ViewRay, Inc.
Q3 2017 Earnings Call Transcript

Published: 13 Nov 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the Q3 2017 ViewRay, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Zack Kubow. Sir, you may begin.

[Zack Kubow:]

Thanks, operator and good morning to everyone. Welcome to ViewRay’s third quarter 2017 financial results conference call. Joining me from the company are Chris Raanes, President and Chief Executive Officer; and Ajay Bansal, Chief Financial Officer. This morning ViewRay issued a press release announcing its third quarter 2017 financial results. A copy of the press release is available on the Investor Relations section of the ViewRay website at www.viewray.com. We encourage you to review that document. This call is also being broadcast live over the Internet at www.viewray.com and a replay of the call will be available on the company’s website for 14 days. Before we begin, I would like to caution listeners that comments made by management during this conference call may include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve material risks and uncertainties. Actual results could differ from those projected in any forward-looking statements due to numerous factors, including those discussed under the heading Risk Factors in ViewRay’s quarterly report on Form 10-Q for the quarter ended September 30, 2017 and subsequent reports filed with the Securities and Exchange Commission. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 13, 2017. ViewRay undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call. With that said, I would now like to turn the call over to Chris Raanes.

[Chris Raanes:]

Thank you, and good morning, everyone. Welcome to ViewRay’s third quarter 2017 financial results conference call. Although it seems so long ago, I’d like to start by reminding you that Q3 is the quarter in which the first-ever curative intent treatment with MRIdian Linac was delivered. We had a very productive third quarter, highlighted by significant progress on all the key drivers of our business, generating customer interest, taking new orders, shipping and installing systems and demonstrating the clinical benefits of the MRIdian system. Our momentum has continued into the fourth quarter. In October, we raised $50 million to continue supporting our efforts in each of these areas. Let me provide you some more details on our progress. First, new orders. I’m pleased with our orders in Q3. Our backlog grew to nearly $195 million as we took in $29.9 million in new orders in the quarter. In the first two full quarters, since we received FDA clearance for the MRIdian Linac, we have generated more than $67 million in new orders or more than one-third of our backlog. Also meaningfully, by the end of Q3 of 2017, we’ve taken as many orders as we took in the entire year of 2016. So Q4 orders are all year-over-year growth. Order momentum for Q4, typically a strong quarter, is looking good. We are very pleased with our recent win of the Denmark tender, which was a tender form multiple conventional linacs and several MR Linacs, which we did together with Varian. In a head-to-head competition with Elekta, the ViewRay MRIdian system was selected. We expect to book two orders from ViewRay MRIdian Linacs in the quarter as a result of the tender. We’re also very proud of another recent tender win in Zurich for an MR Linac for the University of Hospital Zurich. We expect to book that order in this quarter as well. So just on tenders alone, we’re off to a strong start in the fourth quarter. Let me now turn to MRIdian Linac installations and shipments. In the third quarter, we installed the first MRIdian Linac at the Henry Ford Health System, who began treating patients in July. We’ve subsequently installed the MRIdian Linac in the United Arab Emirates so that we ended Q3 recognizing revenue on two systems. Because installations are such a key metric for investors at this time, I thought that, as a onetime event, we would give you some more color on the progress we’re making in the second half of the year. In the current quarter, we’ve already completed one more installation at Washington University in St. Louis. This is our third MRIdian installation for the year and makes Washington University our first site to have two MRIdian systems. In summary, three MRIdian Linacs are already installed

[Ajay Bansal:]

Thanks, Chris, and good morning, everyone. The revenue in the third quarter with $12.2 million compared to $0.4 million in the third quarter of 2016. Our backlog at September 30, 2017 was $194.8 million. This compares to a backlog of $125.2 million at September 30, 2016. In terms of our cash position, we ended the third quarter with $34.4 million. In October, we raised aggregate gross proceeds of approximately $50 million through sale of common stock in a direct registered offering. The participants in the financing consisted of existing and new investors. Finally, we are repeating our guidance on the sale of seven to eight MRIdian Linac systems but adjusting our revenue to be in the range of $42 million to $47 million. This compares to a previous revenue range of $45 million to $50 million. The slight decrease reflects the shift in timing of MRIdian Cobalt system upgrade that we now expect to offer in early Q1 as opposed to Q4. With that, let me turn the call back to Chris for closing remarks.

