ViewRay, Inc.
Q1 2018 Earnings Call Transcript

Published: 11 May 2018

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the First Quarter 2018 ViewRay, Inc. 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 be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Lee Roth at The Ruth Group.

[Lee Roth:]

Thanks, Christine. Good afternoon to everyone, and welcome to ViewRay's First Quarter 2018 Financial Results Conference Call. Joining me from management are Chris Raanes, our President and Chief Executive Officer; and Ajay Bansal, Chief Financial Officer. This afternoon, ViewRay issued a press release announcing its first quarter 2018 financial results. A copy of this release is available on the Investor Relations section of the ViewRay website at www.viewray.com, and we encourage you to review that document. This call is also being broadcast live over the Internet at viewray.com, and a replay of the call will be available on our website for 14 days. Before we begin, I'd 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 forward-looking statements involve material risks and uncertainties, and our 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 March 31, 2018, as well as subsequent reports filed with the Securities and Exchange Commission. Furthermore, the content of this conference call contains time-sensitive information accurate only as of the date of this live broadcast, May 10, 2018. ViewRay undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. With that said, it's my pleasure to turn the call over to Chris Raanes. Chris?

[Chris Raanes:]

Thank you, and good afternoon, everyone. Welcome to ViewRay's First Quarter 2018 Financial Results Conference Call. It is just under 2 months since we reported to you on our fourth quarter results, so I'll keep my remarks today brief. The main themes for this year are execution and growing commercial momentum as we move past the first anniversary of FDA approval of the MRIdian LINAC. In Q1, we received new orders for MRIdian Linac systems totaling $21.2 million, which took us beyond the milestone of 50 total orders for MRIdian systems. In the first quarter, we recognized revenue on 4 MRIdian Linac systems. In addition to the 4 systems, we also recognized revenue on an upgrade of one of our first-generation systems to MRIdian Linac. Total revenue for the quarter was $26.2 million. While this is a new record for ViewRay, Q1 revenue was high for 3 reasons

[Ajay Bansal:]

Thank you, Chris, and good afternoon, everyone. Total revenue for the first quarter ended March 31, 2018, was $26.2 million compared to $1.2 million for the same period last year. Revenue for the first quarter this year included 4 MRIdian system installs and one system upgrade. Our backlog at March 31, 2018, was $195 million. This compares to approximate $145 million as of March 31, 2017. In terms of our cash position, we ended the quarter with total cash and cash equivalents of $78.9 million. This cash position includes proceeds raised through the sale of common stock and warrant in our direct registered offering to Fosun on March 5, which raised aggregate gross proceeds of approximately $59 million. In the first quarter, our cash usage amounted to $37 million. This compares to $73 million in cash usage for full year 2017. The high cash usage in the first quarter of 2018 was driven by a number of onetime factors. Specifically, during the first quarter, our [bond] was affected by a $5.8 million growth in accounts receivable and by installation of systems for which customers had previously paid deposits totaling $14 million. In addition, we increased our net inventory in the first quarter by $4.4 million. For the full year 2018, we project our cash usage in the range of $80 million to $90 million. Finally, as Chris has already stated, we are reiterating our guidance of $80 million to $90 million in total revenue for the full year 2018. I would now like to turn the call back to Chris for closing remarks.

[Chris Raanes:]

Thank you, Ajay. In summary, 2018 is off to a strong start, and we expect to grow our momentum in the second half of the year. We look forward to delivering the benefits of our revolutionary MRI-guided technology to more clinicians and patients around the world. And with that, I'd now like to open up the call for Q&A. Operator?

[Operator:]

[Operator Instructions] Your first question comes from the line of Difei Yang from Mizuho Securities. Your line is open.

[Difei Yang:]

Hi, good afternoon. And thanks for taking my question. congratulations on a great quarter. So just a couple of questions on the -- I see inventory going up. Does that imply you are seeing a very strong Q2 -- remainder of the 2018?

[Ajay Bansal:]

Difei, as we mentioned, we're maintaining guidance for the year to $80 million to $90 million in revenue, which, as we've discussed before, implies 13 to 15 new system installs for the year. So we already delivered 4 in the first quarter, and of course, we expect to deliver the balance in the remaining time frame. And we are building our inventory to make sure that that's not a factor or a concern in delivering those installs.

