U.S. Markets closed

Accuray Inc (ARAY) Q3 2019 Earnings Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Accuray Inc  (NASDAQ: ARAY)
Q3 2019 Earnings Call
April 23, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen and welcome to the Accuray's Fiscal Third Quarter Financial Results Conference Call. As a reminder this conference call is being recorded.

I would now like to turn the conference over to Michael Polyviou with EVC Group. Sir, you may begin.

Michael Polyviou -- Investor Relations, EVC Group

Thank you, Carmen and good afternoon everyone. Welcome to Accuray's conference call to review financial results for the third quarter of fiscal year 2019 which ended March 31, 2019, as well as recent corporate developments. Joining us today on the call are Josh Levine, Accuray's President and Chief Executive Officer and Shig Hamamatsu, Accuray's Senior Vice President and Chief Financial Officer.

Before we begin, I'd like to remind you that our call today includes forward-looking statements that involve risks and uncertainties including statements regarding our fiscal 2019 guidance, including factors that could affect such guidance, expectations regarding market conditions in China, expectations related to new product releases and future business plans and strategies. There are a number of factors that could cause actual results to differ materially from our expectations, including but not limited to risks associated with the adoption of the CyberKnife, TomoTherapy and Radixact Systems, commercial execution, operationalizing the China joint venture and overall strategy in China, the timing of China user license issuances and Company's ability to take advantage of the issuance of such licenses, future order growth, future revenue growth and macroeconomic factors outside of the Company's controls.

These and other risks are more describe -- more fully described in the news release we issued just after the market closed this afternoon, as well as in our filings with the SEC. The forward-looking statements on this call are based on information available to us as of today's date and we assume no obligation to update any forward looking statements that reflect actual performance or results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by the applicable securities laws.

Two housekeeping items. First, during the Q&A session, we request the participant to limit themselves to two questions and then requeue with any follow-ups. Second, all references that we make in a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our third quarter refer to our fiscal third quarter ended March 31, 2019.

Now, I'd like to turn the call over to Accuray's President and CEO, Josh Levine. Josh, please go ahead.

Joshua H. Levine -- President and Chief Executive Officer

Thanks, Michael. Good afternoon everyone, and thank you for joining us on today's call. Accuray's third quarter performance was highlighted by 12% year-over-year gross order growth. The quarter was driven by strength in China and continued momentum for both of our delivery systems and software offerings. We also saw strength in competitive bunker take-outs, which for a fifth straight quarter represented over 20% of our gross orders. On a year-to-date basis, gross orders grew 18%.

Also during the quarter, we substantially completed the $15 million cost savings initiative announced in the second quarter and should realize the full benefit in fiscal year 2020. Our third quarter highlights also included the execution of our joint venture agreement in China, which we believe will uniquely position us to succeed in that market, which represents the single largest growth opportunity in radiotherapy. We made progress during the third quarter in operationalizing the joint venture with our partner China Isotope and Radiation Corp., and I'll be providing some more color in detail on this later in my prepared remarks.

I'll provide a review of our regional gross orders performance in the quarter, highlight progress with the China joint venture and the China market opportunity as a whole, and then conclude with an update on our latest product innovations. I'll then turn the call over to Shig for a more detailed review of our financial performance.

Gross orders of $83.6 million in the third quarter increased 12% year-over-year due to a strong performance in our APAC region, specifically China, where we continue to see demand for our Type A products. As you're aware, end-user customers are still awaiting the issuance of licenses, which we believe, will begin by late May or early June. During the third quarter, we took 10 orders from our China distributor and the composition of the orders were primarily for Type A products.

In our Americas region, gross orders were down slightly in Q3 compared to the prior year, but have grown 13% on a year-to-date basis. While the growth in the Americas during the first nine months is encouraging, it's still a bit early to characterize this trend as a sustained momentum.

In our EMEA and Japan regions, gross orders declined on a year-over-year basis due to tough prior-year comparisons. With that said, both EMEA and Japan continue to be strong contributors to our overall gross order number and each contributed over 20% of the total gross orders in the third quarter. By order type, approximately 25% of overall orders in the third quarter were competitive take-outs, 60% were for new vaults, and 15% were replacements in our own installed base. All three of these metrics are consistent with our historical ranges.

Turning now to China. When we look at the overall level of Linac market penetration compared to mature markets around the world, it is clear that China is currently operating at a significant deficit in terms of clinical treatment capacity. To put this in comparative perspective, in the US, we have roughly 12.4 Linacs installed per million people. Western Europe has roughly six to seven Linacs per million and China is estimated currently to be at 1.4 Linacs per million.

When China's disease incidence forecasts are taken into account, the current level of radiotherapy treatment capacity represents both a significant concern, as well as an opportunity. While the near-term addressable market today is defined by the roughly 1,400 radiotherapy license quota outlined by China's Ministry of Health last October, to keep pace with future patient treatment needs, China will likely need a total of 5,000 plus Linacs over the next decade.