[Chris Raanes:]

Thanks, Ajay. In summary, we’re coming to the end of the year in which we received FDA clearance for the MRIdian Linac and are in the process of installing or preparing to ship the seven to eight systems that we forecast in the second half. Over three years of experience with the MRIdian system is producing more and more differentiated clinical data, and momentum in new orders for that MRIdian Linac is growing. I’m happy to report that ViewRay’s future has never been brighter and we look forward to a strong year in 2018, the first full year of the MRIdian Linac. And with that, I’d like to open the call to Q&A.

[Operator:]

Thank you. Once, this is the operator. [Operator Instructions] Our first question comes from Difei Yang from Mizuho Securities. Your line is now open.

[Difei Yang:]

Good morning, and thanks for taking my question. So just a couple. Chris, could you comment on a move forward basis what is the installation capacity that you have? So it sounded like you may be able to do five, six units per quarter.

[Chris Raanes:]

Good morning. Difei, good question. The way I would characterize install capacity is three parallel systems internal to ViewRay. Plus we now have the Korean team trained, we have the Japanese trained – the Japanese team trained and the Chinese team is just finishing up with their training. So that’s the way to look at our capacity right now. And of course, we’re continuing to invest there.

[Difei Yang:]

Okay. Thank you. And then my second question is really around housekeeping. So is there a trigger point in the installation process, which – where you would be able to basically recognize the revenue? What would that trigger point be?

[Chris Raanes:]

Could you repeat that again? I’m sorry I didn’t quite get it.

[Difei Yang:]

Oh, so I was just wondering for installation, is there a point where you would call installation is complete such that revenue can be recognized.

[Chris Raanes:]

Sure. Typically, there’s a defined, let’s call it, the acceptance test procedure. And when the ATP is complete, that’s when we recognize revenue if we’re responsible for the installation. If the distributor is responsible for the installation, then we recognize revenue upon shipment to the customer.

[Difei Yang:]

Thank you.

[Chris Raanes:]

Thank you.

[Operator:]

Thank you. And our next question comes from Suraj Kalia from Northland Securities. Your line is now open.

[Suraj Kalia:]

Good morning, gentlemen. Congratulations on the quarter.

[Chris Raanes:]

Good morning. I can hear you, great.

[Suraj Kalia:]

Background noise. So Chris, the competitive wins in Europe. It is obvious these sites were looking for real-time guidance. Can you give us some color on these wins that you have had? How did you establish influence by Elekta’s Unity issues? I guess what I’m asking is, wasn’t that the sites looked at for both platforms and said, "You know what? It doesn’t matter. We’re still going with MRIdian Linac." Or part of it was different pieces with Elekta’s Unity, delays and whatnot? I’d love to get some additional color if I could.

[Chris Raanes:]

Sure. I think the question was – I’m repeating it for everyone because your phone line did actually break up a little bit there. What was among the deciding factors when people went with the MRIdian Linac in these tenders. And let me just say that in general, I think we see very, very little in terms of people waiting for another system to see how that’s going to turn out. I think people compare them on their merits. Of course, it’s the big advantage that we have clearance with the FDA and CE and that we’re able to ship and that we’ve got clinical data. But I think at the end of the day, people compare what it can do and the publications and the user presentations and understanding the basic physics, was this designed to be a radiation therapy machine, where there’s no distortions and any of the other problems. I think that’s really my sense of what would be sending people in our direction.

[Suraj Kalia:]

Got it. Chris, was the Danish site part of the C2T2 group?

[Chris Raanes:]

I’m sorry, it was what part of the C2T2?

[Suraj Kalia:]

The Danish site, was it part of the C2T2?

[Chris Raanes:]

It was not part of the C2T2.

