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Edited Transcript of VRAY earnings conference call or presentation 12-Nov-19 9:30pm GMT

Q3 2019 ViewRay Inc Earnings Call

OAKWOOD VILLAGE Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Viewray Inc earnings conference call or presentation Tuesday, November 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michaella Gallina

ViewRay, Inc. - Senior Director of IR & Communications

* Scott William Drake

ViewRay, Inc. - President, CEO & Director

* Shahriar Matin

ViewRay, Inc. - COO

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Conference Call Participants

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* Andrew Jacob D'Silva

B. Riley FBR, Inc., Research Division - Senior Analyst

* Anthony Charles Petrone

Jefferies LLC, Research Division - Healthcare Analyst

* Christopher Thomas Pasquale

Guggenheim Securities, LLC, Research Division - Director and Senior Analyst

* Difei Yang

Mizuho Securities USA LLC, Research Division - Executive Director of Americas Research

* Jason M. Bednar

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate

* Mason E. Austen

Morgan Stanley, Research Division - Research Associate

* Matthew Oliver O'Brien

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Suraj Kalia

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 ViewRay Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker, Ms. Michaella Gallina, Head of Investor Relations.

Please go ahead, ma'am.

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Michaella Gallina, ViewRay, Inc. - Senior Director of IR & Communications [2]

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Thank you, Sherry. Good afternoon, everyone, and welcome to ViewRay's Third Quarter 2019 Financial Results Conference Call. Joining me today is Scott Drake, our President and Chief Executive Officer. Earlier today, ViewRay issued a press release announcing its third quarter 2019 financial results. The release is available on the Investor Relations portion of our website at www.viewray.com. This call is also being broadcast live over the Internet via our Investor Relations site, and a replay of the call will be available on the website for 14 days.

Before we begin, I would like to caution listeners that comments made by management during this call may include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statements due to numerous factors, including those discussed in the Risk Factors section of ViewRay's Form 10-Q for the quarters ended June 30 and September 30, 2019, and any subsequent reports filed with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2018.

Furthermore, the content of this conference call contains time-sensitive information accurate only as of today, November 12, 2019. ViewRay undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call.

I will now turn the call over to Scott.

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [3]

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Thank you, Michaella. Good afternoon, everyone, and thanks for joining our call. Today, we will begin with an update on patients treated with MRIdian, discuss Q3 results and the progress we're making across the organization, review our financials, and then we look forward to answering your questions.

Over the past quarter, I've had the opportunity to engage with dozens of customers across the globe. It is increasingly understood that we provide leading clinical capabilities, and our customers are taking notice. Our direction is clearly in line with market trends. We provide noninvasive, personalized medicine that our constituents, patients, providers, physicians and payers are seeking. Our 32 systems around the world have now treated over 6,500 patients, and our clinical evidence of compelling outcomes with 0 grade 3 or higher toxicity continues to grow. Broad utilization of MRIdian is critical to driving therapy adoption globally.

As we speak, we're bringing MRIdian to patients in a new geography, the United Kingdom. Our first system will be up and running in the near term, and site preparations are underway for our second U.K. system.

Customers are looking to safely deliver high-dose beam-gated SBRT, and we are exceptionally well positioned. While the competition tries to draw similarities to our offering, no one can see, shape and strike the tumor like MRIdian. A recent example demonstrates our differentiation. A patient had been receiving treatment at a premier academic institution in Texas. His radiation oncologist, grounded in the capabilities of MRIdian, referred the patient to one of our programs in Miami for treatment. In fact, several patients at this major institution have been referred to MRIdian centers. Patients are also taking notice.

At another one of our leading sites, there is a 4-week treatment waiting list. This demand is driving interest in increasing MRIdian capacity in this Midwestern catchment area. Also, impressively, a newly activated customer conducted multiple adaptive treatments on day 1. They have conducted more than 40 adaptive fractions in their first month. They're educating patients on the merits of MRIdian in the Northeast and beyond.