Given Accuray's current installed base of 900 devices, you can see why we're so excited about China as an overall growth catalyst for our business. We continue to make operational progress on executing our joint venture strategy. Last week, the JV obtained a business license certification. Having this license certification means we can now begin to apply for the Medical Device Radiation Safety license, as well as hire employees to staff the JV from a basic infrastructure perspective, which in commercial terms, moves us closer to order generation. We expect the JV to have the Radiation Safety licence to sell and take orders sometime during this summer.

During the early stages of ramping the JV, we will continue to work with our current distributor TomoKnife to take and convert orders to revenue to ensure there will be no disruption to our near-term opportunities. Once licenses begin to issue, this initial transition phase will allow us to maximize orders and revenue, while we operationalize the JV to support our longer-term strategy for the China market.

In the first phase of this transition, we anticipate the JV will begin selling Type A and our current Type B Accuray therapy -- Accuray radiotherapy devices much like a distributor. In the second phase of the strategy, the JV will manufacture and sell a locally branded, Made in China Type B radiotherapy device. This locally produced product would replace our current Type B, TomoH offering. We believe this two-faced strategy in parallel with our current distributor TomoKnife continuing their sales responsibility over the next year, will allow Accuray to best maximize both near and longer-term opportunities.

To enable longer-term market penetration, our manufacturing partner China Isotope has active selling relationships in almost 10,000 China hospitals across more than 30 provinces. China Isotope's customer relationships are also diverse by hospital type, including many institutions beyond the Tier 1 academic and research based hospitals, which have been Accuray's strength historically. As a result, we believe that the customer base that China Isotope currently serves, will provide Accuray with improved strategic market access that should help diversify and expand our overall market opportunity.

In the near term, Accuray's order and revenue activity in China will continue to be partially governed by two processes; the license application and issuance process and the tender process. Based on the latest information, the China Ministry of Health is nearing completion of its implementation of license application infrastructure and it is expected that the initial batch of Type A licenses should start to flow soon, most likely in late May or early June. We then anticipate it will take approximately six to eight additional weeks for the tenders to be awarded and the first units to go to revenue. We, therefore, continue to expect our order activity in China will benefit fiscal 2019 with the bulk of the revenue benefit occurring in fiscal 2020. As we communicated on our last call, we do anticipate some quarter-to-quarter variability in order flow as this licensing and tender process becomes fully activated, which Shig will cover in more detail shortly.

Turning to our product development roadmap, our current upgrade strategy is focused on further increasing the speed and utility of our devices and continuing to extend Accuray's historical strength in the overall precision of our treatments. The VOLO Optimizer software upgrade for CyberKnife, which was introduced at ASTRO last fall, is now on approximately 30% of compatible CyberKnife systems in our installed base. The VOLO Optimizer reduces treatment times by up to 50% allowing CyberKnife treatments to be performed in 15 minutes to 30 minutes depending on the disease site. The reduction in treatment planning times is even greater at approximately 90%. We believe the availability of the VOLO upgrade on CyberKnife will be both a catalyst to our installed base replacement cycle and allow us to attract new customers to the CyberKnife platform. Currently, approximately 100 systems in our CyberKnife installed base are the latest generation M6 platform that is MLC compatible and capable of realizing the full benefits of enhanced treatment times of the VOLO Optimizer. This means a reasonable number of the roughly 250 CyberKnife systems in our installed base are high-value trade-in trade-up targets for our latest generation CyberKnife platform.

For Radixact, Accuray is bringing the motion synchronization capability currently found on CyberKnife to our extremely versatile Radixact IGRT system. We expect to have our first shipment of this important feature, which we call Synchrony for Radixact by the end of our current fiscal year. Broader commercial launch will be toward the end of the calendar year. Synchrony corrects for target motion during treatment delivery in real time without the need for gated treatments or uncomfortable patient positioning devices designed to restrict patient movement. The result is efficient treatment deliveries that enable tighter dosing margins, improved sparing of healthy tissues, and greater patient comfort. As the original innovator of motion tracking and synchronization with our CyberKnife system, Accuray fully intends to extend our leadership in this important area by transitioning this capability to our Radixact platform.

In addition to Synchrony, we are in active development on enhanced imaging upgrades for both our Radixact and CyberKnife systems that will improve soft tissue resolution and contrast. We believe these upgrades will expand the market opportunity for both of our treatment delivery platforms. We anticipate an enthusiastic customer reception for both our Synchrony motion tracking and synchronization upgrade for Radixact and the VOLO Optimizer for CyberKnife at the upcoming ESTRO conference in Milan later this week.

And now, I'd like to turn the call over to Shig for a deeper dive into our financial performance in the third quarter and our outlook.

Shig Hamamatsu -- Senior Vice President, Chief Financial Officer

Thank you, Josh and good afternoon everyone. As Josh highlighted, we had $83.6 million of gross orders in the third quarter, representing an increase of 12% over prior year. On a year-to-date basis, gross orders have increased 18% over fiscal 2018.