[Suraj Kalia:]

Got it. And Chris, would you compete for the tender as, obviously, like you’re doing it in Europe? The way we understand – the way this is understood, ViewRay and Elekta took it out on advise. You guys are coming off with a totally different value proposition. Can you maybe give us some color on the dynamics? Because at least from our coverage of ViewRay in the past, you had a number of these larger tender offers, the company of your accolade used to just kind of free throw. Argument being, you don’t want to compete on price. You guys are coming up with something different. And to the extent that you can, is this going to be a little feature, that you’ll be hopefully be tearing up the period or this was just one-off?

[Chris Raanes:]

So you’re absolutely right. We have something different. And as a result of having something different and compelling, this is a pretty standard distribution deal. There’s no big, special, large discounts or anything like that. It’s pretty normal deal, and that’s really nice when you’ve got something where you can hold like that. In terms of is this a one-off, yes, this is a one-off. This was something we did to bid on this tender. Would we do it again? I think both, I mean, both sides are probably open, but I can’t speak to that. But my guess is both sides are open to doing it again if the situation presents itself, but we don’t have any larger encompassing agreements that says we will continue to do that.

[Suraj Kalia:]

Great. Thank you for my question.

[Chris Raanes:]

Thank you.

[Operator:]

Thank you. And your next question comes from Ryan Zimmerman from BTIG. Your line is now open.

[Ryan Zimmerman:]

Great. Thanks for taking the question. So just want to start on the install process a little bit. We talked briefly about it. But anything that we can take away or are learnings that you picked up during the third quarter that may expedite the install process going forward? And things you’ve changed to improve those installs, say, in the fourth quarter and beyond?

[Chris Raanes:]

Well, the answer is absolutely. We’ve learned a ton, and we’ve incorporated those early learnings into our process. We’ve had engineers be part of the install teams to see what things worked smoothly and what things needs improvement. And as a result, we’re seeing the install times go down rather dramatically. And obviously, that’s both – it’s good. It drives our installation capacity. It allows us to do things more quickly. But I think the biggest win on that front as we continue to drive it down, and we’re ultimately heading for a 30-day installation. I think we’ll end the year in the 60-day range kind of thing. And the shorter the installation cycle, the shorter the cash cycle, the more installs we can do in any given quarter. So that’s really important to us, and quite frankly, it’s pretty important to the sites too, right? They prefer when things go faster. So we’re working diligently on that, have learned a lot, and it’s making a difference.

[Ryan Zimmerman:]

Thank you for that. And then another follow-up question from me. Were there any order wins that you’ve seen – we’ve talked a little bit about the wins over competitive MRI systems, but maybe if you could speak to also order wins that you’re seeing over non-MRI-based systems if you are coming up against that? And that would be helpful, too.

[Chris Raanes:]

Yes. That’s a really good point. And I emphasized the two tender wins for a host of reasons, and they’re big deals. But they’re the unusual case, right. Our normal competitor is the standard high-end linac, right, and that’s more often varying than anyone else. But it’s all of those guys, and we win against those on a pretty regular basis. I think people buy the high-end linac, and I’m really pleased to be able to say that doctors are still motivated by the right thing, right. At the end of the day, they want to do a better job for their patients, and they look for the high-end system because they believe, in our case, they can do a better job for their existing patients. They can broaden the number of patients that they treat and then it’s all part of reputation, both for the doctor and for the hospital, that we have the most advanced sort of care. So we go up against the standard linacs all the time, all the time. And then finally, because it is a bit capital purchase, that decision often ends up in the C suite. And the concern there, also medical, again, good thing, people do want to do the right thing for their patients, but they’re also in business. And so they look at the positive reimbursement that our sites have been getting, and they look at the differentiation that our sites have been getting if they’re able to advertise that they’ve got something and kind of use it as a draw for people. Yes, I think that’s probably a pretty good color.

