ViewRay, Inc. (VRAY) Q4 2018 Earnings Conference Call Transcript

ViewRay, Inc. (VRAY)
Q4 2018 Earnings Conference Call
March 14, 2019 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2018 ViewRay earnings conference call. [Operator instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Michaella Gallina, senior director of investor relations. You may begin.

Michaella Gallina -- Senior Director of Investor Relations

Thank you, Catherine, and welcome to ViewRay's fourth-quarter and full-year 2018 financial results conference call. Joining me from ViewRay are President and Chief Executive Officer Scott Drake and Chief Financial Officer Ajay Bansal. Earlier today, ViewRay released financial results for the quarter and year ended December 31, 2018, which can be found on the Investor Relations portion of our website. Before we begin, I'd like to remind you that management will make statements during the call that include forward-looking statements within the meaning of federal securities laws.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. For a list and description of those risks and uncertainties, please see the company's filings with the Securities and Exchange Commission. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 14, 2019. The company undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call.

With that, I will now turn the call over to Scott.

Scott Drake -- President and Chief Executive Officer

Thank you, Michaella, and good afternoon, everyone. We appreciate you being on our call. In our prepared remarks, I will first provide an overview of Q4 and full-year highlights, share color on the progress we've made on the commercial, operational, clinical, and innovation fronts, provide 2019 guidance. Ajay will go deeper into our financials, and then we'll look forward to answering your questions.

I'll begin with Q4 highlights. As you know, Q4 was our new management team's first full quarter with the company and I would describe it as solid. In a short period of time, we have built a leadership team very capable of growing and scaling the company. We have defined our mission, vision and shared values that will guide and ensure our success, and we have put operational rigor in place to drive our key strategic imperatives that we call are vital few and key drivers.

Our teammate and customer willingness to recommend scores indicate that we're on the right path. Q4 financial highlights include MRIdian System orders of approximately $49 million, an increase of 43% versus prior year. Total revenue in the quarter was $20.7 million versus $19.9 million in the prior period. For full-year 2018, we received new orders of approximately $141 million, an increase of almost 25% over prior year, and total revenue in 2018 was $81 million, an increase of 138% over prior year.

Let's move on to share the progress we're making on the commercial, operational, clinical, and innovation fronts. It's important to state that all of these efforts are underpinned by a clear understanding of what each of our key constituents is looking for us to deliver. First, commercially, our U.S. team is fully in place and training is well under way.

We are driving pipeline process rigor and fully expect our team to drive solid order growth over the course of this year. On the international front, we have also made substantial progress and are in process of expanding our direct footprint and bolstering our distribution relationships. I'm very pleased with the progress we're making across global regions. Similarly, on the operational front, we're making significant progress.

The majority of our vault readiness team is in place and we are actively engaging with every customer to prepare for installation and shorten the overall time frame from purchase order to revenue recognition and first patient treated. We are experiencing shorter PO to rev rec time frames and expect continued progress. Our efforts to train customers prior to ATP are having the desired effect. More customers are treating multiple cancer types and utilizing our adaptive capability on day one of treatment.

On the clinical front, steady progress is taking place. In Q4, we enrolled our first patient in our multi-center prospective SMART trail. We are bringing several sites online and are working toward enrolling the first 25 patients in the safety phase of the study. Also, the retrospective pancreatic high-versus-low dose study has been accepted for publication in Cancer Medicine.

Turning now to prostate evidence. As many of you are aware, Amsterdam UMC has conducted a single-arm prospective study utilizing adaptive SBRT treatment. We anticipate publication of the data around mid-year. In addition, WashU recently published how they're broadening their use of the MRIdian System to include pediatric patients.

A three-year-old patient underwent treatment and the clinical team leveraged our feature set to mitigate radiation exposure in order to reduce the risk of secondary cancers later in life. No toxic effects were observed during or after treatment. And today, 28 months later, there's been no evidence of recurrence. Lastly on the clinical front, we conducted our first and very successful MRIdian users meeting.

About 130 physicians, physicists, therapists, and dosimetrists gathered to share best practices. We are amazed and inspired by how our customize -- our customers are utilizing our system and the extraordinary patient benefits being provided. On the innovation front, we recently achieved FDA clearance for faster, brighter, and better imaging. We are now capable of imaging at eight frames per second and delivering additional sequences of T1, T2, and enabling diffusion-weighted imaging.

This is yet another step in extending our innovation leadership position. We have vetted our innovation pipeline with thought leaders and are confident future capabilities will fulfill customer needs and deliver great patient benefit. Turning to guidance for 2019, we expect revenue to be in the range of $111 million to $124 million. At the midpoint, this is about 45% growth over prior year.