Starting in fiscal year 2019, we included upgrades purchased through our service contracts in our gross orders and these types of orders totaled $900,000 for our third quarter, and $3.6 million on a year-to-date basis. Excluding these upgrades on service contracts, gross orders increased 10% in the third quarter and 16% on a year-to-date basis.

From a product mix perspective, CyberKnife contributed approximately 45% of total gross orders compared with 35% a year ago, primarily driven by the strong demand in China. The increased contribution from CyberKnife should possibly impact our gross margin as these orders convert to revenue in the future. Our Radixact and TomoTherapy platform continue to perform well and accounted for approximately 55% of the Q3 total gross orders.

Net age-outs for the quarter was $15.2 million, down from $25.9 million in the prior year. Net age-outs consisted of $20.8 million of age-outs offset by $5.6 million of age-ins. We also recorded $7.3 million of cancellations and $1.3 million of currency-related adjustments. As a result, on a net basis, we generated $59.8 million of orders in our third quarter.

As discussed prior calls, the volume of order cancellations can fluctuate from quarter-to-quarter. On a year-to-date basis, order cancellations totaled $16 million or approximately 3% of our total backlog which is consistent with our historical trend. China Type A systems represented about 30% of the total age-outs for the quarter. We continue to believe we will start converting these aged-out China orders to revenue, most likely starting in fiscal year 2020 as Type A licenses start to be issued.

We ended our third quarter with backlog of $493.9 million, representing an increase of 5% over prior year.

Turning now to our income statement. Total revenue for the third quarter was $103.2 million, representing a 3% increase over prior year. EMEA, APAC and Japan drove the revenue growth in the quarter. On a year-to-date basis total revenue grew 4% over prior year. Product revenue for the quarter was $46.5 million, an increase of 7% over prior year.

The product revenue increase was driven by strong demand for the Radixact system, which approximately doubled in unit volume from the prior year. Since its introduction two-and-a-half years ago, we have recognized revenue for approximately 90 Radixact systems. Service revenue for the quarter was $56.8 million, which was relatively flat year-over-year. I would like to remind you that the prior-year service revenue included a higher than normal level of upgrades purchased through service contracts, which was driven by new software releases related to our Precision Treatment Planning and iDMS connectivity.

As we mentioned in prior calls, timing of upgrades can vary from quarter-to-quarter. Sequentially, service revenue was up 5% from the previous quarter driven by continued installed base growth, training and spare parts revenue. On a year-to-date basis, service revenue grew 2%.

Turning now to gross margin. Our overall gross margin for the third quarter was 39.2% compared to 36.3% in the prior year. Year-to-date, our overall gross margin was 38.7% or approximately flat year-over-year. Product gross margin was 41.5% in the third quarter compared to 41.4% in the prior year. On a year-to-date basis, product gross margin was 40.6%, down from 42.5% in the prior year due to the lower mix of CyberKnife system revenue. Service gross margin in the third quarter was 37.3% compared to 32.4% in the prior year. The lower gross margin in the prior year included the impact of higher than normal service parts consumption in that quarter, which was an isolated incident. On a year-to-date basis, service gross margin was 37.2% compared to 36.3% in the prior year, as we continue to expand our overall service gross margins. We believe our continued investment in service efficiency and product reliability will continue to improve our service margin -- service gross margin over time.

Moving down to the income statement, operating expenses for the quarter were $37.6 million, a decrease of 6% from the prior year. Contributing to the decrease was an $800,000 non-cash one-time credit related to a lease termination of one of our office buildings. Excluding this one-time credit, our third quarter operating expenses were $38.4 million, a decrease of 4% from the prior year.

On a year-to-date basis, operating expenses were $119 million or down 1% year-over-year. Excluding one-time charges related to the accounts receivable impairment, severance and lease termination credit, year-to-date operating expenses decreased $5 million or 4% from the prior year. Adjusted EBITDA for the third quarter was $6.7 million compared to $1.4 million in the prior year. The third quarter adjusted EBITDA excludes the impact of one-time non-cash credit related to the lease termination I mentioned earlier.

Adjusted EBITDA on a year-to-date basis was $14.8 million compared to $9.3 million in the prior year. We ended our third quarter with $65 million of cash and short-term restricted cash, which remained flat from quarter -- from prior quarter as we continue to invest in our working capital to prepare for converting China orders to revenue in fiscal 2020. Before I move on to discuss our fiscal 2019 guidance, I would like to update the status of the cost reduction initiatives we discussed in our previous calls. With the execution of the initiatives substantially completed, we continue to expect the total savings from this action to be approximately $15 million on an annualized basis and start realizing the full benefit of this action in the fourth quarter of this fiscal year.