[Ryan Zimmerman:]

Thank you. And just another one from me, and I’ll hop back in queue. I found your comment on Henry Ford’s usage of about 30% of other cases being stereotactic radion surgery, thus far, since installing Linac, pretty interesting. I’m just wondering how you’re thinking about that. Has that been more of a normalized rate that you expect to see at other sites as you install more Linacs around both the country and the world?

[Chris Raanes:]

Yes. So data suggests that it’s going to be how people use it. We have – we’ve even put up charts in the past in various talks where we look at both how the normal population views the high intensity short duration and how our users view it. And the numbers roughly are that in the overall population, the SBRT is something like 15% to 18%. And I’ll give you a couple of examples. We talked about the nearly 50% at that Henry Ford. It’s 95% in Amsterdam, and the numbers range in the 35% to 45% across other sites. So people are definitely using it way more for SBRT than they use other systems, and it’s because they can. The doctors get it. They have seen the papers and the clinical evidence. They have reason to believe that it’s more effective. So they like it. Clearly, the patients like it, and it’s a draw that you can bring somebody in and tell them they don’t have to be there for six to eight weeks. They can be there for five days sort of thing. And that’s the whole play on that breast studies that I talked about. I mean, that’s really, really exciting. Imagine taking mainstream breast lumpectomy treatment from a six to eight-week nominal to a one-week nominal treatment. That’s going to be a big deal. People get capacity. Patients get quality of life, and the doctors are happier. And I think because you can see so clearly with the MR, you’ll see people using it more and more.

[Ryan Zimmerman:]

Thanks for taking question, Chris.

[Operator:]

Thank you. And the next question comes from Anita Dushyanth from Zacks Investment. Your line is now open.

[Anita Dushyanth:]

Good morning, Chris. Congratulations on the quarter. And thanks for taking my call. Just a quick question on how – whether you’ll be able to throw some light on the systems that were already in Copenhagen and the automation that there were other systems that the hospital had. Do you know if they are using the Linacs, the MRIdian for any specific procedures? Or was it just that they were in the process of getting a lot of systems from different manufacturers because they just have more cases to handle?

[Chris Raanes:]

Yes. I don’t know the real down details here, but what they wanted, they wanted one big tender to refurbish their system. And they wanted some conventional linacs, and they want some MR linacs. And the tender was written as a combination of the two. It was a large number, order of magnitude 12 to 14 for the regular linacs and maybe two to maybe a little bit more on the MR linacs. I don’t remember the exact numbers. And if it’s not from multiple, it’s from two. We bid it together with Varian. Varian won the conventional, and we won the MR part of it. And as I mentioned, we expect to book two of those orders this quarter. What they’re going to use them for? I can only guess, they want to do the same thing that other people do. They want to be able to treat pancreas cancer effectively, and in their system, they want to be able to do more SBRT. They want to be able to do the highly accelerated breast, et cetera.

[Anita Dushyanth:]

Okay. And as far as the installation time goes, I know you talked about it earlier, but I missed that. Are – you said you’re getting close to 60 days for the installation?

[Chris Raanes:]

I think we’ll see that we’re right around the 60-day here at the end of the year.

[Anita Dushyanth:]

Okay. Okay. That’s great. And have you had any response from the Canadian territory in terms of orders in this quarter? Or you’re expecting something in the next quarter? I mean the next year? Any approval?

[Chris Raanes:]

Yes. Now that we’ve got our Canadian approval, I don’t think that was tied to any specific order or anything like that. Of course, we’re constantly marketing all over North America. And by the way, we do handle Canada direct with our North American sales force.

[Anita Dushyanth:]

Okay. And my last question will be, are you expecting the Japanese approval to come any time before end of this year?

[Chris Raanes:]

Hard for me to predict, but I’ll project the new system will do. I’d just remind everyone that probably the two toughest regulatory approvals to get are the Japanese shonin and the Chinese with the CFDA. Those are both in process. We’re optimistic about both, but I can’t predict when it’ll come out.

[Anita Dushyanth:]

Okay, great. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Annette Lykke from Handelsbanken. Your line is now open.

