, including our increasing multisystem order opportunities that create increased variability and timing, the uncertainty around both the issuance of Chinese class A licenses and implementation of our joint venture in that market as well as a thorough review of the guidance metrics provided by our peers. Based on these factors, we've made the decision to exclude gross order guidance moving forward. This means that, while we will report our total gross orders for each quarter, we will not be providing specific gross order guidance for fiscal 2019. Overall, we do expect gross orders to grow for fiscal 2019, and we are also providing more detail and granularity on regional order and revenue performance in this quarterly release and future releases. With that said, I'll turn the call over to Kevin.

Thank you, Josh, and good afternoon, everyone. As Josh highlighted, we had $96.4 million of gross orders in the quarter, up 12% over prior year. On a regional basis, growth was strongest in the U.S., primarily due to the Mercy -- multisystem order Josh discussed. On a product mix basis, the fourth quarter was highlighted by strong performance for the CyberKnife System with growth seen across all regions. In addition, the fourth quarter represented a large percentage of orders being due to trade-ins of existing systems. On a net order basis, we generated $65 million, which included adjustments of $17.1 million for age-outs and $14.4 million for cancellations and other adjustments. Age-outs were slightly lower than our guidance provided; and cancellations, which can fluctuate quarter-to-quarter, were higher than average. In the fourth quarter, we had 5 cancellations, which by geography were in Latin America, Japan, and the Middle East. For the full year, 14% of our backlog aged-out on the net basis, which is consistent with the prior 3-year range of 13% to 14%. Cancellations on a full year basis represented 5% of ending backlog, which is up slightly from 3% in the prior 2 years. We anticipate first quarter net age-outs to be approximately $22 million, and we continue to work on converting these orders to revenue in age-in. Turning to order composition mix for the full year. Approximately, 20% of gross orders were from trade-ins of our existing installed base, 20% were competitive replacements and the remaining 60% were for new vaults. On a full year basis, orders represent a positive book-to-bill ratio of 1.14 and ending backlog is now $478.5 million, which is up 6% from the prior year-end. Turning now to our income statement. Total revenue for the fourth quarter was $113.8 million, representing a 2% increase over prior year. On a full year basis, revenue was $404.9 million, representing a 6% increase. Full year revenue growth was particularly strong in our European region, and service revenue was also a large contributor to our growth. Product revenue for the quarter was $54.6 million, a decrease of 10% over the prior year period. However, product revenue on a full year basis expanded 2%, driven by our European region. Product revenue was fairly evenly mixed between our CyberKnife and TomoTherapy Systems for the full year, which drove margin expansion. On the TomoTherapy platform, approximately 70% of the revenue units were from the Radixact System. Service revenue for the quarter was $59.2 million, an increase of 15% over the prior year. The growth rate in service revenue was well above both our historical averages and our expectation and is attributed to increased upgrades purchased on service contracts, the timing of which can vary from quarter-to-quarter. These upgrades were primarily from our recent software releases around both treatment planning and connectivity.While we are pleased with the increase in service revenue and related upgrade sales, we believe that going forward service revenue should grow at or around our installed base growth rate. Turning now to gross margin. Our overall gross margin for the fourth quarter improved to 42.2% from the prior year of 38.5%. Product gross margin increased to 47.4% in the quarter compared to 38.2% in the fourth quarter of prior year. As discussed during our previous calls, prior year financial period included a quarterly $2 million intangible amortization charge from the TomoTherapy