As we now have 4 full quarters under our belt, let me share the foundational work we have done to prepare for our path ahead. We have built up our team across all functional areas. Several of these functions either didn't exist a year ago or have been significantly enhanced. I would highlight progress in areas such as vault readiness, dedicated field service, customer clinical training, in our clinical studies team.

Concurrently, we have increased our investment in our commercial, clinical and innovation pipelines. It is important to recognize the newness of our team and the initiatives we're pursuing to drive this new paradigm of care. We are making progress across the company, while we're in the early stages of commercializing this next-generation therapy. We have listened to and heard our customers clearly. They desire simplified workflow and faster treatment times for high-dose adaptive SBRT. Our efforts are directly responsive. We are launching new software and a faster MLC early next year. We will continue reducing treatment times and anticipate that later in 2020, we'll launch another upgrade on our path to sub 30-minute treatments. These advances will put us on parity from a standard SBRT treatment time frame yet with significantly enhanced additions of adaptive, high-dose, AutoBeam-gated therapy. We believe this critical capability set will stand alone.

Moving on to Q3 results. Revenue in the quarter was $20.9 million, primarily driven by 3 revenue units. We took 8 orders in Q3, including 3 upgrades. During the quarter, our backlog grew to approximately $231 million. As mentioned on our last quarter's call, we have built a highly capable operations team. For projects that are in advanced stages of customer permitting and planning, we have the ability to drive PO to first patient treated down below 12 months. We have successfully achieved this in multiple instances.

We have also experienced delays when customer preparation is not as advanced, which can extend this process significantly. In these instances, we're simply moving at our customers' pace, as we believe this is right for long-term relationships. We have also received multiple orders from customers that are building new cancer centers. Although they want the latest technology, we may see elongated time frames here as well. The punchline, we now have the capability we set out to build and view this variability as the nature of our business.

Turning to cash. Our cash utilization was approximately $31 million in the quarter. This was as anticipated. Regarding the capitalization of the company, we have listened carefully to investors and worked hard to create optionality. The path we are on, we believe, is right in line with the best interest of investors. As definitive agreements are not yet in place, we will not share further details as we cannot guarantee the outcome. I will reiterate that we are working on a solution that is directly responsive to investors and also in line with the long-term goals of the company.

I will now turn the call over to Michaella to discuss our Q3 financials.

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Michaella Gallina, ViewRay, Inc. - Senior Director of IR & Communications [4]

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Thank you, Scott.

For the fiscal quarter ended September 30, 2019, total revenue was $20.9 million, primarily from 3 revenue units, as compared to $17.7 million and 3 revenue units in the same period last year.

Total cost of revenue was $20.3 million compared to $17.3 million in the same period last year. Total gross profit was $0.6 million compared to $0.4 million over the same period last year. Total operating expenses were $32.3 million as compared to $24.5 million for the same period last year.

Finally, net loss for the quarter was $20.8 million or $0.21 per share compared to $32.9 million or $0.39 per share for the same period last year. Turning now to orders and backlog. In the first quarter of 2019, we received 8 new orders, including 3 upgrades, totaling approximately $35 million as compared to orders totaling approximately $36 million for the same period last year.

As of September 30, 2019, our backlog stood at approximately $231 million compared to approximately $201 million as of September 30, 2018. One system was removed from the backlog in the third quarter. As previously shared, we use approximately $31 million of cash. We ended the quarter with total cash and cash equivalents of approximately $91 million.

Lastly, we are reaffirming our guidance for 2019. We continue to expect total revenue to be in the range of $80 million to $95 million and cash used to be in the range of $80 million to $90 million for the full year.

And with that, we will now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Chris Pasquale with Guggenheim.