[Annette Lykke:]

Thank you very much. And thank you for taking the questions. First of all, I would like to ask you a question about reimbursement and reimbursement codes. As I understand – please correct me if I’m wrong, currently, the reimbursement code used for MRI-guided linacs are now the MRI codes. Do you have any expectation or anticipation of when MRI Linacs will have their own code? And how will those look? Will you see any changes to the overall reimbursement as you have it today. And I’m asking this because 10 years ago also, there was a bit of an issue when the CT was launched as a part of the linacs. And then in the beginning, you had very nice codes, but when they got their own reimbursement codes, they were not as high. And I heard that this is a reservation in the States. Can you elaborate on that?

[Ajay Bansal:]

Well, currently reimbursement is quite good. As you said, we are using the existing code. And as a result of the existing code, especially around replanning, et cetera, the reimbursement to the institutions, it turns out to be pretty attractive. Having said that, you’re right. I mean, MRI Linacs should get their own codes down the road. This is clearly a very better form of treatment. I mean we’re just talking about the pancreatic data, where survival has increased better than 2x. We still haven’t reached median survival, by the way. And toxicity is down from 16% to 0% in the cases that have been studied so far. All of that is very good for the patient. It’s very good for the system. And we, together with other MRI Linac manufacturers should be able to take that once you have collected sufficient data to CMS and ask for reimburse codes. So that process typically takes a while, so it’s difficult to predict when that will be there. But suffice it to say that we are – the current reimbursement is working very well for the institutions that are using our systems. And we think the reimbursement codes for MR Linac should be – our expectation would be that they would be more favorable than the existing codes now for users of the system.

[Annette Lykke:]

Ajay, can you explain to me how that process is? I mean, you say you expect them to be more favorable, and I agree with you. You have some excellent data on, for example, in overall pancreatic cancer. But what other processes here are you seeking for those codes? Or how will this work?

[Ajay Bansal:]

We haven’t started the process of sort of – we still haven’t entered into a dialogue yet with the CMS on that. We have to gather data from the institutions, and there are requirements for how many institutions need to supply that data before we engage in an active dialogue. So we expect to formulate our strategy and then start looking to enter into that dialogue over the coming months. But the process will take a few years.

[Annette Lykke:]

Thank you. Then on the pricing, please correct me, but do you have your backlog of $495 million. Is that probably – was it 32 systems or how much?

[Ajay Bansal:]

Yes. We have stopped giving guidance on how many systems are in the backlog. But I think you can do the math roughly. And the numbers you are mentioning are relatively in line, a system here or there. But – and as we have guided previously, our systems are roughly in the range of $6 million to $6.5 million at present. And so that’s sort of our pricing strategy currently.

[Annette Lykke:]

Okay. And are you continuing to have your pricing around $6 million to $6.5 million? Or have you seen sort of a pickup lately in terms of pricing?

[Ajay Bansal:]

No. These are very early days Linac for our system. We have had the Linac approval for all of nine months so far. So the pricing, we are somewhat a little bit flexible on pricing right now, looking at everything in terms of the market penetration and getting systems out there, and – but we fully expect the pricing to firm up very positively for us. The data that’s coming out of these systems is quite compelling. And over time, our expectation would be that the pricing goes – it starts becoming even more favorable than it is today.

[Chris Raanes:]

Let me echo that a little bit. Our intention is to leverage all the benefits of this. I would expect price to kind of slowly be rising continuously going forward. And harder what you see when you do your maths. Sometimes, we do early in to market deal or something like that, first one in to move things along. But I think pricing has been holding really, really well. And I agree with Ajay. It’s better treatment and that’s good for been able to raise price.

[Annette Lykke:]

Then let’s go to penetration. You have now installed a couple of systems. And then what are your thoughts on longer-term penetration rates for, I would say, U.S. and Europe maybe five or 10 years from now? Will this be as Varian has said previously a not – system and not selling more than 50 units? Or do you see this as a more standard part of treatment, of course, mainly maybe for the harder – hard-to-reach tumors? Or could you see this as a more regular part of the radiation therapy longer term?

