ViewRay, Inc. (NASDAQ:VRAY) Q4 2022 Earnings Call Transcript

ViewRay, Inc. (NASDAQ:VRAY) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good afternoon, ladies and gentlemen. And welcome to the ViewRay Q4 2022 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. This call is being recorded on Monday, February 27, 2023. I would now like to turn the conference over to Matt Harrison, Director of Investor Relations. Please go ahead.

Matt Harrison: Thank you, operator. And welcome to ViewRay’s fourth quarter conference call. Joining me today are Scott Drake, our President and Chief Executive Officer; and Bill Burke, our Chief Financial Officer. Earlier today, ViewRay issued a press release and appendix for today’s call, both of which are available on our website. Going forward, we will be providing an appendix of key metrics, which will be filed with our 8-K in lieu of an earnings presentation. Today’s call is being broadcast and webcast live. A replay will be available on our website for 14 days. Before we begin, I would like to remind you that the discussion during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company’s most recent filings with the SEC.

Also, the discussion will include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measure and two years of historical results can be found in our appendix and exhibit of our current report on Form 8-K filed today with the SEC. I will now turn the call over to Scott.

Scott Drake : Thanks, Matt. Good afternoon, everyone, and thank you for joining us to review our 2022 fourth quarter and full year results. Before we begin, I’d like to welcome our new Chief Financial Officer, Bill Burke. Bill previously served as CFO of Haemonetics and brings over 25 years of global financial and operational experience to ViewRay. He and I have known each other and worked together for many years. And he is a significant addition to our team. Welcome, Bill. I’ll start today’s call by covering key patient metrics. I’ll highlight our full year financial performance and some key innovation, clinical and commercial wins. Following my comments, Bill will cover our financial performance and guidance. Finally, I’ll provide closing thoughts and open the call for Q&A.

As we’ve stated many times, therapy adoption is the precursor to our growth as a company. To date, MRIdian has treated over 29,000 patients. This number continues to grow rapidly as we expand the footprint of MRIdian centers and accelerate patient throughput. The vast majority of these patients were treated in five or fewer fractions with highly effective, virtually side effect-free therapy, allowing them to get back to health and get back to life quickly. The stark contrast between MRIdian and conventional treatment is what drives our team to pursue therapy adoption day in and day out. We ended the year with 56 MRIdians in the ground with about 80 more in backlog or some stage of installation. Turning to our full year financial results with major milestone by crossing over $100 million in revenue, driven by 46% top line growth.

This performance is a testament to the great work our team has done. As projected, gross margin improved about 1,000 basis points. Gross margin was also at an all-time high for the company, and we will continue to drive this crucial metric higher. We finished the year with 32 orders, which reflects the impact of our clinical and commercial success. And the backlog increased to $380 million. On the clinical front, we’re pleased to share that the MIRAGE results were accepted in JAMA Oncology, a leading publication in the field. As a reminder, MIRAGE was a Phase 3 randomized controlled trial conducted by UCLA comparing MRIdian versus conventional SBRT for localized prostate cancer. JAMA Oncology highlighted that MRIdian significantly lowered acute grade 2 GU toxicity and GI toxicity was zero.

Acute toxicity for these patients takes the form of sexual dysfunction and the life-altering effects of incontinence. We’re pleased to see the great work by UCLA get picked up in this major publication. This adds to the growing body of evidence supporting the adoption of MRIdian therapy and is already helping our commercial efforts. 2022 yielded many strategic wins across the organization. On the innovation front, A3i, our next-generation feature set, was launched. Customer feedback on workflow, ease of use, throughput and brain treatment are resoundingly positive. Our clinical pipeline continues to take steps forward. Customers are proving critical value in both tough-to-treat and more common cancers alike. Through the SMART pancreas trial, we saw positive survival signals and the safety of MRIdian when treating with a belated short course therapy in this deadly disease.