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Christopher Thomas Pasquale, Guggenheim Securities, LLC, Research Division - Director and Senior Analyst [2]

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Scott, I just wanted to follow-up quickly on a couple of points that you made in your prepared remarks. One, did I hear you correctly that you expect to be at 30-minute treatment times by late next year? And then just on the financing front, do you have a sense for when you might be in a position to share some of the things that you guys are working on?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [3]

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Thanks, Chris. I think I don't want to make any hard declarations. I think we are making very steady progress on the reduction in treatment times. Some of those things are innovation-based. Others are more best practices-based that we're spreading via training of our customers and identification of those best practices. I think we will continue to make very steady progress throughout 2020.

I would say it's a little bit site-dependent and a little bit cancer type-dependent as well. I would anticipate tricky cases, such as some pancreas cases would take longer than some breast or prostate cases, for example. So I think it's difficult to make a patent comment, but I do believe we will continue to make very steady progress.

And as it relates to the financing, Chris, I'd love to be able to share more specificity with you. Given that definitive agreements are not in hand and completed, I just can't say any more than really what I said in my prepared remarks. We like the path we're on. We think it's responsive to investors. We think it's very good in terms of the long-term needs of the company but really can't say anything until we have ink on paper.

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Christopher Thomas Pasquale, Guggenheim Securities, LLC, Research Division - Director and Senior Analyst [4]

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Okay. Fair enough. And then just last one for me. Curious whether the pace of activity has changed at all since ASTRO or maybe as customers have started to get their arms a little bit more around the APM. Just your thoughts on the trends over the last couple of months here?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [5]

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Yes. Thank you, Chris. Thanks for your questions. I would say the pace of activity at ASTRO was demonstrably higher this year than last, by some factor. I recall a little over a year ago at ASTRO, we would have several executives in meetings and not nearly as many as I would have liked. This year, we had to divide and conquer. We had executives in different rooms and just kind of an onslaught of meetings. So the activity level is clearly higher, and I anticipate that, that will continue going forward. The number of customers that we're calling on is also higher than it was before, and we measure that in our pipeline reports. So I would say that activity levels are increasing, and I like the way that our customers are responding to our value propositions.

The only thing that I would say very quickly on the heels of that, Chris. I said it last quarter, I want to say it here, I think it's easy to make too much of a "low-order quarter" or a "high order quarter". And I said that in Q2, I want to say it here again in Q3, I think we're just going to have variability for a period of time when we're dealing with these small numbers until we're able to really drive this paradigm-shifting technology more deeply into the market.

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Operator [6]

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Our next question comes from Suraj Kalia with Oppenheimer.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [7]

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Can you hear me all right?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [8]

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We can, Suraj.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [9]

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So Scott, congrats on the quarter. Let me follow up on Chris' question. And is it safe to say, when you're talking about definitive agreements, there is some sort of arrangement with a strategic in the works? Would I be too far off in that assumption?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [10]

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I just can't comment there, Suraj. Like I said, I wish I could give more specificity. I know investors are curious about it, and I very much appreciate the thrust of your question. I just can't go more deeply into it at this point in time, but we look forward to sharing more when we get to a definitive agreement.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [11]

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Do you anticipate that before the end of the year? Or there is a possibility it could get stretched out into Q1?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [12]

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Yes. Like I said, I'd love to give you more specificity. I think what we're doing is responsive to what we have heard from investors and in line with their desires and also obviously in line with the long-term best interest of the company. I just -- I can't share any more at this time.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [13]

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Fair enough. One more question, Scott, and I'll hop back in queue. The 6,500 patients treated so far, Scott, can you give us how the pie chart looks on the patients treated on the Linac versus Cobalt? And if possible, on what specific indications have these patients been treated? Or at least, what's the majority? Is it prostate? Is it breast? Any color there would be great.

