ViewRay, Inc.
Q2 2016 Earnings Call Transcript

Published: 15 Aug 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q2 2016 ViewRay earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. Zack Kubow with The Ruth Group. You may begin.

[Zack Kubow:]

Thanks, operator, and good afternoon to everyone. Welcome to the ViewRay’s second quarter 2016 financial results conference call. Joining me from the company are Chris Raanes, President and Chief Executive Officer, and Ajay Bansal, Chief Financial Officer. This afternoon, ViewRay issued a press release announcing its second quarter 2016 financial results. A copy of the press release and the company's Form 10-Q will be available on the Investor Relations section of the ViewRay website at www.viewray.com. We encourage you to review these documents. 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 one year. Before we begin, I would like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the ViewRay annual report on Form 10-K and subsequent reports as filed under 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, August 15, 2016. 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'd now like to turn the call over to Chris Raanes.

[Chris Raanes:]

Thank you and welcome to the ViewRay’s second quarter 2016 conference call. I will begin the call by covering three topics. First, I'll give you a brief review of our financials; second, I’ll describe how our MRIdian cobalt system is establishing MRI-guided radiation therapy as the future of radiation oncology, including the announcement this morning of approval in Japan; and third, I will update you on the exciting progress we are making on our linac technology. I will then turn the call over to the newest member of our executive team, Ajay Bansal, who joined ViewRay as CFO in June. Welcome aboard, Ajay. Ajay will provide a more detailed review of our financial results. I will then come back to make some closing statements, after which we will open the call for Q&A. Starting with our second quarter performance, we secured three product orders worth $17.1 million. This included an order from a prestigious institution in Manhattan, our first in the New York Metro area. Since the March 8 announcement of our linac technology, we’ve been in a transition period during which we continued to ship MRIdian cobalt to some of our customers, while other customers are choosing to wait for the linac. Ajay will discuss this in more detail in a few minutes. We announced this morning that Japan has approved our MRIdian cobalt system. This is a major milestone in our strategy of geographic expansion. Japan is the world’s third largest market for radiation oncology, and we expect it to become an important market in the near future due to its receptivity to innovation. We have a technical partner and distributor in Japan who have been training for the launch for some time, and we look forward to working with them to bring the MRIdian system into clinical use in Japan in the coming months. With this approval, we now have the MRIdian system cleared in all the largest markets, except for China where our application is pending. There are now six MRIdian sites around the world, treating a wide variety of cancer patients, including a number of patients that would have had no other treatment option if not for the MRIdian. Clinicians using our system continue to demonstrate from real world clinical experience with clear advantages of MRI-guided radiation therapy or radiation therapy with eyes, as we like to call it. In July, at the American Association of Physicists in Medicine in Washington DC, or the AAPM, the MRIdian system was the focus of 40 abstracts selected by the AAPM. These abstracts included topics such as adaptive radiotherapy, margin reduction, dosimetric accuracy, and our biological MR imaging capabilities for [indiscernible] assessment. Seven abstracts focused on MRIdian on-table adaptive capabilities, with one exploring our system’s unique ability to image, adapt on-table, and treat a patient, all within a single 30-minute session. It is not only the academic community that has noticed the power of MRIdian in fighting cancer, the human dimension of MRIdian is beginning to attract media attention too. As you may have seen recently, local TV in Los Angeles profiled a patient treated on a MRIdian system, and there were also two national TV patient stories in The Netherlands. All three television clips are available on our website, www.viewray.com, providing a glimpse into what we believe is the future of radiation oncology, the potential for helping patients and the healthcare system through the real-time visualization provided by our MRI-guided radiation therapy system. The current MRIdian system is validating what physicists and radiation oncologists have known intuitively for years that MRI guidance reveals tumors and organs as they change shape and move within the body during treatment. What we’re doing now leads me to the third and final part of my opening comments. We’re combining the advantages of MRIdian system with the favored power source of 80% of treatment centers, the linear accelerator or linac. We have moved quickly since we first announced our linac technology development program on March 8. After proof of concept, we built a fully operational system at our Silicon Valley vault and scientists and clinicians have visited to take measurements and assess the technology. Our visitors have been particularly impressed by the sharpness of the beam and the high dose rate achieved with our linac technology. At the AAPM meeting last month, some of them presented the first technical data on the performance of MRIdian linac technology. These oral presentations, given during the MR linac design session, focused on the design and characteristics of the MR-guided linac technology and summarized data from their recent testing. The speakers highlighted our patented magnetic and radio frequency shielding technology which virtually eliminates interference between the linac and the MRI. They also presented quantitative data demonstrating the ability of the linac system’s image and deliver radiation simultaneously. We now look forward to clinicians presenting additional data on linac technology at ASTRO, the largest radiation oncology meeting of the year in September. ASTRO provides the perfect opportunity to showcase the MRIdian linac technology as a groundbreaking and clinically compelling technology in the fight against cancer. Let me now tell you about the next steps for this linac technology, which is not yet cleared for sale in the United States. We’re finishing the data collection and are on track to complete our regulatory submissions for FDA 510(k) clearance and CE Mark before the end of the year. Finally, let me remind you why we’re so excited about the MRIdian linac technology. Customers are reacting enthusiastically to it, and we expect our MRIdian linac technology to produce strong order growth once cleared and to contribute near industry-standard product gross margins in the product’s first year. With that, I'd like to turn the call over to Ajay, who will provide additional details on our second quarter financial results.