Of the expected savings, approximately 30% will benefit gross margin, while the remainder will reduce operating expenses across all functions. A large benefit of the cost reduction initiatives was realized in our third quarter resulting in $6.7 million of adjusted EBITDA or $23 million on a trailing 12 months basis. This number compares to $17 million (ph) of EBITDA we generated in fiscal year 2018. We believe, we now have the right operating cost structure in place to expand our EBITDA generation capability as we grow orders and revenue.

Turning now to our guidance for fiscal 2019. Today, we are updating guidance calling for annual revenue in the range of $415 million to $425 million, which would represent growth of approximately 3% to 5% over fiscal year 2018. The revenue range provided is reflective of the timing of China license issuances, which as Josh explained earlier, will not likely benefit us in the fourth quarter. More specifically, if our end customers have not completed their tender process in the next 30 days to 45 days, we don't believe we will be recognizing any China order revenue in the fourth quarter which will likely result in achieving the lower end of the revenue guidance I just provided. Regardless of the amount of China revenue we realize in the fourth quarter, we continue to believe that China revenue conversion will accelerate during the first half of fiscal 2020.

We expect adjusted EBITDA range to be $23 million to $29 million. As EBITDA most closely follows revenue, if there is a delay in China licenses and revenue conversion, we would finish the year in the lower end of this EBITDA range. In terms of gross orders, during fiscal 2019, we have refrained from providing specific guidance on this metric. However, in light of our exceptional 18% year-over-year growth for the first nine months of fiscal year, driven primarily by pent-up demand from China and the reporting of the largest US multi-system order in the Company's history during the fourth quarter of fiscal 2018, we felt we should share with you our expectations for full-year gross orders. Currently, the fourth quarter gross orders are expected to be flat to slightly less than last year's figure of $96.4 million, which as I previously mentioned, included the largest US order in the Company's history. Therefore, our gross order growth rate for fiscal 2019 would be in the low teens.

Turning to our net age-out forecast, we anticipate fourth net age-outs to be in the mid $20 million range, although as we explained (ph) in the third quarter, we are and will actively work on promoting those orders to revenue. In terms of our gross margin outlook, we continue to expect overall gross margin to be flat to slightly down to our fiscal 2018 levels. This is a result of the TomoTherapy, Radixact platform contributing to a higher percentage of the total revenue.

We now expect operating expenses for the full fiscal year to be down approximately 2% year-over-year. Excluding the impact of one-time items of impairment, severance, and the lease termination of credit, operating expenses are forecasted to be down 5% year-over-year.

And with that, I'd like to hand the call back to Josh.

Joshua H. Levine -- President and Chief Executive Officer

Thanks, Shig. Before we open the call for your questions, I'd like to thank the entire Accuray team for their increased focus, commitment, and improving execution supporting the important work that's making a difference for our customers and patients.

Additionally, we would like our shareholders and analysts to note that on Monday, September 16th from 3:30 p.m. to 5:30 p.m. Central time, Accuray will host an Analyst and Investor information session at the ASTRO conference in Chicago. I wanted to make note of this event today, because it's the first time in many years our Company has hosted an investor event at ASTRO and we wanted to give investors and analysts as much advance notice on this date as possible.

And operator, we're now ready to open the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question is from Josh Jennings with Cowen. Your line is open.

Josh Jennings -- Cowen & Co -- Analyst

Hi, good afternoon Josh and Shig. Thanks for taking the questions and congratulations on the strong order growth and the progress in the China JV. I was hoping to start with just the China market. I know that there's a lot of, I guess, administrative things that need to happen with the China Ministry of Health still completing the license application infrastructure as you mentioned your prepared remarks. And turning to the last two quarters most of the China orders have been Type A. And I was just hoping to understand better the dynamic about why you haven't seen more Type B orders coming out of China and when you think that, that could be opening up and when that could turn into a tailwind because of the 1,400, I guess, Class A and B licenses in the quarter there? I think (inaudible) vast majority of 90% or so are Type B.

Joshua H. Levine -- President and Chief Executive Officer

Yes, you're absolutely right Josh on that. The mix is much heavier overall to the Type B side. The simple answer is that the, we have been building -- kind of building out the additional dealer network on -- or a sales agent network on the Type B side. As we talked about in prepared remarks, the JV will end up -- well, first of all, the transition between TomoKnife and the JV that our distributor TomoKnife kind of the historical distributor, has a 12-month tail to continue to sell and we want that activity to continue for reasons related to continued momentum. But the Type B products are really probably going to be more of a joint venture focus. And the work that's taking place right now on that front is to line up sales agents across the bulk of the provinces to assist in that effort. And I don't think quite frankly, it's going to be too much longer before we start to see some Type B activity start to flow.

I mean again, as you pointed out, the first two quarters of -- the last two quarters of activity have really been Type A centric and more focused on that side. That's because TomoKnife has continued to be essentially the kind of the sales force of record, a historical record if you will. But the JV is going to be starting to ramp and start to contribute to the Type B side of this, I would predict in the next quarter or two, and it should flow pretty good from there.

So...

Josh Jennings -- Cowen & Co -- Analyst

Understood.