acquisition, which was fully amortized in Q4 of the prior year. Normalizing to exclude this charge, product margins in the prior year fourth quarter would have been 41%. Therefore, our current quarter product gross margin of 47% is still a significant increase, even when normalizing to exclude amortization. In the fourth quarter, we saw a healthy contribution from the CyberKnife product line, which yields higher margins and we also saw year-over-year pricing increases for our systems. Service gross margins in the fourth quarter were 37.4% compared to 39% in the prior year. The primary driver of lower service margins was higher part consumption. However, full year service margins are in-line with the prior year and our expectations. On a full year basis, our overall gross margin was 39.9%, an increase from prior year of 36.9%. Moving down the income statement. Operating expenses for the quarter were $44.9 million, an increase of 11% from $40.4 million in the year-ago period. The majority of the operating expense growth is coming from 3 key initiatives: first, accelerating our R&D roadmap; second, investing in our commercial team, specifically, our U.S. sales team from which we have already seen initial signs of progress; and third, investing in business development, primarily related to our long-term China strategy. Additionally, in the fourth quarter, we had higher compensation-related expenses due to higher-than-expected revenue. Fourth quarter operating profit was $3.1 million compared to $2.8 million from a year ago. Adjusted EBITDA for the fourth quarter was $7.8 million compared to $10.3 million in the prior year. The decline was due to the strategic investments in the operating expenses that I previously mentioned. Full year adjusted EBITDA was $17.1 million compared to $20.4 million in the prior year, though revenue grew 6% and gross profit was up 14%. In fiscal year 2018, we reinvested our profit into the key strategic initiatives that I discussed to drive future growth. Even with the increase in operating expenses, we realized strong fourth quarter cash generation from our operations. We ended fiscal 2018 with $93 million of cash, cash equivalents, short-term restricted cash and investments, which represented an increase of $20 million from the prior quarter. In the current fiscal year, we also strengthened our balance sheet. At the beginning of the year, we had $167 million of debt, of which $115 million were convertible notes. We exit the year with approximately $150 million of debt, of which only $85 million are convertible notes and the maturity of all of our debt is due approximately 4 years from now. Turning now to our guidance for fiscal 2019. We anticipate revenue to be in the range of $415 million to $425 million, which would represent growth of approximately 3% to 5% over fiscal 2018. This would represent product revenue growth of 4% to 8%, which is aligned with our current year backlog growth of 6%. We expect service revenue growth of approximately 2%, as we will have a more difficult year-over-year comparable. The bottom-end of our revenue range also allows for some continued delay in China revenue installations. Adjusted EBITDA is expected to be in the range of $21 million to $27 million, which would represent year-over-year growth between 23% and 58%. To achieve our adjusted EBITDA range, we expect both flat operating expenses and gross margins to prior year. Regarding margins, we anticipate more of the TomoTherapy and Radixact platform to revenue in the next fiscal year, therefore, decreasing overall product margins from 2018. Before I hand the call back to Josh, I want to inform you of a perspective backlog policy change that was made effective July 1 for fiscal 2019. Going forward, we will include upgrade orders purchased through our service contracts in our reported gross order number. Historically, these upgrade orders were not included in our gross order or backlog numbers. The inclusion of these upgrades in our gross orders will better reflect our operational performance as upgrades could become a more meaningful part of our business moving forward. For reference, we had approximately $10 million of such upgrade revenue in fiscal 2018. And with that, I would now like to hand the call back to Josh.