[Ajay Bansal:]

Thank you, Chris. And good afternoon, everyone. It is my pleasure to be joining the call today and I look forward to meeting with many of you in person over the coming months. I'm excited to have joined ViewRay for its potential to change the delivery of radiotherapy to cancer patients. ViewRay is the first and only company that has commercialized a system, which is capable of simultaneously imaging using an MRI and delivering radiation therapy. As Chris mentioned, we're getting very positive feedback from clinicians for using the MRIdian system for treating their patients. We’re also on track to file a 510(k) application for clearance of our MRIdian linac technology later this year. When approved for marketing, MRIdian linac will positively impact our business in several ways. It has the potential to accelerate the sales cycle and greatly change the gross margin profile of the MRIdian system. We look forward to keeping you updated as we make progress with our MRIdian linac technology. Turning now to financial results, let me first review our new orders and backlog. In the second quarter, we closed three orders for a total of $17.1 million and had one cancellation. Total backlog at the end of second quarter was $100.7 million, representing 18 signed sales contracts. This compares to 16 signed sales contracts, representing $89.6 million in backlog as of March 31. As a reminder, backlog is defined as the accumulation of all product orders, for which revenue has not been recognized and for which we have a signed contract with deposits. As discussed during our previous two earning calls, several of our US-based customers and some of our international customers have chosen to wait for MRIdian linac clearance before proceeding with the installation of our MRIdian system. Further, as we said in our Q1 earnings call, we did not expect to recognize any product revenue in Q2. We did, however, ship one system in Q2, for which we’ll recognize revenue once it's installed and accepted. We expect Q3 to be similar with one shipment, but no product revenue recognition. We’ll also likely ship one system in Q4 and we do expect to recognize some product revenue in Q4. As a reminder, revenue recognition for systems that we install generally occurs upon acceptance. Revenue recognition in territories where a third party is responsible for installation generally occurs upon delivery. Turning now to quarterly numbers, total revenue in the second quarter was $299,000 compared to $182,000 in the same period last year. In both of these periods, revenue consisted entirely of service revenue. Operating expenses in the second quarter of 2016 were $10.1 million compared to $10.7 million in the same period last year. Interest expense in the second quarter of 2016 was $1.4 million compared to $839,000 in the same period last year. The increase in interest expense reflects the $15 million draw-down from a CRG debt facility in May. Our cash balance at the end of June was $9.4 million. This quarter, we were added to the Russell 3000, Russell Global and Russell Microcap indices, reflecting the progress that we have made since becoming a public company. This should help drive visibility of ViewRay within the investment community. I'll no turn the call back over to Chris for closing remarks.

[Chris Raanes:]

Thank you, Ajay. In closing, we’re very pleased with our progress toward commercialization of the next generation of MRIdian, as MRI-guided linac progresses towards the forefront of cancer treatment. I look forward to keeping you updated on our progress and I will now open up the call for Q&A. Operator?