[Difei Yang:]

Yes. So Ajay, on that, maybe you can talk a little bit about the supply chain, about the time frame going from putting your orders of the parts, all the way leading to completion of the installation, how long does it take and the different steps involved and maybe installation capacity as well.

[Chris Raanes:]

Difei, this is Chris. On the install process, we're making solid progress on that. The install times continue to come down, and we see ourselves on track to being a 30- to 40-day range by the end of the year. So we're feeling real good about that. We continue to maintain the teams, such the 3 internal installs, 2 externals, and actually, we're done training the third group out. So we should be able to do 3 internal and 3 external. But the big gain in capacity install is going to be as we bring the cycle time down, right, as we come down from last year, it was in the 75-day plus. And like I said, we're on track now to be between 30 and 40 by the end of the year.

[Difei Yang:]

Yes. And my last question on competitive landscape. Do you see competitive landscape being changed in any dramatic way? And with new entrant, is that -- in your view, is that a neutral, positive or negative to ViewRay?

[Chris Raanes:]

And that's a great question. There's really no -- I don't have new news on competitors. We all went to the same big trade show just now at ESTRO that we talked about. We had great interest there. The symposiums were jammed. I think we probably had the best attended symposiums at the show. But let me be clear, actually, I would welcome a competitor finally getting a product out there. More than one of us making noise about MR guidance, which we all know is the future of radiotherapy, is a good thing. And we feel very, very comfortable that we have the best solution. Our technology was designed from the beginning to treat radiotherapy. We don't have any distortions. We fit in the existing rooms and with the technologies. We just announced at ESTRO we've just taken the imaging to the next step, and we've shown that we can get better quality images with our system. We can with almost anything else out there. We're very, very comfortable with that.

[Difei Yang:]

Thank you so much. And congratulations on a great quarter.

[Chris Raanes:]

Thank you.

[Operator:]

Your next question comes from the line of Craig Bijou from Cantor. Your line is open.

[Craig Bijou:]

Hi, guys. Thanks for taking the questions. I wanted to start with Japan. And I think you got the approval for the MRI Linac a little earlier than expected. But I was hoping maybe you can put -- frame the market opportunity. I understand it's the third largest opportunity or third largest market in the world. But maybe if you can just size that maybe with a little more specificity. And then how should we think about when to expect some revenue contribution from selling systems in Japan?

[Chris Raanes:]

That's great, and we're very excited about our approval over there. As I mentioned, we have 2 of the first-generation systems. One of them treating patients at the National Cancer Center has just been going along great, and that's been making a lot of positive news for us. As you mentioned, we now have the clearance to go ahead and start marketing, and we have a great partner over there in ITOCHU. We've had a lot of interest. There are big trade show. JASTRO tends to happen right around the Thanksgiving time of year. But we see a lot of opportunity to make progress even before that. I'm pretty optimistic on being able to capitalize on this new clearance before even though the JASTRO trade show.

[Craig Bijou:]

And just revenue contribution to -- I mean you think -- so I guess -- sorry. It sounds like you see some potential orders ahead of that show in the fall.

[Chris Raanes:]

That's the way we're looking at it right now.

[Craig Bijou:]

Okay. And then I wanted to talk about your meeting in Amsterdam and then ESTRO and the high level of interest that you guys were seeing there. And I wanted to ask if there was any more color you could provide on that, maybe where if it's geographic regions, radiation oncologists from U.S., Europe, Asia, where's the highest level of interest. And then maybe just -- if there's any differentiation and interest between the types of cancer, breast, prostrate. I know you mentioned that there was presentations on several different types.