Thanks, Kevin. Before we open the call to questions, I'd like to address the CFO leadership transition that was included in our press release. On October 1, Kevin is going to be leaving Accuray after serving as our CFO for the past three years. He has accepted an offer to become the CFO of a privately held company in the urology market segment, headquartered here in the Bay area. On behalf of our board And leadership team, I want to thank Kevin for his service and dedication to Accuray over the past three years and wish him the best in his new endeavor. Kevin will remain as CFO through October 1, 2018. After October 1, Kevin has agreed to be available to the company to assist in any ongoing transition items through the end of the calendar year. Shig Hamamatsu who joined the finance team last year and is currently our VP of Finance and Chief Accounting Officer will assume the CFO responsibilities effective October 1, as Interim CFO, while we initiate a search. We believe the thoughtful planning and time lines we've built into this transition will ensure there is no impact on the goals and objectives we shared with you this afternoon. And with that, operator, we're now ready to open the line for questions.

[Operator Instructions]. And our first question comes from the line of Josh Jennings with Cowen.

Kevin, sad to hear that you'll be leaving the Accuray ship. I was hoping maybe just hear from you, part of your decision-making process in terms of leaving the company.

Yes. Look, Josh, I've been offered an attractive opportunity to become the CFO of a privately held company in the urology market here in the Bay Area. We made a lot of progress at Accuray from both the financial standpoint and also bringing in a solid team underneath me to make this really a seamless transition. And with that, I just thought now was the opportune time for me to make this move.

Understood. And my follow-up question. I just wanted to get a little bit more clarity understanding on the decision to eliminate new order guidance, and I think I understand it. But just wanted to clarify to -- any other color around that decision making? Sounds like you are adding an upgrade revenue into it, so we should be thinking about that as we forecast out new orders for fiscal '19 and beyond. But just wanted to be here on -- and then also just clarify that you are expecting new order growth and whether that includes the upgrade order growth or not?

I'll address the financials and then maybe Josh could talk a bit about the strategic rationale. So, yes, the upgrades will now be included in our number and that is included in Josh's statement that we will grow next year. However, I'd say that our growth in fiscal 2019 is independent on the change of backlog policy, I'll just say that. And to put the numbers in perspective, we -- I gave in my prepared remarks that this would have been $10 million impact to our fiscal '18 results, had we included this change retrospectively as opposed to moving forward. Maybe...

Yes, Josh, let me take the rest of it just from a strategic standpoint. I think the factors leading to this decision were focused on primarily the growing funnel opportunity that we see with multisystem orders. It's an opportunity, but it also creates a little bit of variability and predictability headwind in terms of timing from a forecasting standpoint. Again, bigger deals, more decision-makers and touch points in that decision process, multiple institutions inside of it and integrated delivery network. It just feels for us like these are things that are factors or contributing elements that make it a little bit more difficult to predict on a quarter-to-quarter basis what the order impact will be. Again, just to reiterate, on a net basis, as Kevin identified, we absolutely believe and expect gross orders will grow. So that shouldn't be a takeaway or concern coming away from this at all. And the other aspect of it was that when we looked at the peer universe, again, all of the -- the other players in space, we were actually an outlier in this regard in -- regarding -- with regards to commenting or guiding on this metric and we just thought that in the spirit of looking across the space, it probably made sense to conform to the approach that the other companies were taking.

Our next question comes from the line of Anthony Petrone with Jefferies.

Congratulations, Kevin. It was great working with you, and certainly, good luck on your future opportunity in the Bay Area. Maybe just to go back a little bit to discuss China and then a little bit on guidance as well. So I was just trying to get a sense of within China, a lot of headlines as it relates to tariffs, is that baked into the -- through the outlook for China, has that come up at all? And in addition to that, maybe just any updated views on timing? Both for the type A licenses, it sounds like it's a moving target at this point. But also on the JV establishment? And then just a follow-up to that would be, once the JV is in place in China, how impactful do you think that will be the China orders in revenue once that's in place?

So Anthony, look, we're going to tag team this answer. Let me take the first part of it. So I'll start with the tariff question. We like everyone else are monitoring that the macro level kind of trade discussion topics and have analyzed the impact to our business, which, at this point, we believe quite frankly is reasonably immaterial to our full year guidance. On an imports -- from an imports side perspective, we have a few components coming from China. So we believe we got limited risk based on the analysis that we've done. From an exports side, we believe the risks we have are mitigated by the fact that our current business model contemplates these costs being borne by contract terms by our distributors. So again, I think we're, I'd say, reasonably well protected in this. But -- and we don't see it right now as a big impact one way or the other. On the quarter discussion, I mean, I think you've heard us say consistently over the last several quarters, it would be foolhardy at this point for us to start to try and triangulate our forecast with any degree of precision, what timing of this could be. We still expect the class A quarter will be released, but we don't have any incremental clarity right now on when. And -- but as Kevin identified, our current guidance contemplates continued delay in this regard. And obviously, the impact that our APAC region took in fiscal '18 is another data point for us to kind of make sure that we're just -- we're being cautious about that part of this. On the JV side, I will tell you that we have made good progress, very good progress. We're now at a point where it makes sense to release any more details than that, but I can tell you we feel really bullish about where we're at, both in terms of the counterparty and counterparties we're talking to and where this will land with regards to its impact to our business. It has, in some regards for us, given the opportunity we see for our products in China. We see it having pretty transformative impact for our business down the road. So hopefully, we'll have some more details to be able to share with you in the next couple of quarters.