[Chris Raanes:]

Well, I think the concept of only selling 30 systems is pretty ridiculous. If you do the math of – we’re in the low 30s in backlog, and we’ve already shipped nine plus. So we’re at 40, and Elekta is talking about an eight to 16. So the 50 systems are already in the rear view mirror, and Q4 is going gangbusters. So that’s sort of a ridiculous concept. Going forward, I don’t know why anyone would ever want to treat without having MR guidance. Once you’ve given the radiation oncologist the ability to see, shape, protect the healthy organs and make sure you’re hitting what you want, why wouldn’t you do that on every tumor that you’re treating along? Long term, we see this as becoming the way. We literally think it’s going to switch over to MR-guided over the longer term.

[Ajay Bansal:]

The efficacy, superior toxicity goes down, time for treatment goes down. And I would actually give credit to one of the analysts on the call when they initiated a report on us. The point they made, and it was a wonderful call. It’s sort of like if I, any member of my family or any of my friends were to get treatment, radiotherapy, I would ask them to go get it on the MRIdian. I think down the road, all of us who are looking for healthcare options are going to look at their wide options. Internet is out there, and they will see the benefits of MRI Linacs and are going to demand their other positions. Why would you want – in the breast case example, Chris mentioned not only is the treatment time reduced from 42 days to five days, you’re actually delivering 50% less radiation to the body.

[Annette Lykke:]

I find it very hard to disagree with you guys on this. But on the other hand, the system is priced twice or three times as much as a high-end linac. So there, maybe also some financial pushback. Is this what you mean? I mean you said you were completing to standard high-end linacs? What are the pushbacks in these situations? Is it pricing? And another way to ask, the financing you’re getting right now for the Linacs or the hospitals are getting for the Linacs now, are they more coming from the, I would say, research kind of budgets rather than from the normal business budgets from the hospitals? Where are the pushbacks as you saw it now?

[Chris Raanes:]

You make a good point. The strongest penetration so far has been at the larger high-end institutions, right? I mean, that’s sort of the – that’s the bread and butter. It’s quite intentional right now. Those are the big guys who want, doing the first treatments and writing the papers and things, this is the best way to treat breast, this is the best way to treat pancreas, this is the right number of times to adapt when you’re doing a liver tumor, et cetera, et cetera, et cetera. And instead of saying about push-back, the question should be what do the other centers need in order start broadening that? They need a little more operational data or if they want to see these things running for a while. And I think as soon as they do, you’ll see the penetration starts coming out to those folks of the larger networks and then, finally, just into the mainstream.

[Annette Lykke:]

Would you be willing to share some business cases with us, where you say, we’ll payback – you need to treat this many patients, and the payback? Or if you have these many referrals, then this system will be finalized within three or five years? And I mean I just heard from some of the bigger hospitals, they’re saying that they’re never going to have an MRI-guide because it’s too expensive, because they can only treat maybe anything between six and 10 patients per day. And I agree that the fact that you would then only treat to maybe three to five times. And too short a number of fractions with very high doses would free up capacity. But I’ve never seen the calculations. I’ve never seen the business case presented in a structured way.

[Chris Raanes:]

So let me say a couple of things. One, we let third parties do the business cases. So we’re not telling hospitals how they should bill or anything like that. And those cases do turn out to be pretty good business cases. Second, I don’t know where the six to 10 kind of treatments. I mean, we’re seeing that done easily in partial days on our new system. So I think that might be old Cobalt data or something like that, and clearly, the Cobalt was just a little bit slower. So I’d encourage you to go talk to some of the people who make these pro formas and such, but we don’t give that. And I have a couple of other people waiting on the line here that I need to give some time to.

[Annette Lykke:]

Thank you.

[Operator:]

The next question comes from Andrew D'Silva from B. Riley. Your line is now open.

[Andrew D'Silva:]

Good morning, thanks for taking my question. Most of them have been answered. Just a couple of quick ones here. First of all, just as far as the orders go for the period, are you guys at all surprised by the traction you’re getting considering the headwind with the Affordable Care Act? And once things start to resolve there, do you expect to maybe see an increase from what you’ve seen previously as capital spending might open up a little bit?