[Chris Raanes:]

All right. Let me take those in sequence. Well, look, both the Amsterdam symposium, which we hosted in March, and the ESTRO show are -- which was in Barcelona, are very European-centric. And so the majority of people that attended were from the European region, but not exclusively. We had people even at the symposium that came from both Asia and from United States. They wanted to go see and see the install at the VUmc. They wanted to hear -- we had speakers from both the U.S. and Europe. So I think the predominance of people at those 2 venues were European. But in terms of overall interest, it is from all the regions. And I alluded to this in my last call. And I think this is going to be a big year for the U.S., right, having had our cleared product at ESTRO last year, letting people see it, touch it, go through the capital planning cycle at the end of the year. I think you're going to see a nice uptick in U.S. orders in 2018. Then -- sorry, which is incomplete there. Which cancers people are interested in, well, we're getting a lot of activity and buzz around the pancreas data. That is -- that just continues to be something that people are talking about and they wanted to go further with. Having said that, the community-based hospital -- the U.S. community-based hospital has a volume of about 30% of all patients going through radiation therapy are treated for breast. And if you add prostate to that, it's over half of all the patients. So that is something that people are genuinely focused on. The really good news is that we continue to have great data on that. The breast study from Dr. Thomas at WashU is carrying on, and that's the one that's showing our ability to tweak in 1 week as supposed to 6 to 8 weeks, so a huge advantage to the patient and all that with 100% good to excellent cosmetic outcome. And then on the prostate, there's been a lot of work on the prostate, and it's something that folks view and see we're talking about, both at the symposium and at the trade show. They had treated a lot of prostates using the image-guided capability of our system to

[Craig Bijou:]

Great. Very helpful. Thanks for taking the questions.

[Chris Raanes:]

Thank you.

[Operator:]

[Operator Instructions] Your next question comes from the line of Andrew D'Silva from B. Riley FBR. Your line is open.

[Andrew D'Silva:]

Good afternoon. Thanks for taking my question. And sorry if you touched on any of this, I was hopping between calls. Just to start off, if you are not filing your 10-Q today, could you let me know what cash flow from operations, CapEx stock-based comp and depreciation and amortization were for the period. And while you're pulling that, are you finding that as we look at installations this year, should we assume that the initial KOL discount from the sales price we saw previously likely won't impact too many individual MRIdian sales going forward this year as guidance? And then also the first quarter results would imply about a $6 million sales price. Is that a fair assumption? We shouldn't see too much volatility in that going forward.

[Chris Raanes:]

Well, I'll give Ajay a second to pull some data together. I'm pretty sure we are filing our 10-Q, but I wasn't (inaudible). Hope we have all the data you need. As for natural pricing, the pricing is actually doing just fine on new orders. And when you're trying to decode pricing from revenue, then I'll let Ajay go into the details on this, there's always -- there's accounting issues. Issue is the wrong word. There's accounting treatment, either -- if you have a year of warranty, you have to carve out of the revenue recognized 1 year of a service contract, and then that gets ratably recognized over the period. Some of these systems -- some of the foreign countries come with 2 years, so you end up having to carve 2 years out. So you can't necessarily decode the sales price from the revenue recognized. And I'll stop there. In the meantime, Ajay should have his...

[Ajay Bansal:]

Yes, yes. So Andy, we -- new orders total of $21 million for the quarter, so the pricing was pretty decent on the new orders that we closed this year. And we are very mindful of pricing. But obviously, our prime goal here is to maintain pricing while achieving good market penetration. So they are going to play off of each other in the coming quarters as well. Regarding cash usage, of the $27 million that I spoke of, about $2 million of that was for property, plant and equipment and the rest of it was operating cash usage. And in terms of the non-cash elements, stock-based compensation is about $1.2 million, and depreciation was about $0.6 million. And I'm sure I'm missing some part of the question you asked. Was there anything else, Andy, that you had wanted to know?

[Chris Raanes:]

But we did, in fact, filed the 10-Q, right?

[Ajay Bansal:]

Yes. The 10-Q is being filed today. That is correct.

[Chris Raanes:]

You can get all the detail.

[Andrew D'Silva:]

Okay then, I can find that. That's not important then. And then with gross margins, can you educate me on what the step functions are that will cause the expected gross margin to bump up as we progress through the year. Is it just accounting to scale or the tighter, higher selling prices? Or are there other operating efficiencies we should watch out as you progress or watch out for as you progress throughout the year? And if I recall, I think it was approaching 30% near the end of the year for gross margins and then the goal was 40% for '19.