That's helpful. And maybe just 1 quick follow-up on the orders next year that -- how did software -- and you mentioned true motion software potentially at clearance this year. How will that play out as it relates to orders?

Yes. So we had given the impact to our fiscal '18 that -- to put that number right around $10 million. That should -- this could be a pretty good proxy for what we would expect in 2019 as well.

Our next question comes from the line of Amit Hazan with Citi.

This is Phil [ph] no. It kind of following on the line of questioning from both of the first two questions. I was wondering if you could touch on the backlog conversion policy change and the reason that you all made that decision?

Yes. So we've made that decision just due to the fact that upgrades, and particularly, upgrades around software are becoming increasingly important to our business. And we just believe including these will be a better reflection of our operational performance if they're going to contribute a more meaningful number in the future. That's point one. Point two is, these orders typically convert to revenue much quicker than systems and are more predictable is what I would say. And they represent future revenue for the company. And in our opinion, backlogs should be the best reflection of what we expect to recognize as future revenue. And it didn't seem to make a lot of sense to include -- to not -- to exclude, excuse me, upgrades purchased on service contracts out of backlog; while at the same time, for a cash upgrade, we currently include. So we think it's an improvement. It's actually more transparent and a better reflection of our reality.

Okay. All right. That's fair enough. I just want to confirm you said that you expect total orders to grow next year independent of how this item goes either positive or negative next year, right?

Correct.

Yes.

Okay. And then, are you going to be reporting on sort of a comparable basis as we go forward? Or should we -- what should we do with the $10 million from this year to try and get to a comparable basis?

Yes. Look, I said it was $10 million in '18. You can assume that's a fairly good proxy for 2019. I'd also highlight that Josh had mentioned in his prepared remarks that the company is also providing, as I hope you heard on this call a little more granularity on both our regional order performance and also our revenue performance, which I think if you look at the peer universe, we're now much more aligned with our reporting.

Sure. Okay. That was kind of three part first question. So I'll try and sneak 1 quick one in on the positive side. Just the momentum after the five orders in the APAC region sort of towards the class B, how the prospects are looking thereafter? A pretty positive quarter here?

Look, there is a lot of opportunity in the non-type A space. It's probably the biggest growth driver when you look about across the product segments in China going forward. This is the area that where we think we're going to get longer-term, bigger impact from the work we're doing right now in trying to select the right on the ground manufacturing partner from a joint venture status. So we've got current distributor relationships that are actively selling Onrad and TomoH in the type B segment or non-type A segment. And I think that, again, we feel really strongly about improvements in market access, better sales and market coverage in terms of infrastructure that will result from getting this joint venture put in place to serve the China market more broadly.

And our next question comes from the line of Brandon Henry with RBC Capital Markets.

And Kevin, it's been a pleasure working with you. I -- wish you all the best as -- at your new CFO role. First question, it looks like fiscal 4Q gross orders missed the previous guidance. Can you just talk about what you think happened in the fourth quarter on the gross order front? And where you think you fell short?

Well, Brandon, I'll take it. I think Kevin may have some additive comments as well. I think the biggest impact is that we're seeing some of what I described with regards to quarter-to-quarter variability as a result of better funnel opportunities in larger orders, those that are multisystem in nature, but that's the good news. And the downside or the headwind from those are that, again, quarter-to-quarter predictability of time to close just becomes more challenging for us. That's not to say and the takeaway shouldn't be that we're not going to have those orders. I just can't -- we can't be as crisp perhaps or as precise on time to close as some of a smaller order activity. There were more people involved, more touch points in terms of points of influence. In these situations, you've got significant number of clinical staff at both the radiation oncology and the medical physics level, but you also have, not surprisingly, folks at an administrative level and a financial level, CFO, supply chain leaders that are also weighing in because of the size and scale of some of these orders. So again, lots of moving parts. Great for us that the opportunities that we're chasing are growing, but that's the primary reason why we're kind of just -- we want to be a little more cautious or reserved about this.