We also announced LAP-ABLATE, a Phase 3 global multicenter randomized controlled trial in locally advanced pancreatic cancer. This trial is intended to demonstrate the survival benefits of MRIdian and change therapeutic guidelines for how pancreatic cancer is treated. We are also driving increased patient and clinician engagement through our market awareness efforts. Patient efficacy groups like PanCAN and ZERO have begun to highlight our data and are requesting educational events from our customers. This is driving greater levels of awareness and adoption. I’ve seen firsthand that when patients learn that highly effective, short course, virtually side effect-free therapy is available, they will demand it and travel for it. To further our efforts in patient awareness, we entered into a partnership with Katie Couric Media to leverage a trusted source and highlight that such therapy is available today to a broader and broader patient population.

These results are evidence that our strategy is working as intended. Our innovation pipeline enables our clinical pipeline. Clinical data drives commercial demand, and market awareness amplifies the effect. All of these efforts drive therapy adoption, the precursor to revenue growth, margin expansion and P&L leverage. I’m proud of the work that we’ve done over the past year and all that was accomplished. Our team hit several major milestones and delivered on our promises despite significant macro challenges that persist. We very much look forward to 2023, another promising year for ViewRay, our customers and most importantly, cancer patients who need and deserve personalized precise therapy. With that, I’ll now turn the call over to Bill.

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Bill Burke : Thank you, Scott, and good afternoon, everyone. Today, I will review our fourth quarter and fiscal ’22 financial results and provide our 2023 guidance. Full details can be found in today’s press release, and we will be filing our 10-K subsequent to this call. Before I begin with the financials, I’d like to make a few comments. I’m excited to be part of the ViewRay team, which has graciously welcomed me as a teammate. I want to thank Zach for his ongoing support as we continue with the transition. The past seven weeks have been a journey, learning about the amazing technology and experiencing the excitement, both internally and externally, about MRIdian’s opportunity to become the standard of care for cancer treatment and the positive impact MRIdian is having on patients’ lives.

I’ve quickly learned that ViewRay is positioned to create long-term value anchored by its leading technology and clinical evidence. During each quarter, we intend to install multiple MRIdian systems. Each individual installation represents a significant percentage of revenue for that quarter. There are elements of our business where we have limited influence, including customer site construction as well as permitting and other items, which are often required in connection with the sale of MRIdian. Timing of these uncontrollable events may impact the installation process and quarterly results, but in no way impacts long-term value creation, which we measure in years. At this stage in the company’s maturity and scale, annual results are a far more relevant barometer than quarterly measurement.

Quarters are relevant in our business from a supply chain and resourcing perspective as we pace our installations throughout the year to satisfy these requirements for continued growth. Now moving on to financial results and guidance. Revenue in the fourth quarter grew 70% compared to the same period in the prior year to nearly $34.7 million, highlighted by 85% growth in product revenue, which was driven by five revenue units, an increase of two units compared to the prior year. We also grew service revenue by 23%. Revenue in fiscal ’22 grew 46% compared to the same period in the prior year to approximately $102.2 million, including 53% growth in product revenue primarily driven by an increase of six revenue units to 16 units in fiscal ’22.

We also grew service revenue by 26% as the installed base continues to grow. Gross margin in the fourth quarter was approximately 13% compared to minus 1% in the same prior year period. Gross margin was led by product margin of 14% compared to minus 5% in the same period last year, demonstrating the benefits of leveraging our expense base with additional revenue units. Gross margin on service was 3%, a decline from 9% in the same prior year period due to higher freight costs in the current quarter and a onetime item that benefited the prior year. Sequential service gross margin from the third to fourth quarters declined by 200 basis points from 5% to 3%. The sequential decline was due to higher consumption of service parts in the fourth quarter compared to the third quarter.

We do not anticipate the decline in the fourth quarter to be a trend in 2023. Gross margin in fiscal ’22 was approximately 10% compared to an essentially breakeven gross margin in the same prior year period. Gross margin was led by product margin of 10% compared to approximately 1% in the same prior year period, once again driven by the benefits of leverage from additional revenue units. Gross margin on service was 6%, an improvement from minus 1% in the same prior year period due to efficiency gains with the growth of the installed base. We continue to improve our gross margin, and we are well positioned to see gross margin expansion, mainly attributable to growth in revenue units in the short term and with our cost down initiative contribution in the longer term.