[Ajay Bansal:]

Yes, sure. So our gross margins for the quarter were about 21.3% also. And if you take the upgrade out of the equation, the upgrade was -- the upgrade is a little bit different than the rest of the business, which is new installs and service revenues. And if you were to take the upgrade out of the equation, then our gross margins would've been closer to 25%. And so we stay pretty comfortable in our thinking that we will reach gross margins approaching 30% towards the end of the year and, longer term, approaching the industry gross margins of around 40% or so. With respect to what's going to drive the gross margins, all of the factors that you mentioned

[Andrew D'Silva:]

Okay, great. And that's very understandable. And then as you move from a 4-frame per second system to an 8-frame per second system, are there modifications that can be put in place for the legacy 4-frame per second platforms that are out there in a similar fashion to how you just upgraded that Cobalt MRIdian system this quarter?

[Chris Raanes:]

Yes. This is Chris. You'll noticed that I actually referred to it as an upgrade. So it is a product that can be retrofitted onto the existing systems. And like I also said, it's one of the first of many that you ought to expect from us. So it's just kind of going to be the way that you'll see ViewRay operate, always improving on the capabilities of the fundamental platform over the year.

[Andrew D'Silva:]

Okay, perfect. And just my last question, and as it relates to MRIdian being able to -- since you perform as a workhorse for -- from a treatment duration standpoint, have you got any insight from your customers that have been using the offering? And have they been able to use the product with a comparable treatment duration so use can be capitalized efficiently? Any insight there will be useful. I think that's one of the most frequent questions I get from investors.

[Chris Raanes:]

Yes -- no. We recognize that that's of great interest, both to customers and investors. And we have -- we are working with our sites to do a detailed study on that, and we'll publish sort of a white paper on it so that people understand that we'll also use it internally to see if there's anything we might've missed in the development. But I'll tell you, the early results are very encouraging, very, very encouraging.

[Andrew D'Silva:]

All right. Wonderful. Thank you so much and congrats on getting on those systems installed this quarter and best of luck going forward this year.

[Chris Raanes:]

Thank you.

[Operator:]

Your next question comes from the line of Suraj Kalia from Northland Securities. Your line is open.

[Suraj Kalia:]

Good afternoon, gentlemen. Congrats on the great quarter. So a bunch of questions. Ajay, forgive me if these were asked. I've just been toggling between calls. What was the U.S., OUS. split in the quarter? And was there any FX impact?

[Ajay Bansal:]

Yes. We do not provide any U.S., o U.S. split by quarter. But in a backlog, the split is roughly 1/3, 2/3. 1/3 U.S., 2/3 ex U.S., and that's fairly typical of the industry. With respect to the FX impact, one of the systems that we recognized revenue on was denominated in euros. That's a modest impact, but nothing meaningful to talk about.

[Suraj Kalia:]

Got it. And Chris, your Shonin approval, obviously, it came a little quicker than expectations. My understanding -- and I know some of the questions have been asked in the Japanese market. If I can turn that question around, Chris, and more specifically ask you, is your expectation for Japan more to target the initial academic centers or you're going to make a broad spread? Because the academic centers, as I understand in Japan, are relatively concentrated. Any color from that level of granularity you can provide would be greatly appreciated.

[Chris Raanes:]

That's great, and we are pleased to have gotten the Shonin approval a little earlier than we had all hope. And that's good, and hopefully, we can capitalize on that a little earlier as well. Our -- the mix that we're going after in Japan is similar to what we do with the rest of the world. It's not just the academics, and that's going to be a theme for 2018 all around. You will see a more diverse set of customers coming into the ViewRay family. I mentioned that we have 2 of the first-generation systems already in Japan. One of them is at the National Cancer Center, obviously, a very prestigious academic center. But one is a well-known generally, call it, community-based hospital, and we will continue to see that as we continue to penetrate Japan. And I'm as excited as you sounded like you were. Japan is the third largest market for radiation oncology around the world. But for high-end systems like this, I believe it's actually the second largest. And we're getting really good results over there.