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [14]

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Yes. Happy to, Suraj. Let me provide some color there. And if we don't totally scratch the itch, we're happy to do a follow-up with you on this. The majority of the patients have been treated on the Linac versus Cobalt. I don't have an exact breakdown for you there. And what I find very interesting in terms of the pie chart of the cancer types that have been treated, it varies pretty significantly from one customer to another, which is interesting and I think reflective of a couple of things. We have customers that have treated a preponderance of their patients in breast cancer, another account prostate and another still would be pancreas. So what it tells me is the breadth and utility of the system on one hand. And on the other hand, I think we can do a better job of spreading best practices as it relates to the capabilities that our system has. And that's the work that you're now seeing some evidence of customers that are coming online, doing adaptive treatment day 1 and, in their first week of treatment, treating multiple forms of cancer and even customers that have been with us for some period of time, more extensively and more deeply utilizing the full capability set of MRIdian.

So I'm pleased with the work that we're doing on that front. And we'll continue, I think, to expand the utilization of the system, both at current accounts and new ones as well.

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Operator [15]

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Our next question comes from Matthew O'Brien with Piper Jaffray.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [16]

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Scott, can you just talk a little bit -- there's a lot of dynamics going on in Q2 as far as system deferrals and both from a distributor perspective internationally and then some other things here in the U.S. So have any of those dynamics either loosened up a little bit, you still feel comfortable that you're going to convert all those into system sales? And what I'm getting at is in Q4, you're really assuming a pretty modest revenue number to stick with the midpoint of the range. So is there anything that gives you more or less comfort in the lower end or the high end of that range?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [17]

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Yes. Matt, thanks for the question. Just in line with what we said in Q2, those dynamics of the 2 distributor deals and the 3 customers that had elongated time frames, we remain convicted that they will all be MRIdian customers just in a longer period of time than we originally hoped for. So I don't think there's any change on that front.

And as it relates to revenue, that's pretty well baked relatively far in advance. And so I wouldn't anticipate anything demonstrably different than what we have been guiding to here. And I would leave it at that.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [18]

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Okay. And so as we think about the organization today, it sounds like the team is well set, installation-wise, sales force coverage, everything else. I look at the business the last couple of years, you've kind of done mid-teens in terms of new system installs for the last couple of years. So do you think as we head into 2020 -- and not wanting to get into guidance too much here, but as we head into 2020, that -- the activity that the team is set up to do something meaningfully higher in terms of installs as we get into 2020 versus what we've seen in the last couple of years?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [19]

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Yes. Matt, I would -- we're not going to guide to 2020 at this point. But I would share with you that we have built the capability set. I think the punchline is we have built the capability that we set out to build really across the organization. But specifically, from an installation standpoint. And we are moving at our customers' pace. Where they are a bit slower, either on the planning or permitting phase or, as I mentioned, where there's a brand-new cancer center being built, we really can't influence that time line, and we're moving more at our customers' pace.

What we're doing is trying to be very appropriately aggressive, getting our word out and our value proposition out, calling on more and more customers and delivering those value propositions more and more effectively. And then we're in the position with the capability to install the systems as quickly as our customers are really ready for us to do so. And as I mentioned, we've done that PO to first patient treated inside of 12 months now on multiple occasions, and we're comfortable with the capability that we've built there.

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Operator [20]

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Our next question comes from Anthony Petrone with Jefferies.

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Anthony Charles Petrone, Jefferies LLC, Research Division - Healthcare Analyst [21]

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Maybe one, Scott, to start out just on the clinical data front. Apologize for the background noise, I'm just traveling. Just on the clinical data front, how the prostate data was received so far, the next steps with the prostate study and then what we should expect for the SMART pancreatic cancer study. Do you still expect toxicity data in the next several months to 2 quarters or so? And then I'll have a follow-up.

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [22]

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Yes. That's great, Anthony. Thanks for the question. I'll start kind of high level and ask Shar to chime in. As I mentioned, I've had the opportunity to interact with dozens and dozens of customers, literally across the globe, multiple continents here in the last quarter. I think the prostate data is resonating very well. The fact that there was 0 grade 3 or higher toxicity and grade 2 toxicity was much lower than the investigators actually anticipated, I think that is noteworthy as well.

Shar, do you want to comment at all on what you've seen on that front?