In the fourth quarter, other income and expense was an expense of $1.8 million compared to income of $2.1 million in the same prior year period. For fiscal ’22, other income expense was approximately zero compared to a $6.4 million expense in the same prior year period. Other income was primarily impacted by the reduced warrant liability on our balance sheet from a lower year-over-year share price at the end of the period. Another notable driver was higher interest earned on our cash balance, offset by increased borrowing costs. Net loss for the fourth quarter was $27.8 million or $0.15 per share compared to a net loss of $27.1 million or $0.16 per share in the same prior year period. Net loss of fiscal ’22 was $107.3 million or $0.59 per share compared to a net loss of $110 million or $0.67 per share in the same prior year period.

We ended fiscal ’22 with $142 million in cash and cash equivalents. Our cash usage for fiscal ’22 was $77.3 million. Excluding term loan net proceeds from the November debt refinancing, cash usage for fiscal ’22 was $91.2 million. Cash usage for the year was a combination of ongoing operating expenses and some impact from working capital as there was a deferral of certain customer collections pushed into future periods, partially offset by higher accounts payable. We regularly deal with elongated collection time frames. And this has been exacerbated by higher interest rates, foreign currency and inflation, but we have high confidence in collection. Now turning to our fiscal ’23 guidance. We expect revenue growth to be in the range of 25% to 40% with similar growth in system and service revenue.

System revenue will be seasonally weighted to the back half of the fiscal year at about 60% of total revenue. This growth includes two planned turnkey units for approximately $15 million late in the fourth quarter. Revenue on these two turnkey units is primarily recognized at customer acceptance. A slight variation from our expected timeline may result in an update to our guidance but would not reflect any underlying concerns in the health of the business. We are initiating adjusted EBITDA as a guidance metric in fiscal ’23, which will be a substitute for providing cash flow guidance as in prior years. We believe adjusted EBITDA is a more consistent and predictable measure of our business. Working capital or growth capital is critical for the company and our greatest pressure point, particularly within our supply chain and with elongated collection times.

We estimate our adjusted EBITDA for fiscal ’23 to be in the range of a $70 million to $80 million loss and includes $7 million to $10 million of nonrecurring engineering costs related to our product cost down initiatives. For comparison, the adjusted EBITDA loss in fiscal ’22 was approximately $78.2 million. On the strength of revenue guidance, we expect gross margin in the mid to-high teens predicated largely on the number of A3i upgrades. We also anticipate experiencing operating expense leverage as revenue grows at a more significant rate than operating expenses despite short term investments related to our product cost down initiatives. We expect to continue making strides growing into our overhead structure. With that, I’d like to pass the call back to Scott for a few closing comments.

Scott Drake : Thanks, Bill. Four years ago, we chose to lead and differentiate with clinical data, and we are delivering on that promise. We are the only company in the space leading with meaningful clinical data, and we are very happy we put this stake in the ground. Four years ago, MRIdian was perceived to be a niche therapy with limited patient application. Our customers have now treated tens of thousands of patients, over 65 tumor types across the expanse of tough-to-treat and more common cancers. Four years ago, we heard from our customers a desire for increased throughput. Today, top quartile customers treat over 300 patients a year, and that is before the benefits of A3i take effect. Four years ago, virtually 100% of our customers were academic centers.

Now approximately 40% of our customers are community hospitals. Over the past four years, we have made significant progress. Our strategy is clearly working, and we are well positioned to drive greater levels of therapy adoption in the years ahead. With that, I’ll open the call for Q&A.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. Your first question comes from the line of Rick Wise from Stifel. Your line is now open.

Rick Wise : Good afternoon. Hi, Scott, hi, Bill. Maybe I’ll start off with orders. You obviously had a good solid fourth quarter, nine new orders, which we had heard before. But help us think through your order expectations for the year ahead and particularly related to the Chindex order. And I feel like if memory serves, you had talked about China representing potential upside to consensus models. So several things. Help us think about the first quarter orders in that context. What are you assuming as you’re thinking and giving us guidance for the year? And how would we sort of think about order cadence as the year unfolds?

Scott Drake : Yeah. Thanks, Rick. I would tell you from an order perspective, I think we’ve had a pretty good track record of momentum over the past few years despite the macro challenges that we faced. Q4 was a record for the company with nine orders. And given what we’ve already announced in Q1, we’re going to surpass what we did in Q4. So we feel very good about the commercial momentum in the business. I think that’s a consequence. As we’ve talked many times, it all originates with our innovation pipeline, which enables our clinical pipeline. That’s amplified with market awareness, and all of that culminates in therapy adoption, which drives orders in every other metric in our business. So I feel very good about where we’re at in terms of the commercial prospects of our business.