[Chris Raanes:]

So no, I’m not surprised by the traction at all. In many, many ways, we’re not a macro player, right. We’re not going to drift with the market. We have something new, unique, compelling. I think we’re going to embody that independent of the macro environment around them. Having said that, look, I think we’ve all – everyone in this business will be a lot happier when the healthcare debate settles down. Hopefully, a good thing it will come everybody, and people will feel a little freer to spend their money. But people are always willing to buy something that’s important, and this seems to be important to them.

[Andrew D'Silva:]

Okay, great. Thank you. And then as far as your guidance goes, obviously, you’re applying a pretty steep ramp in the December quarter. Is there any way you can help us think about how gross margin should shape up on the higher revenue run rate that you’re kind of projecting for the period?

[Ajay Bansal:]

So Andy, gross margins for Q4 should be significantly better than our Q3 gross margins. Q3 was around 15%, 16%. I think Q4 should be closer to 20%.

[Andrew D'Silva:]

Okay. All right. Perfect. And then just last question about the other marketing. At what rate should we expect that to go up to as revenues increase? Are there any other variable costs we should be thinking of outside of cost of goods?

[Ajay Bansal:]

Last year, our operating expenses outside of cost of goods were running at around $10 million a quarter to $10.5 million a quarter. But last quarter in Q3, our operating expenses were closure to about $12.5 million a quarter. So these are all expenses outside of cost of goods. And going forward, we would expect our operating expenses to go up somewhat, as we are installing more systems, spending more in development efforts as well as sales and marketing efforts. So we should see a continued modest increase, all the way at least for the end of next year.

[Chris Raanes:]

Yes, and the funny – I’m sorry. You did ask specifically about sales and marketing, and we do intend to invest in that, the front end of our commercial process. So I think you will – we will see some more feet on The Street, maybe some early presence – direct presence in some of the important overseas territories. That’s a good area for us to make investments, but it sits around on all the issues.

[Andrew D'Silva:]

Okay. Great. And then just one final question. As far as your core market that you’re targeting through your internal sales initially, should we be thinking that it’s primarily the largest health system that have capacity for multiple systems to go in? Or are you looking at maybe a more ubiquitous play just over the general market more specifically?

[Chris Raanes:]

This is going to be a general mainstream product. There’s no question about that. It’s starting at the bigger institutions, but you will see – like I said, the operational data is kind of the key thing. They see a year of operation with one of these, and then we’ll get comfortable and we’ll start moving into the more mainstream hospitals. We’re already in conversations with some of these folks. So I think just stand by for that.

[Andrew D'Silva:]

Okay. Thank you so much. Good luck on going forward.

[Operator:]

Thank you. And we have a follow-up question from Difei Yang from Mizuho Securities. Your line is open.

[Difei Yang:]

Thanks for taking my follow-up. So moving ahead, looking into 2018, in terms of the back orders, where – which geographic region do you think is likely to be the strongest?

[Chris Raanes:]

We’ve said from the beginning that this market for us, for all the other players is about one-thirds of U.S – two-thirds of OUS. And if I look at our backlog, we’re sitting almost exactly at that number. And so I’d expect our rollout to follow that.

[Difei Yang:]

Thank you.

[Operator:]

And I’m showing no further questions in the queue at this time. I’d like to turn the call back over to Chris Raanes for closing remarks.

[Chris Raanes:]

Well, thanks very much. Thanks, everybody. In summary, we’re in the process of installing or preparing to ship the rest of the seven to eight systems that we forecast for the second half. We’ve got clinical data from three years of experience now with the MRIdian system, demonstrating clear benefits for patients’ MRI-guided radiotherapy. The momentum is growing especially in the orders, and we’re really looking forward to a strong 2018. And I look forward to keeping you up-to-date. Thanks for calling in today. Take care.

[Operator:]

Ladies and gentlemen, this does conclude your program for today, and you may all disconnect. Everyone, have a great day.