Okay. And then with the Americas region, can you kind of discuss the performance you're seeing there after you guys had a big increase in the commercial infrastructure in fiscal year '18? And what are you seeing within that business that gives you confidence that fiscal year '19 will be a better year for the Americas region than fiscal year '18?

So if I look at fiscal '18, we started the year slow. We were behind the power curve. We were still in a hiring mode. We were ramping the hiring, but I would say that we finished -- we came out of the first half of fiscal '18 pretty significantly behind where we had expected to from a plan -- an order plan standpoint, Brandon. And what I've seen -- what we've seen trend-wise, momentum-wise in the last 2 quarters is pretty encouraging. So if you look at, again, where they finished in Q4, the Q4 was a significant win in terms of uplift, but the back-half performance in general really made up for where they were light through the first half of the year. And so I'd say in general, I think we've got an improving sales funnel. We've got again signs of momentum and things we can build on -- positives we that can build on coming out of Q4 's performance. I want to be clear, while I'm encouraged with this, we're not declaring victory on this. We've got more work to do in the U.S. market for sure. And -- but I think we've got early signs here that the momentum, is directionally, is giving us some optimism around '19.

Okay. And then just one on the operating expense guidance. I think you guys said you expected to be -- operating expenses to be flat year-over-year, but gross orders only grew 2% in fiscal year '18. So do you think you have the right infrastructure in place now and you've made big enough investments in the commercial infrastructure to support that the gross order growth going forward while keeping operating expenses flat?

Yes. Unequivocally, yes. I don't see -- I think we have a place now from a scalability standpoint on the commercial side of the house that we will not need to add additional people.

And our next question comes from the line of Tycho Peterson with JPMorgan.

Josh, I want to kind of go back to the theme of multiunit orders. You've kind of talked about this couple of times in the call. Are you able to talk how much of the backlog at this point are multiunit orders? And other initiatives that maybe you're pursuing to improve order conversion of some of these bigger chunkier orders?

Yes. So let me take the second part first. I mean the answer is very definitively yes, on order conversion. I mean, we have, again, the revenue management position that we added earlier last year was -- has been a big impact, Tycho, in getting more of those orders in the backlog to move and to come to revenue. The -- I think -- so that the multisystem order situation is not just the U.S. phenomenon, but I also think that the improvement in our U.S. visibility, the improvement in -- the impact of some of the infrastructure investments we've made are going to also contribute to better momentum, if you will, in that area. Again, from a sales funnel standpoint, there's growing opportunity there. We've got a people dedicated positions from a business development and strategic account management standpoint now, focused on IDNs, which is really where, by customer segment where the vast majority of these opportunities reside. So I'd say based on all of those factors, we feel good about, where we're at and we'll likely see continued positive impact of momentum from this over time.

Maybe I'll take your question on multisystem composition. And rather than looking at kind of the full slate of the $450-plus million of backlog, I just frame it in the fact that in our fiscal fourth quarter multisystem orders were between 20% and 30% of our total order book, which kind of gives the sense of the growing importance that these will have moving forward.

Okay. And then, on cancellations, as you guys -- probably they picked up a little bit. Is there anything to note there were any of these competitive losses? And I guess, can you just give us some feedback on what you're seeing in the field? I know you said 20% are competitive replacements in your favor over the course of the year. So I know you're still winning your fair share, but were any of these losses to competition?

I think -- so very definitely on the first part of the question, Tycho, we're still winning more than we're losing. On a net basis, we're net positive in terms of equipment going into the ground and being installed. And on the bunker retention side, we feel good about where we're at. I think, again, as our -- as the mix of our business has become so heavy and related to the distributor mix of our orders in the backlog, I think -- again, we've been fairly steady from a cancellation rate standpoint of maybe 1 or 2 devices, if you look at just kind of a rolling 4 to 6 quarters going back, I'd say, generally, it's been pretty consistent that 1 or 2 cancellations kind of level. I think as we look at the bigger mix or the bigger dependency, if you will, on distributor-related order activity, maybe that's changing over time or -- again, it's hard to predict what that would look like going forward. But we're participating in business opportunities where we wouldn't have the opportunity to participate if we didn't have the distributor business. So because we don't have the resource, the bandwidth financially to be able to put direct selling operations into all of those markets. So I think it's probably more than anything, it's a byproduct of basically order mix by channel direct versus distributor with the growing emphasis on the distributor side.