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Shahriar Matin, ViewRay, Inc. - COO [23]

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Yes. So if you look at our data, we're still in the early stages, I'd say, of our team deploying that and using that data with customers. I think what's interesting is we've done the analysis and built up our talk track. If you look at the TRIP and HYPRO studies, grade 2 or higher toxicity actually increases for GI by over 40% when you go from conventional fractionation, about 39 fractions, to hypofractionation, about 20 fractions. When you go to 5 fractions on the MRIdian, it actually drops 90%. And that's the talk track we're creating and getting our team prepared and using with prospective customers.

So I'd say it's early days as far as that's related. I think what's critically important to understand is that didn't include spacers or fiducials for our system of 5 fractions. And the only way to really do that is it's MR guidance and MR -- and on-table adaptive therapy is key elements of it. But it's also the real-time tracking and the real-time gating. So it's a combination of all of those and really getting the message across that these, all in combination, drive these clinical outcomes, not just MR or on-table adaptive. And these were for moderate to high-risk prostate patients, whereas some other studies were more for earlier-stage prostate patients. So we're excited about the data and what that -- this means for patient outcomes. But I'd say again, arming our team and getting them to speed clinically. It's in the early days of that.

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [24]

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Anthony, I would follow up and share. I think you were looking for more color on kind of follow-on data. Interesting, there was a publication, the Green Journal came out, peripheral lung study, 53 -- I think 53% or 54% PTV with MRIdian than conventional Linacs in this peripheral lung study. These are the kind of capabilities that we bring. The aggregate set of capabilities, as Shar mentioned, are critically important to be able to do these kinds of things, and we're very excited and continue to drive that compendium of data.

As it relates to the SMART study, it's enrolling very nicely. We are bringing more and more new sites into the study. We have agreement. One thing that's relatively new here, we are not going to have to do the pause of the study that we originally anticipated that we might have to do. So we're going to be able to continue with enrollment on that front, which is good news in terms of the overall pace of that study and being able to get the data out.

So Anthony, hopefully, that answers your questions. Happy to entertain any follow-up.

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Anthony Charles Petrone, Jefferies LLC, Research Division - Healthcare Analyst [25]

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Well, yes, very helpful. And just the follow-ups would be just an update on the competitive landscape. Obviously, Elekta is out there now for a bit of time, and Varian's talking more about adaptability with some of their new solutions. So just any update there.

And just lastly, a quick one on the financing. Just to be clear, is that a ViewRay-specific financing? Or is that customer financing?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [26]

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Let me take them in reverse order. The financing that we were referring to was the capitalization of the company. And as it relates to competitive dynamics. I would tell you that I think what's going on competitively in the market is actually helpful to us because as we're out there talking about the full capability set, being able to track soft tissues and tumors in real time, being able to automatically gate the beam, hitting the tumor with an ablative dose while concurrently preserving organs at risk and healthy tissue, that stands in pretty stark contrast to what others are out there talking about. And I don't diminish what's happening at all competitively. But I think the more we talk about and articulate our capabilities, the more stark the contrast is with what others bring to market. And I think we're getting better, frankly, at telling that story.

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Operator [27]

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Our next question comes from Difei Yang with Mizuho Securities.

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Difei Yang, Mizuho Securities USA LLC, Research Division - Executive Director of Americas Research [28]

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So Scott, if you could help us to put things into perspective. I think you mentioned 0 grade 3 side effects. And so typically -- for a typical SBRT treatment, regardless the cancer type, what should we be expecting there? And then I think earlier in the discussion, you also talked about with additional improvement, you can -- the machine -- you can bring down the treatment time down to 30 minutes or less. And so what is currently -- what is the current treatment range, time range?

Then finally, any of the plans to bring down back orders.