We don’t guide to orders as, Rick, I know you know well, and we do that for a very good reason. It is the most difficult metric, I believe, in the company to actually forecast. But it is an indicator and an important one in terms of the future growth of the business. But we feel very good on that front. As it relates to the other embedded question, China, we encourage investors to still think about it in terms of upside or risk mitigation in terms of the plans that we have put out there. On one hand, we are very excited about the opportunity to penetrate China, which is the second largest and fastest-growing market. But on the other hand, what I think we’ve learned in other parts of Asia, Europe and the U.S. The real catalyst in our business is getting a system in the ground and treating patients.

That is what really agitates a market. And I don’t think we’re going to have that in a demonstrable way in China for some period of time.

Rick Wise : Got you. Scott, we’ve heard from a lot of medtech companies so far this earnings season talking about the macro picture, supply chain inflation, freight, FX. And I think the message in general has been the macro environment, yeah, everybody’s got some specific issues. But the macro environment seems to be stable, if not improving, hearing a lot about improving. To what extent are macro headwinds stable or I hope, easing or do you expect in ’23? Maybe help us understand what that could mean for ViewRay in terms of component availability. You’ve highlighted several times the complexity of judging installation times and again, how — what’s embedded in the kind of guidance you’ve given us?

Scott Drake : Yeah, Rick, great question. We try to take all of these kind of positive signals and the challenges and bake all of that into our guidance and thinking for the year. Obviously, from a revenue standpoint, we’re coming off of a year that really exhibited pretty significant momentum with 46% growth on the top-line. And now our backlog of around $380 million really represents quite an opportunity for us to continue to grow nicely in ’23 and beyond. At the same time, we have shared in our prepared remarks and prior to this call that those macro challenges continue. While I would say the supply chain issues overall have improved, we still face those challenges unequivocally. And even though we’re chasing fewer components today, it really only takes one or two of those components to be a problem in our business.

So I would say supply chain is improving, but we still have very real challenges. The other challenges that you mentioned that we and others face persist. Inflation, interest rates, currency work against us and work against our distribution partners. We have seen their behavior change pretty quickly, given the aggregate effect of those areas. And they’re hanging on to their cash. But what we’ve learned over the past three years is how quickly things can change. Whether you’re talking about when COVID first hit or inflation spiked up, et cetera, we’ve seen things change pretty rapidly. And we’re now even seeing currency move back in the direction of our distribution partners. But with that dynamic backdrop, we’ve got to be very thoughtful in trying to take all of this into account.

There is no doubt that supply chain, elongation of receivable cycles, those challenges continue in the business. But we do our very best to take all of that into account as we provide our guidance, and we’ll provide transparency as we move forward.

Rick Wise : Okay. Thank you. One last one for me if I could. And maybe we’ll pick on Bill a little bit. Welcome to the call, Bill. I’ll ask you the tough questions. I appreciate that quarters are tough to predict and as you say, not perfectly indicative of what’s going on in the business. But maybe just good housekeeping suggests that we should — I should at least ask about the first quarter. Current — thank you for the first half, second half split, that’s helpful. If I look at the current consensus midpoint and the midpoint of your guidance, that might suggest a first half 50-55 kind of range. And I’m looking at the first quarter consensus at 25 and change, $25 million and change. Are you comfortable with this 27% sequential step down fourth quarter to first quarter? Am I setting — am I expressing this all correctly just as we get the year underway?

Bill Burke : Hey, Rick, thank you. And I’m happy to be at ViewRay here, and I appreciate the question. I’m going to try to stay away from specific quarterly guidance, but we did put out 25% to 40% growth for the year, which is a really healthy growth for us. And that growth range represents about 18 to 20 revenue units. And I’m going to just reiterate what you just said, which is we did say that the revenue would be weighted to the back half of the year to about 60%, right? So I’m going to stick with that for now. I do want to reiterate again that although we understand there’s quarterly numbers out there, right, we still believe that the value of the company is definitely better viewed as — on our annual guidance, our annual performance than a quarter-to-quarter basis.