Okay. And then just 1 last one on the modeling for next year. As we think about guidance, sounds like, per your comments, no real tariff impact on guidance? And I guess, is it the same for ASC 606? I know you said at the beginning of this year there wasn't really going to be an impact, but as we think about software becoming more important. Is there anything we should think about next year?

No. So we don't believe we went through the full analysis now that the adoption of 606 is going to materially change either the timing or amounts of revenue we recognize moving forward, which I know a couple of the other larger companies in this space had made announcement about 6 months ago, but this won't impact Accuray.

[Operator Instructions]. Our next question will come from the line of Brooks O'Neil with Lake Street Capital Markets. Brooks O'Neil: So I noticed a little bit more discussion about soft tissue visibility. In particular, you guys talked about software development, but how important do you see soft tissue visibility being in the markets you're serving? And how competitive do you feel you'll be with the work you're doing in software development?

Imaging -- improved imaging enhancement and soft tissue resolution inside of that topic, Brooks, is -- quite frankly, it's the big topic in the market at this point. I mean, I think from a competitive standpoint, everybody is looking at imaging and improving imaging enhancement -- improving imaging resolution and enhancing resolution, especially around soft tissue is, I think the introduction of MR linacs has kind of raised the consciousness to a degree across the space in that regard. We feel good about where we're at. I mean, the 3 of the largest internal development programs from an R&D standpoint that we have are -- 2 of the 3 are imaging related. And I think that on the Radixact platform and the CyberKnife platform, we feel very good about where we're going to land with regards to kV cone beam CT capability and an integrated capability on CyberKnife going forward with regards to the medPhoton imaging ring. So again it's -- this is a kind of an iterative process that we introduced CTrue, as I talked about in my prepared remarks at Escrow, that's actually been well received and the uptake on that is moving nicely. We are probably 18 months away from kVCT conversion on Radixact, and probably another 18 months away on the CyberKnife side as well to the upgrade to volumetric imaging -- kVCT volumetric imaging through the medPhoton imaging ring. Brooks O'Neil: So just as a quick follow-up, you don't see if I'm -- and I might not be understating it probably, but you don't see the need to go to full MRI imaging to stay competitive in this regard?

We don't. Again, I'm -- I think there is a -- when you look at the people that have gone to the MRI -- the integrated MRI linac answer or solution, they are the larger academic medical centers, they're the places quite frankly, from a budget standpoint, that can afford pretty much -- their elasticity around budget capability is significant, but it's not the mainstream of the market. And we're comfortable with where we're at with regards to where we'll be with kVCT and with, quite frankly, our intra-fractional motion tracking and correction capability. Brooks O'Neil: That's great. Okay, let me just ask one more. Historically, a lot of focus and conversation about the replacement cycle, particularly, in the U.S. market, can you just talk to us about what you're seeing in terms of replacement cycle? Is it beginning to materialize the way you hoped? Is there a big bulbous out there where you see opportunity somewhere in the next couple of years for you guys? Any comments would be helpful.

Yes. So look -- look I think we'll start early in the replacement cycle. And in Fiscal 2018, it represented 20% of our gross orders. However, that number in the fourth quarter was closer to 30%, so -- which was a high watermark for us in fiscal 2018. And if I look at the U.S. in particular, in aid of our installed base, I think it represents a nice opportunity moving forward for us to retain those systems and contribute to order growth.

And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Josh Levine, President and CEO, for closing remarks.

Thank you, operator. And thank you, everyone, for your participation this afternoon. We look forward to speaking with you on our fiscal first quarter earnings call in late October or sooner if you'll be meeting with us at ASTRO in San Antonio in October. Thanks, and have a good rest of the day.

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