Joshua H. Levine -- President and Chief Executive Officer

Really, more -- more just start-up infrastructure and start-up related ramp than anything else.

Josh Jennings -- Cowen & Co -- Analyst

Understood. Thanks for that. My second question, my final question is just on the Americas business, I think you guys anniversary the US sales restructuring effort this quarter and that bore a lot of fruit over the last four quarters, but can you just talk about, I guess, how we should think about the Americas' franchise and the comps over the next couple of quarters and whether that region can return to growth in the coming quarters? Thanks for taking the questions.

Joshua H. Levine -- President and Chief Executive Officer

Sure. The simple answer is yes, I have an expectation that the Americas and the US geography predominantly are going to contribute to a greater extent than they have. The numbers right now, the percentage growth in order of volume looks pretty frothy, but that's again (inaudible) I'd say, fairly modest baselines from prior year. They've been moving in the right direction though for the last two or three quarters, so I'd say there's some consistency there in what we're seeing. I think the funnel in general, is improving. There are as we've talked about in the last quarter or two, there are some multi-system orders in the US funnel, in the Americas funnel that I think again, are making progress. And I think that we'll finish this year at a reasonably strong percentage growth from the US over prior. But again, I think we're just being realistic and transparent about the prior-year numbers. I mean, we're just -- those really aren't necessarily the kind of benchmark that I would like to hold the US team accountable to. But based on the funnel that I see developing and I think the quality of the people that we've added and the leadership that's in place, Josh, I feel good about where the US should end up over the course of certainly the next, I'd say four quarters to six quarters. So more to come there, we need to execute, but I feel good about where we're headed.

Josh Jennings -- Cowen & Co -- Analyst

Thanks again.

Operator

Thank you. And our next question is from Anthony Petrone with Jefferies. Your line is open.

Anthony Petrone -- Jefferies -- Analyst

Thanks and good afternoon. Congratulations also on a strong quarter, and obviously, the development in China. I'm going to start with a couple of questions on China and then I'll just shift over to Radixact and some of the clearances and new solutions on that system. But on China, maybe you understood Josh, just on how the rest of the fiscal year is going to play out, maybe just to piggyback on Josh's question, as we look into really over -- through 2021, what is the Company's expectation on the number of licenses that ultimately will convert to orders and revenue out of that estimated 1,400 total between Class A and Class B through the soft deadline of 2021 and then I'll have a follow-up on the JV.

Joshua H. Levine -- President and Chief Executive Officer

I mean Anthony, at any level of analysis, that's obviously -- it's a lot of devices. The number of -- the aggregate number of licenses in the quota is a big number. With that said, the market has gone at least two years with essentially being in park at least the public facilities market, obviously the private facilities have had a little bit more leeway, but the vast majority of the market in terms of existing serve (ph) market institutions have really not been able to acquire the equipment that they need, based on lack of clarity at least in our situation, lack of clarity around Type A versus Type B. It's impossible to predict in absolute terms what the Ministry of Health will issue, but as an internal metric, we're making assumptions around 75%, 80% of that 1,400 license universe across both A and B. That's kind of an internal set of assumptions we're making relative to a number of aspects of our business planning process. As you might imagine, we've got to ramp production from a revenue support standpoint to meet that kind of accelerated or expanded forecast going forward in the next 24 months, a number of other internal systems and requirements to support the business. So we've had to make certain assumptions about what it looks like and the internal take or benchmark, if you will, is probably somewhere in that 75% to 80% kind of range.

It could be higher than that. I mean, again there's a lot of work to do to get -- once the licenses start to flow, there's still a lot of work required to get equipment in the ground from an installation and a training standpoint. But I think that our aspects or our estimates if you will, of what's actionable or what will be actionable in the next two years is probably somewhere in that 75% range.

Anthony Petrone -- Jefferies -- Analyst

That's helpful, and just on the JV structure and as it relates specifically to Type B, out of the gate here you have Onrad and TomoH that you had mentioned on the last call that the second phase of the JV will really be centered around the locally manufactured product that will be focused in Type B regions, just how is that going to work out between the two transitions? In other words, do you think the market within Type B freezes a bit as it waits for the local product or do you expect that you'll see some early traction with TomoH and Onrad?

Joshua H. Levine -- President and Chief Executive Officer

I think we'll see some early traction with TomoH and Onrad. I think -- I mean the degree of pent-up demand is pretty significant and that -- obviously the bigger upside here, the bigger volume requirements are coming from smaller and medium-sized facilities which are facilities that are -- hospitals that are kind of outside of the major population centers in the provinces and that's where China Isotope and Radiation Corp's market presence is. They have a presence of -- a sales presence in something like 30 different provinces that represent the bulk of the geography and their active resources of theirs in place, active customer relationships and we hope to leverage a lot of that, or at least more than our fair share, call it, in the ramp with just the products that we'll have in the near term. Going forward, the manufacturing facility that's going to produce our Type B product that China made, Type B product, that facility is already in -- they're building that facility out as we speak.