But I also do want to say quarters are important for us internally, too, right? We have — how the cadence of installations run and the resources that we have to provide, both from a human resource standpoint and also from inventory planning is critical. So we do try to pace those installations and thus revenue units evenly throughout the year. So there is a business need to do that. So when you do look at the quarters, obviously, they’re going to be more evenly weighted than 10 units at 1 quarter per se. So I’d like to just stick with the 60% in the back half of the year and so my other quarterly comments that I made.

Rick Wise : Sounds good. Thank you.

Scott Drake : Thanks, Rick.

Operator: Your next question comes from the line of Jason Bednar from Piper. Your line is now open.

Jason Bednar : Hey, good afternoon, guys. Thanks for taking our questions. And apologies in advance for any background noise here. the backlog you had here is impressive. It’s obviously even stronger taking in account the Chindex order you have here in the first quarter. Questions that we often get on your business are, in some cases, paradoxical, asking when book-to-bill will decline and hope that the denominator there starts to improve, that the backlog conversion gets better. It’s a bit of a bigger picture topic, but can you talk about how you’re thinking about converting this backlog with respect to either backlog conversion rates or book-to-bill rates you’re anticipating as we look forward over the next few years?

Scott Drake : Yeah, Jason, thanks for the question. I think it’s actually — you’re right. It’s kind of a paradoxical one because we want to have our order book continue to grow rapidly. That’s a great leading indicator. And I would tell you that interest in MRIdian is definitely increasing. We really don’t have much of a demand problem anymore or an interest problem. It’s really urgency of getting these systems in the ground. And a lot of that is out of our control as we’ve highlighted here. And it is our motivation and we’re having more conversations with customers expressing urgency of getting their system in the ground. What I can tell you, if you take a step back and we attempted to address this a little bit in our prepared remarks.

But if you look at the transformation of this company over the past four years, and then to your point, you try to project that forward, you see a pretty interesting set of things unfolding. Four years ago, MRIdian was really perceived to be a niche technology. Not so today. We had virtually no clinical data, prospective Phase 2, Phase 3 data. Compare that to today, and you know what the clinical compendium is both now and what lies ahead. We had a throughput problem four years ago. I would say we don’t have that today. And then you add the benefits of A3i, and we are very, very well positioned there along with an innovation pipeline that is incredibly rich that we have not talked publicly about nor will we hear today. And again, four years ago, we were in virtually exclusively academic centers, and now we have about 40% of our customers that are community hospitals.

So I think when you look forward, Jason, it’s very difficult to predict with those very significant changes and improvements that have taken place when would things ultimately slow down a bit and the book-to-bill would come down. We don’t really see that happening here in the short term. And I think when you look at adoption of technology that’s so different across many different parts of medtech, I think you would also see in those instances, it’s very difficult to project what that adoption curve will look like. Our customers believe this is the future of radiation oncology, that you cannot unsee things and that the addition here to the field of very meaningful clinical data in both tough-to-treat and more common cancers is kind of a dawning of an age.

So I agree with them in their characterization of MRIdian. And I think it’s very difficult to characterize and quantify your question, but I appreciate it.

Jason Bednar : Yeah. Thanks, Scott. I mean, maybe as a follow-up just to that, I mean, I’m wondering what changed the trajectory of the revenue piece, that denominator. Because that could also then shrink that book-to-bill, not that we want to see that, but I think a lot of folks are sitting, looking at your backlog and saying, that’s really darn impressive. But also saying, we want to see that backlog convert. So I mean, is there something we can look at as far as backlog conversion rates may be over the next few years? What’s maybe — what’s a normal look at that backlog conversion rate when we — if we ever get back to normal?

Scott Drake : Yeah. God willing, we will. Offsetting penalties as it relates to that, Jason, on one hand, Paul and I have conversations with customer, including a couple here over the past couple of weeks where customers are trying to get into our installation slots even here still in ’23. And that’s very good to see. And I think we have more instances of that. We never have enough or too much of that. That feels really good on one hand. But on the other hand, to Rick’s question, we are fighting a lot of things that we don’t control. The permitting process, construction, labor shortages, both at construction companies and at hospitals and obviously, supply chain. So I would say there’s very positive signals. And on the other hand, there are very real challenges that we have been facing over time.