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [29]

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Yes. You're welcome. Thank you for your questions. Let me attempt to answer all 3 of them, Difei, and hopefully, I'll hit the mark here for you. Regarding your first question, it is very difficult to give an apples-for-apples comparison because of the capabilities of our system and the limitation of others. To give you context there, the overall market in the U.S., for example, treats with SBRT, something like 15% of the time. And yet our customers are treating with SBRT, even high-dose SBRT, 75% to 100% of the time. So it's just very different in terms of how our system is utilized because of its capabilities and how competitive systems are utilized because of their limitations. And that's exactly why we are so steadfast at driving the clinical pipeline to prove what we can do and, frankly, to prove what others cannot. So it's very difficult to give you an apples-for-apples on that front.

As it relates to the treatment time frames, let me give you a little context there. The current time frame to do SBRT in the marketplace generally is, give or take, 30 minutes, that time frame that we're shooting for. But we bring to that equation high-dose, beam-gated SBRT, which is different than what is delivered, generally speaking, from an SBRT perspective. So it's kind of an apples-for-oranges there even though we believe we'll be able to get into that time frame and many fewer treatments generally than what is conventionally considered SBRT, which can be many more treatments than our 5 or fewer or, in some instances, just 1 fraction with us. Can you remind me of your third question, Difei?

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Difei Yang, Mizuho Securities USA LLC, Research Division - Executive Director of Americas Research [30]

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Yes. The final one is on plans to bring down back orders.

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [31]

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Yes. So to bring down the backlog, it's really in line with what I shared in my prepared remarks. When planning and permitting goes at a good pace, we can move very, very swiftly. And when that's not the case, we are just moving at our customers' pace. So we're trying to make it very clear that we have built the capability set to move quickly, and we will do so when our customers are prepared for that. And when they're not, we don't believe having friction with them, trying to drive it falsely to our time frame is beneficial for long-term relationships. So we're trying to be really clear on one hand that we're well equipped to do it relatively quickly. And on the other hand, we're moving at our customers' pace where we think that's appropriate.

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Difei Yang, Mizuho Securities USA LLC, Research Division - Executive Director of Americas Research [32]

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Great. Just to clarify on the back order. So something like installation capability is no longer a bottleneck. Is that the right understanding?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [33]

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That is the correct understanding.

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Operator [34]

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Our next question comes from Jason Bednar with Baird.

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Jason M. Bednar, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [35]

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I wanted to first ask in your conversations just around multi-unit orders, I don't think we heard an update here tonight on this effort. Just -- but Q3, obviously, had the Penn State Health win. So just how would you characterize the state of your conversations around these efforts today versus maybe if we're sitting here 3 or 6 months ago?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [36]

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Yes. Jason, thanks for the question. I would say -- the same commentary that I shared last quarter, I would share again. We're calling on more customers than we ever have before. They're more multisystem deals and opportunities out there than we've ever had previously. We're cautiously optimistic on those fronts. So I think kind of more of the same in terms of those multisystem opportunities other than the fact that perhaps they've matured a little bit since last we spoke.

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Jason M. Bednar, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [37]

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Okay. That's helpful, Scott. And then maybe just a few questions on the software and hardware upgrades you discussed. So I guess can you quantify the step change at all we'll see in the treatment times with the planned rollouts next year? And do you plan to charge for these upgrades? And then not sure if any of this is tied to the small licensing you did a couple of months ago with BUMC, but can you get to the sub 30-minute target with your own internal efforts? Or do you think you need to do more of these types of partnering or licensing?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [38]

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Yes. So I think there's a lot there to unpack. I would share, Jason, that I think the pathway to those sub 30-minute treatment times is one that I think we have a clear line of sight on. The team is actually not going to stop there. We think we can get beyond that, both with innovation and best practices. But our first goal is to get consistently below 30 minutes. It's going to be easier in some cancer types, harder in others. And as I mentioned, there's a certain amount of it that's innovation-driven and a certain amount of it that's best practices-driven. So it's a balance of both. And those customers that are utilizing our system very effectively today, the ones that are doing on-table adaptive treatment a very high percentage of the time, I would -- I think it's reasonable to think about those customers that more is going to come -- more gain is going to come from innovation there because they've probably done some work to optimize already. But in other instances, there may be a lot of gain in terms of best practices. But clearly, innovation will help across the board, those things that we have coming and even things that we haven't fully shared externally at this point.