So this is not something that we're -- that they're sitting on or we're sitting on waiting for licenses to issue. There's a ramp here that's required and we needed to start quite frankly as soon as we could, following the execution of the JV agreement and we've done that. So they're moving as expeditiously as they can, and we're in full support of that. We want to have a product registration package that we can get in front of CFDA as soon as possible for review and all of that should help to -- as soon as they're ready to start producing and as soon as we've got a regulatory approval process obtained, we should be in business on the Type B side with the locally manufactured product.

Anthony Petrone -- Jefferies -- Analyst

I appreciate that. I'll get back in queue. Thanks.

Operator

Thank you. Our next question comes from Brooks O'Neil with Lake Street Capital Markets. Your line is open.

Brooks O'Neil -- Lake Street -- Analyst

Good afternoon. I hope to ask, -- sneak in a couple of quickies here. First, Josh you mentioned competitive wins. I didn't hear you say a lot about replacement cycle progress in the US. Could you just give us a quick update on that?

Joshua H. Levine -- President and Chief Executive Officer

Yes, replacement cycle in the US, again, it's not just the US discussion, it's a US and Western Europe opportunity. But again, it's been relatively stable at roughly 15% to 20% of the total gross order volume. So it's consistent with where it's been, Brooks. And again, I think that our view is that with the themes that we're launching or have launched in the last quarter and the going-forward for on the upgrade side with VOLO and soon to be Synchrony on Radixact, we think these are catalysts for replacement sale opportunity for trade-in trade-up of older generation devices in both geographies, both US and Western Europe.

Brooks O'Neil -- Lake Street -- Analyst

Perfect. That's great. Secondly, you mentioned soft tissue visualization with Synchrony. Can you just give us a feel or your perspective on how that will match up with the offerings of competitors we're hearing so much about?

Joshua H. Levine -- President and Chief Executive Officer

I would characterize what we're doing on imaging from a relative capability standpoint. I would encourage you to or characterize you to think of it in terms of diagnostic quality CT capability, which we think is going to provide with really terrific contrast. We think that's going to be, quite frankly, very, very competitive with any of the cone beam capability that's out there right now from competitors. Again, it will not have the contrast that MRI capability will, but Radixact will run circles around from a workflow standpoint and a throughput and efficiency standpoint. It'll be able to do things from a workflow perspective and a throughput perspective that you can't do with an MRI Linac. So again, I don't think a head-to-head comparison there can be made, nor would I say that again, we're not -- if we are to say this in the past, we're not seeing devices of ours decommissioned to make room for MRI Linacs, either the MRIdian device or the Unity device.

So I don't believe that in the primary customer base that our history has, -- we've been the strongest historically in terms of academic or research-based medical centers. We're not in a zero some game from a bunker competition standpoint without the MRI Linac devices. I think when we can get our imaging solutions to market, they will be very, very competitive if not even more capable than cone beam, kV cone beam, which is kind of -- that's kind of been the industry standard if you will, prior to -- at least for the more workforce product offerings, if you will.

Brooks O'Neil -- Lake Street -- Analyst

Sure. And if I could sneak in one last one, could you just comment on your balance sheet and any strategy you're currently contemplating with regard to I think remaining converts?

Shig Hamamatsu -- Senior Vice President, Chief Financial Officer

Yes. Brooks, thanks for the question. I think we have about three more years to go. I think for time being, we're focusing on generating cash and trying to pay down the non-convert debt in the near term. I think we need to talk about the convert sometime soon, but that will probably also depend on a stock price as well in a couple of years to see what a stock price is and how to approach the either --what do we convert, and in terms of refinancing that piece of it. So I'll just leave at that for now.

Brooks O'Neil -- Lake Street -- Analyst

Okay. Thank you so much.

Operator

Thank you. And our next question is from Sean Lavin with BTIG. Your line is open.

Marie Thibault -- BTIG -- Analyst

Hi it's Marie Thibault on for Sean Lavin tonight. Thanks for taking the questions.

Joshua H. Levine -- President and Chief Executive Officer

Hi, Marie.

Marie Thibault -- BTIG -- Analyst

Hi. I appreciate all the level of detail you've given us kind of on the China JV and the tender process. I wanted to ask just one follow-up on that and you know when you said, usually it takes about 30 days to 45 days for the tender process to start up. Is that sort of an average -- is that -- do we see kind of a bulk of tenders be issued around then, or do we -- could we see some kind of jump out in front and come in quicker? I'm just trying to get my hands around the likelihood of seeing anything in this current fiscal year.

Joshua H. Levine -- President and Chief Executive Officer

Yes, I mean, I guess it is possible Marie, that there could be stuff, things that come sooner, but I think as far as our view, we've kind of been -- I think we've been growing in our view on this that we're strengthening our view on this from an internal perspective that it's just been so difficult to -- with any degree of precision, imagine or predict forward-looking how these processes get fully activated, that it becomes -- if the tenders are -- that process isn't completed by really legitimately by the end of this month or the first week or two of the month of May, the window of time or if the licenses aren't issued by -- in that time frame, the tender process is, we think probably less likely to occur on a timeframe that would give us the chance to take revenue in this fourth quarter in the current quarter.