When those things are in the rearview mirror, perhaps we’ll be able to speed things up. But we want to be very transparent in terms of both the positive things that are happening in the business and the very real challenges that we face today that, frankly, we’ve been facing over the past three years.

Jason Bednar : Okay. That’s all fair. And maybe I’ll squeeze in one more here. I mean, follow the kind of the three-question format that Rick set. I appreciate the color on the community center mix that you provided there, kind of where the business is at today. if you were to put on your — kind of your wizard hat there, Scott, or whatever hat you want to wear, I guess, where does the community center mix go longer term for your business? Thanks.

Scott Drake : Yeah, Jason, I can be kind of brief here. I think it goes up. I think there’s more and more interest in MRIdian. I think people are fascinated by what our customers are doing. The clinical data, the throughput that they’re showing, the fact that they’re attracting net new patients, there’s a lot of interest. And when you look at the number of community hospitals versus academic centers, the community hospital number is just so much larger. So I think you’re going to see as we go forward, the proportion of our business that’s represented by community hospitals is going to go up.

Jason Bednar : Any number you want to throw on that? Or just believe it as higher than 40?

Scott Drake : That sounded like a fourth question. We’re good. We’re good.

Jason Bednar: All right. Thank you.

Scott Drake : Thanks, Jason.

Operator: Your next question comes from the line of Chris Pasquale from Nephron. Your line is now open.

Chris Pasquale : Thanks, good evening, guys. Bill, I wanted to make sure I understood your comments about the two turnkey units. So first, maybe just define that term for us and how that’s different from a typical install. And then could you just clarify whether those units are or are not included in the guidance you gave today?

Bill Burke : Sure. Thanks for the question. So the turnkey units are both included in the guidance we provided. A turnkey unit in these units are specifically VA units. It’s where revenue is recognized on the completion of the installation and customer acceptance. So if acceptance slips due to some change in the construction timeline, then the revenue may not be recognized until the following year. We’re doing everything we can. I know the commercial team is laser-focused on getting these turnkey unit installations in as quickly as we can. And we understand we want to get them done by December 31 and get customer acceptance at that point. But again, if they slip till customer acceptance on January 3, all the revenue wouldn’t be recognized until three days later. And that doesn’t change the trajectory or valuation or anything of the — like that of the company. It’s just a factor of what Scott just said in terms of the difficulty and construction timeline sometimes.

Chris Pasquale : That’s helpful. Thanks. And maybe while I have you, Bill, I’d be curious. You’ve got a fresh set of eyes looking at this company’s financials. Obviously, a company growing very quickly now, but trying to get the cost structure to line up with that revenue base. Anything in particular that you’re focused on as you come in here and take a look at how working capital is being managed, how the balance sheet is structured, where you think there could be opportunities for improvement?

Bill Burke : Yes, sure. So being here, I just finished my seventh week, right? I quickly established a set of priorities. And we’ve talked — we actually just on the Q&A here, we’ve spoken about a few of them. The first is really to ensure the supply chain continuity, right? To deliver our 25% to 40% growth that we guided towards and continue that growth going forward. Yes, the second part I have really is improving gross margin. Some of that gross margin improvement will come with revenue and the volume associated with that. But a portion of it longer term is because of the cost down initiative that we’re running. And I mentioned in the prepared remarks that we have $7 million to $10 million of cost dedicated to that cost down program this year.

And our intent is to spend that and get the fruits of that spending in later years. So that’s imperative. And then the third really is continue to leverage the OpEx, right? So I think that’s a combination of driving that top-line revenue growth like I mentioned, but also being frugal around expenses, too, and taking a second look at what we’re spending and what we’re getting out of that spending. But I just want to say, overall, questions after less than two months is like, this is a very well-run company. I think Scott and not just the leadership team, but the leadership across the entire company really has set the company up for long-term value creation. There’s a long run rate — a long runway has been created for continued success. And I think the right team is in place, and I think the right strategy is clearly in place, too.

So I don’t think there’s going to be any radical changes by me coming on board there.

Chris Pasquale : Great. Thanks.