[Suraj Kalia:]

And Chris, maybe someone has already asked this question. For the balance of the year, how should we expect the cadence of studies? Or is it just prior to ASTRO. I guess what I'm really curious about is the updated median survival for the pancreatic study from 27 months. Are you following it up prior to ASTRO? Could we see any glimpse of that data or at ASTRO? And the second part of that question is obviously prostate. You guys seem -- the excitement seems palpable on the prostate side. I'll just go out on a limb here, Chris. When can we see some study from any of these institutions talking about erectile disfunction and urinary incontinence? Is that something that we can expect, whether it's a single-site study? Or any color there would be great.

[Chris Raanes:]

Yes. So first one on the pancreas, they are following. They are following up on those patients, and I have every reason to believe they will publish follow-up results at ASTRO this year. So I think we'll continue to see that. We also have the prospective study that we'll be enrolling patients through the -- I don't think we're going to see much results from that probably until next calendar year. And I agree with you on prostate. I think prostate is a big deal and that somewhere that this system has potential to really make a difference. In one of the centers that has been leading the way -- I know what you're talking about, the VUmc in Amsterdam, but they seem to be a focal point for us today. That first adaptive-on-table Linac patient was a prostate patient. And they're using it for prostate, and I would expect to see some results from them. And there are other sites as well. But I think in terms of volume, probably some of those first data will come out of the VUmc in Amsterdam.

[Suraj Kalia:]

Got it. And final question, Ajay. Forgive me if somebody might have already asked this. You guys placed 4 units in Q1. Guidance midpoint is 14. So incremental 10 units remaining for 3 quarters. JASTRO coming up. ASTRO coming up. Help me understand. Is the guidance -- I mean, the obvious answer seems to be you all just want to be conservative. Am I missing anything else? I mean, why shouldn't you all be in a position to basically blow the guidance out of the water as the year progresses?

[Ajay Bansal:]

No. Thank you, Suraj. Thanks for the optimism. We appreciate it a lot. So Suraj, as Chris mentioned, that you recall, last year, we had -- in January, we had announced that we had completed installation of one system, but the revenue recognition for that was pushed into this year. So that was one of the 4 units. And as Chris also said in his opening remarks, one of the units that we're expecting to complete early in Q2, very early in Q2 got pulled into late Q1. And because of the lumpy nature of this business, I would not read too much from quarter to quarter. Yes, we had a very good first quarter, and we are very happy about that. And I think right now, we feel pretty comfortable with the guidance for the year of $80 million to $90 million in revenue. And of course, when we have our next quarter call, we'll update you on results for Q2 as well as any changes to guidance, if any. Currently, we are at the same guidance as we provided when we announced our yearly results in March.

[Operator:]

Your next question comes from the line of Difei Yang from Mizuho Securities.

[Difei Yang:]

Just a quick one. For the new orders, how many of them are coming from nonresearch hospitals?

[Chris Raanes:]

Think about that for a second.

[Ajay Bansal:]

Yes. I think Difei, as we have said, I mean, initial focus and was majority of orders are going to be from the high, prestige academic institutions. We are beginning to see a lot of interest in the community centers as well. But for the coming quarters, 2 or 3 quarters or so, we would continue to see a higher proportion of the orders coming from the academic centers. And this year, we had only one quarter, so I don't want to draw any generalization from the first quarter. Just to sort of remind you, in our last year, our orders grew by about 50% over 2016, and this year, we are hoping for a pretty healthy growth as well. And I'm sure it'll be a mix of academic and community centers but more weighted towards academic centers for this year.

[Chris Raanes:]

Yes. That's exactly right. I'm sorry about that. I was just kind of going over my head what -- which orders we took, and it's hard to draw any big conclusions from just one quarter. But I will repeat that you'll see a more diverse set of customers throughout the year. There's no question about that.

[Operator:]

I'm showing no further questions at this time. I would now like to turn the conference back to management for closing remarks.

[Chris Raanes:]

All right. Well, thank you, everyone, I really appreciate your time today, and I look forward to keeping you updated as we progress in delivering what we believe will be the new standard of care in radiation oncology. Have a great day.

[Operator:]

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