So we've been -- I mean, maybe we've been conservative in that, but just given what we believe, what we've seen historically, what we believe is happening, we think that's probably the right approach, the conservative approach. I think it's interesting that the application process -- we had heard a lot about the application process and the Ministry of Health has developed -- what's been happening behind the scenes is, they've been developing an online application process to assist the thousands of institutions that have an active application that they want to submit and have in the active queue for the tender process that's forthcoming. And that online, the build-out of that online infrastructure, the validation of it, our understanding from our people on the ground there is that's what's taken the added time here. So again, we just think it probably makes the most sense to be more reserved in our outlook with regards to the timing of that and how that translates into the timing of revenue recognition for us.

Marie Thibault -- BTIG -- Analyst

Okay. Thank you.

Joshua H. Levine -- President and Chief Executive Officer

I think what it says -- what it says to me is that the first quarter of fiscal '20 and the first half of fiscal '20 are going to be big ramps in terms of revenue.

Marie Thibault -- BTIG -- Analyst

Okay. Appreciate that insight, Josh. Thank you for that. And I guess, my second question, I'd like to turn back kind of, the domestic market. I know that a few quarters back, there's a lot of focus on the potential for multi-system orders. Were there any multi-system orders in the quarter or what's sort of that funnel look like to you at this point?

Joshua H. Levine -- President and Chief Executive Officer

There was nothing of note in the quarter that we're reporting today, but I will tell you that there are in the funnel going forward, a number of multi-system orders that we've been progressing or advancing over the course of the last few quarters. And I think some of them could hit this quarter, some of them are likely if they're not this quarter, then they're in probably the first half of fiscal '20. And so again, I think that they've made -- that the US team has made pretty good progress in teaming those up and advancing them, but again, nothing to report or to forecast definitively in the current quarter that we're reporting.

Marie Thibault -- BTIG -- Analyst

Okay, perfect. Thanks so much.

Operator

Thank you. And our last question is from Tycho Peterson with JP Morgan. Your line is open.

Tycho Peterson -- JP Morgan -- Analyst

Thanks. Josh, let me now start with reimbursement. CMS obviously leaked (ph) kind of the bundling, that you put the rates out, but we know it's coming. Just curious what you're hearing in the field from customers? Obviously, it didn't seem like it impacted the order book, but you know as we think about bundling going forward, how do you think the response will be from the customer base?

Joshua H. Levine -- President and Chief Executive Officer

Yes. It's good to hear from you Tycho. So if CMS sticks to historical timing, we would expect to hear something in -- probably in the month of July. I mean they've been, if you go back the last five or six years, they've been as early as July 4th weekend; a couple of years, they've been later, but July would probably be a good expectation if they stay to historical precedent. The general, I would say, set of assumptions from everybody close to this is that it will be -- the final rule will capture some kind of alternative payment model.

You know something around value based care, something that would be really encouraging more at least in specific radiotherapy terms, things that would move customers and hospitals essentially more to a hyperfractionated or SBRT kind of a treatment model and away from the -- what I'll call the fraction preservationist kind of approach which has been the IMRT modeled or the 3D conformal model of kind of a long-standing history. So you're talking about -- for the patient, you are talking about faster, shorter treatment regimens for sure and for payers, you're talking about a more accelerated timeline and one that is probably more cost efficient in construct than what's been in place over a long period of time. We think we're positioned, and you've heard us say this in the past, we think we're positioned pretty strongly with our portfolio. We think on both platforms, we really have solutions technically and treatment wise that fit that model going forward. So -- but again, nothing definitive as of now. If a final rule comes out on typical timelines from CMS, it'll probably be sometime this summer.

Tycho Peterson -- JP Morgan -- Analyst

Okay. And then on the software side, I think you guys announced during the quarter, you had your first treatments, you are partnering up with RayStation with RaySearch. I'm just curious if you could talk about how that relationship has evolved and should we see kind of more joint sales with RayStation going forward beyond the Anderson deal?

Joshua H. Levine -- President and Chief Executive Officer

Yes. I think we will. We -- our view is that they are becoming -- when you look at where their installation is taking place, the growth in their installed base, they continue to be the fastest-growing stand-alone treatment system provider in the market. They have become at the academic level or research-based medical center level, they've become in many locations, kind of the system of choice across a wide variety of equipment. So they plan for multiple devices, multiple types of products, and they've made it easier for customers to say anything that falls outside of our ability to plan on RayStation really is kind of an outlier situation for us that we'd rather not deal with.