Operator: Your next question comes from the line of Suraj Kalia from Oppenheimer. Your line is now open

Suraj Kalia : Good afternoon. Scott, Bill, can you hear me all right?

Scott Drake : We can, Suraj. Thank you.

Suraj Kalia : Perfect. So Scott, let me start out. The utilization in FY ’22 took a significant step-up by our math, a little over 200 patients treated per machine installed on average. So I guess you mentioned about quarter of your systems are doing about 300. So we sort of have an idea about the utilization bell curve. More specifically, Scott, just compare and contrast what more established machines are doing so that we have sort of a relative framework how much MRIdian is being utilized versus, let’s say, a CK or a Tomo or TrueBeam or something?

Scott Drake : Yeah, Suraj. So let me touch on that. And just for those who might be a little bit less familiar, if you go back a few years, one of the great pressure points that we were hearing from customers was throughput. And to your point, we’ve really addressed that even pre-A3i. And that’s been done through not only the engineering and improvements in the system, but also in what we’re doing to help train customers and bring them up to speed. And what we find in one account after the next is they generally start with one type of cancer in mind. And often it’s something either difficult like pancreas or more simple like prostate. And then they kind of have this aha moment over time, and they want to add new tumor types to what they’re treating.

And we’re doing that very actively now, and that’s a big part of what you’re seeing here, Suraj, incremental tumor types being treated by individual customers. And then what happens when the system is completely full and in many instances, and you know this personally, there are customers that have eight, even 10-week backlogs on MRIdian, it forces them to contemplate or purchase incremental MRIdian systems. And that’s what we’re seeing a bit more of here. And I think that increase, that step-up in utilization on a per system basis, I think you can anticipate that, that will continue and be facilitated further by A3i.

Suraj Kalia : Scott, if I could push you on this, let’s say, 200 is average. Would you venture to say other systems normalized are doing what, 1,000 per year? Or how should we — just somewhere a road map for us to look forward to.

Scott Drake : Yeah. I would say the outliers would be on the low end, give or take 100 or 150 patients a year. On the high end, we may have — I’m looking at Zig right now. A couple of customers doing north of 400, maybe on their way to 500 patients. I think that’s kind of what you would find in the bell curve of our customers today. But again, I think you’re going to see that bell curve shift to the right in a positive way as we go forward and once A3i is more fully implemented throughout the customer base.

Suraj Kalia : Got it. Scott, one last for you, and Bill, one for you. Scott, many years ago, I remember at a dinner meeting, you were musing about some sort of a leasing model for MRIdian. Would love to get any updated thoughts if that’s still alive, that thought is still alive. And Bill, specifically for you, I know on the backlog, there was a lot of questions about the book-to-bill. Maybe if I can rephrase the question, right? As you look at the backlog, how would you define as the backlog churn and maybe even more — simplifying it even further, over the last three years, how many orders have been canceled? And we know how many have been added. So just sort of give us some flavor how the turnover is happening in the backlog. Gentlemen, thank you for taking my questions.

Scott Drake : Thank you, Suraj. I’ll help Bill out. You may know this. But in terms of over the last three years, I think we’ve had, on average, five systems per year. Maybe this year, 6 systems come out of backlog, and that’s been pretty consistent over the past three years. Bill, I’m not sure if you have a ready answer for Suraj there on the other component of his question.

Bill Burke : No, I did know that answer, and you stole my thunder there. But generally, what we’re seeing, right, is what you just said, Scott, right? We’ve seen five or six orders per year that we have taken out of backlog. And like this year, for example, we haven’t seen any cancellations, right? So what’s come out of the backlog is based on the criteria that we’ve established and the reviews that we do each quarter. Also, we’ve added 32 orders to the backlog this year. We ordered — we put 28 into the backlog last year. And we’ve seen 10 units come out last year and 16 units come out this year as revenue units. So that’s really the type of churn that we’re seeing. But overall, in terms of the growth in the backlog, right, we have a 21% increase in FY ’22 compared to FY ’21.