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Jason M. Bednar, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [39]

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Okay. And just real quick. Just -- do you plan to charge for the upgrades that you're rolling out next year? Or have you not disclosed that yet?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [40]

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We do. We do plan to charge for them. There have been some instances where commitments have been made previously on some of these upgrades, but we absolutely plan to charge for those things that have value to our customers.

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Operator [41]

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Our next question comes from Andrew D'Silva with B. Riley FBR.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [42]

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Sorry if you're asked any of these. I was jumping between calls. But could you just give me some of your cash flow items as far as stock-based comp, depreciation and amortization and then what the free cash flow was for the quarter? And then could you also let us know why one of the systems fell off? Was it the same reason that you had last year for a few systems or something different?

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Michaella Gallina, ViewRay, Inc. - Senior Director of IR & Communications [43]

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Andy, let me handle your questions on the financials, and then I'll hand it over to Scott for the backlog.

Stock-based comp in the quarter was $4.9 million. Depreciation and amortization was $1.2 million, and cash used from operations was $27 million.

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [44]

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And Andy, regarding the system that came out of the backlog, our criteria there is both time-based and activity-based for our assessment on the backlog. So if we just don't like either the time frame or the level of activity happening with that customer, that's when we will take them out of backlog. And that's what happened in this particular instance. To be clear, we still have an order from the customer. And our hope is to make them a MRIdian account. But we're just not satisfied on our criteria, and so they came out this time.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [45]

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Okay. Great. And then as far as strategic direction goes, Kevin Xie joined the Board. He's from Fosun, obviously, a big investor. Previously, you noted that you weren't really focused on China. Any sort of change of thought there? And my last question is just related to the Varian litigation. Just where are you in that process? And what are the next steps?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [46]

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Yes. Let me flip the order. Regarding the IP suit. We do not believe that we've infringed on any valid claims, period. And as it relates to Kevin joining our Board, we're thrilled to have him. They -- along with the very large investment that they've made in the company, they had the right to take a Board seat. Kevin is a highly constructive and well-informed Board member, and we're thrilled to add him to our Board.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [47]

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Okay. But no direction change with China as of this year?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [48]

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Nothing to announce. We -- I just got back from China. It is the second largest Linac market in the world. It's the fastest-growing Linac market in the world. They're about tripling their capacity, as you're aware. So we are keenly interested in that market, but I have no announcements to make.

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Operator [49]

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And your next question comes from David Lewis with Morgan Stanley.

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Mason E. Austen, Morgan Stanley, Research Division - Research Associate [50]

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This is Mason on for David today. Scott, you released this earlier in the year. But I was wondering if you could provide a little bit more color on any potential alternative customer financings you would consider and any time lines we should be thinking about there.

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [51]

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Yes. Thanks, Mason. So we're still in what I would qualify as kind of pilot stage with those various financing forms that we're talking to our customers about. I don't think there's anything here that's new to the industry. There are some things that are newer to us, but things that others offer. And I don't have anything of note to share with you today on that.

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Mason E. Austen, Morgan Stanley, Research Division - Research Associate [52]

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Great. And then just as a quick follow-up. Any updates you could provide on the new CFO search?

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [53]

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Yes. Nothing really to share. We've got a retained search underway. We've got a pipeline of candidates. And fortunately, with the team that we have, we can be very patient in making a choice there, and that's what we're doing. But just steady progress, I would say.

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Operator [54]

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Speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks.

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Scott William Drake, ViewRay, Inc. - President, CEO & Director [55]

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Well, thank you so much for joining us, everyone, today. We look forward to further updates moving forward. I hope you all have a great evening.

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Operator [56]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may all disconnect.