So we think strategically, it still makes a lot of sense for us to be working with them. They help expand and leverage our reach and they help position us in a way that is -- we can avoid being the outlier quite frankly, i.e. the one product line on the systems side that has to have its own workstation for treatment planning purposes outside of RayStation, which they have that's planning for everything else they own. So it just makes a lot of sense strategically. We've got I think the right mindset and incentives in place between the organizations at the field level to encourage joint selling activity and joint account targeting. So I still think what we're doing there from the outset strategically, it still makes sense and I would predict it will have a bigger impact going forward.

Tycho Peterson -- JP Morgan -- Analyst

Okay. And then last one, I appreciate all the color on China. As we think about China Isotope kind of ramping up on their locally made device, do we assume this is accretive to margins or how should we think about margin impact?

Shig Hamamatsu -- Senior Vice President, Chief Financial Officer

Yes. Thanks for the question, Tycho. We do think it should help our margin. We certainly have negotiated a pretty good transfer price with a joint venture from our perspective. So we do expect that to be gross margin accretive.

Joshua H. Levine -- President and Chief Executive Officer

I also think that on that topic, we'll get better efficiency over time from them. I think that the supply chain opportunities over time will be a bigger impact than they certainly are at the outset. We will be the supply chain source for them with parts and key componentry out of Madison, out of our manufacturing facility in Madison at least to begin with, but there's already thoughts and conversations taking place between the two organizations Tycho, around forward-looking thoughts and how we how leverage that up in ways that can help both organizations. So I think that it should be, that should be another impact, positive impact to margin over time or a reduction in COGS.

Tycho Peterson -- JP Morgan -- Analyst

Okay. Thank you.

Operator

Thank you. And our next question is from Phillip Cooper (ph) with Citi. Your line is open.

Phillip Cooper -- Citi -- Analyst

Hi, guys. Thanks for the question. I was hoping on the heels of the CT imaging kind of coming to market, could you provide an update on your thoughts on adaptive therapy maybe timing or your outlook for producing a product on that front?

Joshua H. Levine -- President and Chief Executive Officer

So again, we're probably in the 18-month timeline on imaging commercialization, Phil. And so that's got to be -- that's clearly the primary gating item on this. From an adaptive therapy standpoint, I mean, I think that our ability to and the work we've done to improve treatment planning speed with VOLO, improve optimization around plan comparisons, all of these things should assist pretty substantially in making adaptive-- truly adaptive therapy a reality and a more efficient process than it is today. So, I think the view is that the only way to adaptive therapy takes place is of an MRI Linac. I think those are -- those views or I would describe them as constrained.

Phillip Cooper -- Citi -- Analyst

Sure OK. All right that was helpful context and (inaudible). I appreciate it. A bit more technical second one, if I could. A little bit of the age-in age-out dynamic, can you talk about how China is sort of impacting that and any impact that it's having on cancellations at this point, maybe a question for Shig there.

Shig Hamamatsu -- Senior Vice President, Chief Financial Officer

Yes. Phil, so the age out as I said in my prepared remarks for the quarter was a total of $21 million and 30% of that was China just to kind of give you a sense. The -- so China continued to have some age-out, but as I said also in the remarks that we'll continue to work on those. Those are still good orders. As you know, it just more than 30 months old before our policy gets aged out. But again, we are going to continue to work on those to convert them into revenue starting FY '20.

Phillip Cooper -- Citi -- Analyst

Okay.

Joshua H. Levine -- President and Chief Executive Officer

(multiple speakers) cancellation was by China by the way.

Phillip Cooper -- Citi -- Analyst

Okay. None of the cancellations from China. And as we age back in or are we going to see sort of like a book-to-bill conversion where we age back in and then convert to revenue in the same quarter on the China front or is there going to be some lead time?

Joshua H. Levine -- President and Chief Executive Officer

Yes, exactly. Mechanically speaking you got it right. I mean when something age backs in, just like we did this quarter, we had a couple of deals there, it goes back to backlog, but it comes out immediately because it's always a book and bill in that quarter mathematically speaking.

Phillip Cooper -- Citi -- Analyst

Okay. All right. That's super helpful. Thanks.

Joshua H. Levine -- President and Chief Executive Officer

Yep.

Operator

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call to Josh Levine in for any final remarks.

Joshua H. Levine -- President and Chief Executive Officer

Thanks operator, and thank you everyone for your participation this afternoon. We look forward to talking to you on our Q4 and full-year update. Thanks very much.

Operator

And with that, ladies and gentlemen, we thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.

Duration: 56 minutes

Call participants:

Michael Polyviou -- Investor Relations, EVC Group

Joshua H. Levine -- President and Chief Executive Officer

Shig Hamamatsu -- Senior Vice President, Chief Financial Officer

Josh Jennings -- Cowen & Co -- Analyst

Anthony Petrone -- Jefferies -- Analyst

Brooks O'Neil -- Lake Street -- Analyst

Marie Thibault -- BTIG -- Analyst

Tycho Peterson -- JP Morgan -- Analyst

Phillip Cooper -- Citi -- Analyst

More ARAY analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

More From The Motley Fool

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.