Scott Drake : Yeah. And Suraj, I’ll touch on the other part of your question. We continue to have a lot of conversations with customers about various kind of acquisition models, if you will. Oftentimes, we have a customer that wants to acquire MRIdian that doesn’t have the full amount of capital at the ready for the timing that they would like to get a system in. And we do have conversations about lower upfront models and more ongoing revenue. Those conversations, I would say, are ongoing, and if anything, increasing in frequency. But often when our customers do the math, they decide to just pay the average selling price of around $6 million for the system and the construction on top of that. And we’re always looking for creative ways to reduce the friction and to increase the velocity of our overall commercial funnel. I do not think we have cracked the code there, but we will continue to work on it.

Suraj Kalia : Thank you.

Operator: Your next question comes from the line of Neil Chatterji from B. Riley. Your line is now open.

Unidentified Analyst: Hi, this is Brandon on for Neil. Congratulations on a strong end to the year. Regarding the University Hospital NPA, do you think that kind of agreement has a sort of halo effect on the region? And would you expect orders to pick up in the Ohio Midwest region as a result?

Scott Drake : Yeah. I would say that it has certainly gotten the attention of other customers in Northern Ohio, also in Central Ohio, in Columbus and up in Pittsburgh as well. It’s instigating some pretty interesting conversations. And we can’t wait to get our first and hopefully multiple systems up and running with UH. I think they’re going to do amazing things with the team that they have assembled there. So it will be interesting to see what happens and other key accounts in that geography. It is definitely already incited, I would say, more intense conversations. But I don’t want to try to forecast something that’s inherently difficult to forecast. But I would say interest is increasing in that geography, at least in part due to the UH announcement.

Unidentified Analyst: Okay. Yeah. Do you have any color that you can provide on the recent China order with Chindex and the motivations in particular behind the system adoption in China? Are these motivations differentiated compared to other geographies?

Scott Drake : Yeah, Brandon, I would say a couple of things. I would say at the highest level, independent of ViewRay, China — the Chinese government is really putting their shoulder to the wheel to increase access to care, cancer generally. They have a real need there. The government has recognized it, and they’re putting their money where their mouth is with their 2030 Healthy China initiative. I think MRIdian can play. And in the conversations with Chindex and in their conversations with end customers, I think there is a degree of interest that is increasing as it relates to the role that MRIdian can play there. As we have shared previously, we do not have any kind of Class A or Class B indication as yet. We anticipate that, that won’t be the case until 2024.

And we’re more likely to be in that Class A categorization, given the cost and complexity of the system. But look, what’s true in China is true in the rest of the world. Cancer patients deserve more precise, more personalized care. They deserve shorter courses of treatment with fewer negative side effects. And I think that’s attractive to Chinese cancer patients. And frankly, I think it’s attractive to cancer patients everywhere. And we are highly motivated in our partnership with Chindex to bring this therapy to Chinese cancer patients.

Unidentified Analyst: Great. Thanks for that. Maybe one last one from us. What have you heard from KOLs regarding the MIRAGE study now that the results have been published? Do you think that the publication has any incremental impact that we haven’t already seen from, say, the ASTRO presentation?

Scott Drake : Yeah. I think it sure does. I mean, whenever you get this kind of data that is this compelling in a publication that is this widespread, it is helpful to us. On an anonymized basis, I would tell you that multiple MRIdian customers are seeing demand increase as a consequence of the data that we have here in MIRAGE specifically. I think the publication helps it. I think that’s broadly true, Brandon. We have customers who are seeing when they share with patients the full therapeutic set of options, whether you’re talking about surgery or radiation therapy, they would tell you that more and more of their patients are choosing the non-invasive MRIdian option. And I think that has a significant degree to do with the clinical data that we have.

I think there’s another component of it that is market awareness-based from one patient to another, patients talking to one another. That is having increased demand effect at multiple MRIdian customers. And I think that is a component of our strategy that we’re talking about here, the innovation pipeline enabling the clinical pipeline. Those two allowing us to amplify the effect with market awareness, and all of that driving therapy adoption. I think that is the ViewRay story and ultimately, patients will write it. I have seen personally firsthand that when patients are aware that highly effective, short course, virtually side effect-free therapy, when they’re aware that, that therapy is available, they’ll demand it and travel for it, and we are experiencing that as we speak.

Unidentified Analyst: Thanks for the color. And thanks for taking our questions.

Scott Drake : Thanks, Brandon.

Operator: There are no further questions at this time. This concludes today’s conference call. Thank you for your participation. You may now disconnect.