[Operator:]

Thank you, ladies and gentlemen. [Operator Instructions] And our first question comes from Suraj Kalia with Northland Securities. Your line is open.

[Suraj Kalia:]

Good afternoon, folks. Thanks for taking my question.

[Chris Raanes:]

Hi, Suraj.

[Suraj Kalia:]

So Chris –Chris or Ajay for that matter, let me start out, in terms of the backlog, can you give us an idea, what percent of them were originally signed for the MRIdian cobalt and are these slated to be switched to the MRIdian linac, especially the US orders, or they will continue to be the MRIdian cobalt?

[Chris Raanes:]

Suraj, that’s a great question. And the answer is the vast majority of the orders in backlog are for the cobalt system because that’s what’s cleared, so that’s what we’ve been out selling. My expectation – and this is from talking to all of these folks – is that all, but a handful, will switch over to the MRIdian linac once it gets cleared.

[Suraj Kalia:]

Got it. And in Japan, Chris, – congrats on the approval. Now, is the game plan basically first we place the cobalt and then X months or X years down the line, when linac gets approved be upgraded to linac or how should we look upon Japan, especially given – is it the same as the US where people would suddenly take a break and say let's wait till the linac comes online or is there demand you already see in the pipeline for the cobalt?

[Chris Raanes:]

Another great question. Let me answer first with a very general statement that we’re going to do whatever it is our customers want. If our customers are asking to take delivery of a cobalt system, we’re delivering them a cobalt system. If our customers are asking to please delay, they want to wait for the clearance of the next generation product, we’re working with them on that as well. So the expectation in Japan is that we have clearance for the cobalt system and we’re going to go ahead and deliver the cobalt units for the customers that want it, and I anticipate that that's what they’ll be ordering here in the near future. As you pointed out, the upgrade is a really, really good option and we designed the system and worked on the technology specifically to be able to handle that, so a customer who takes delivery of a cobalt can relatively easily upgrade that cobalt system to a linac. And there’s an ideal opportunity for them to do that in a few years. In roughly five years, most people will replace the cobalt. Our anticipation is almost no one will replace their cobalt, they will upgrade their systems to linacs.

[Suraj Kalia:]

Fair enough. And, Ajay, two questions for you. My memory fails me here. For backlog, what specifically is the time duration after which you'll say, ‘you know what, we’ve got to remove this order from backlog.’ I know others use some amount like 30 months and whatnot. How do you’ll define for backlog?

[Ajay Bansal:]

Yeah. Suraj, we look at our backlog where orders are valid and we're expecting to deliver and where we have a signed contract. We are not assessing it from the lens of a time duration that if it’s not going to be installed in two years, it will not be a part of backlog. But we do assess every quarter as to which customer orders are valid and fine and that we expect to deliver on.

[Suraj Kalia:]

Fair enough. And again, Ajay, pardon me, I might have missed this. My memory fails me again. The term loan agreement, that is not securitized by anything from the backlog. Is that a fair assessment? There aren’t any covenants that call out to – there aren’t any covenants that call out for revenues or some probabilistic scenarios for the backlog. Is that – am I fair in understanding that?

[Ajay Bansal:]

The term loan agreement that we have with CRG, as you know, Suraj, it’s for $50 million, of which we have already drawn down $45 million. The remaining $5 million that does have certain – we need to meet certain milestones for us to be able to draw down on the $5 million, but with respect to the loan that we already have, there’s no sort of covenant which says, you have to pay the loan if we don’t meet a certain – if we don't deliver on a certain backlog, for example.

[Chris Raanes:]

Let me clarify that actually. There is a covenant on revenues over any given two-year period associated with the term loan. And those are, let’s say, Suraj, well under control.

[Suraj Kalia:]

Fair enough. Okay. Gentlemen, thank you for taking my questions.

[Operator:]

Thank you. [Operator Instructions] I'm showing no further questions in the queue. I’m going to turn it back to management for any closing remarks.

[Chris Raanes:]

All right. Thank you, operator. And thank you all for joining our call today. I look forward to keeping you all updated on the progress of our linac technology and the progress of our business. And with that, have a good day. And thank you for being on the call.

[Operator:]

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