We are also keenly focused on cash use. We anticipate spending between $65 million and $75 million this year, significantly less than our spend of $111 million in 2018. Let me conclude with observations on the competitive marketplace and how well we are positioned. Take a quick step back and consider what each constituent wants.

Patients desire better outcomes, noninvasive therapy, and shorter treatment times. Physicians want more precise personalized solution and better outcomes for their patients. Providers want patients to seek their facilities, greater patient throughput, and attractive economics, and payers want improved access to better care at a lower cost. I would add that in a bundled environment, our value proposition becomes even more attractive.

We enable and drive the trends desired. Our integrated plan has increasing traction. We are engaging with more customers with our larger highly capable team. We are smoothing and speeding the path from PO to first patient treated, and our training efforts are yielding therapy adoption.

Our clinical and innovation pipelines are also progressing nicely. I am very pleased with this work and the speed with which it is occurring, a credit to our team. With that, I'll turn the call over to Ajay.

Ajay Bansal -- Chief Financial Officer

Thank you, Scott, and good afternoon, everyone. Total revenue for the fiscal quarter ended December 31, 2018 was $20.7 million, compared to $19.9 million for the same period last year. Total revenue for the full-year 2018 was $81 million, compared to $34 million for 2017. Cost of revenue for the fiscal quarter ended December 31, 2018 was $20.1 million, compared to $15.6 million for the same period last year.

Cost of revenue was $74.4 million for the full-year 2018 compared to $27.7 million for 2017. Total gross profit for the fiscal quarter ended December 31, 2018 was $0.6 million, compared to $4.3 million for the same period last year. Total gross profit for the full-year 2018 was $6.6 million or 8% compared to $6.3 million or 19% for 2017. Driven by a greater number of installs and operational efficiencies, we expect to see improvement in gross margins in 2019.

This will be a step in our journey and will drive stronger gross margin improvement beyond 2019. Total operating expenses for the fiscal quarter ended December 31, 2018 were $22.1 million, compared to $17.1 million for the same period last year. Total operating expenses for the full-year 2018 were $81.7 million, compared to $54.5 million for 2017. Net loss for the fiscal quarter ended December 31, 2018 was $16.7 million or $0.17 per share, compared to $24.6 million or $0.38 per share for the same period last year.

Net loss for the full-year 2018 was $79.1 million or $0.98 per share, compared to $72.2 million or $1.23 per share for 2017. Let me now turn to orders and backlog. In the fourth quarter of 2018, we received eight new orders from MRIdian Systems totaling approximately $49 million, compared to six orders totaling $34 million for the same period last year. For the full-year 2018, we received 23 new orders, totaling approximately $141 million, up from 19 new orders, totaling $114 million in 2017.

At year-end 2018, our backlog stood at approximately $212 million, compared to $204 million at year-end 2017. In the fourth quarter of 2018, we removed three systems from our backlog. While we'll continue to review the backlog each quarter, our recent thorough review is now complete. In the fourth quarter of 2018, our cash usage was approximately $34 million.

For the full-year, we used $111 million in cash, of which approximately $50 million was due to an increase in working capital. We ended the year with total cash and cash equivalents of approximately $167 million. Finally, let me provide a little more color on Scott's comments on guidance. In 2019, we expect total revenue in the range of $111 million to $124 million, primarily driven by 17 to 19 installs and three upgrades.

We expect to use approximately $65 million to $75 million in cash this year. As we continue to invest in our growth, we are keenly aware of our cash burn and are committed to reducing our cash use going forward. With that, we would now like to turn -- open the call for Q&A. 

Questions and Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Chris Pasquale with Guggenheim. Your line is open.

Chris Pasquale -- Guggenheim Securities -- Analyst

Thanks. Good afternoon, guys.

Scott Drake -- President and Chief Executive Officer

Hey, Chris.

Chris Pasquale -- Guggenheim Securities -- Analyst

Scott, you mentioned you're looking for strong order growth in 2019. At this stage in the company's development, I feel like that number is almost more important than revenue. Are you willing to share anything around guidance for what you would expect for orders this year?

Scott Drake -- President and Chief Executive Officer

Chris, first, I would agree with your premise that orders is kind of the metric in our estimation in 2019. I'm not going to guide to that number, but what I would share with you qualitatively is that the work that we've done, building our commercial team, I'm very pleased with. As I mentioned, our full U.S. team is in place, training has either been completed or largely complete, depending upon when that individual teammate joined the company.

We're expanding our direct footprint internationally, bolstering our distributor relationships in target markets and we are engaging with a significantly larger number of customers now than we were previously. I think it's also important for us to keep in mind, and I think this is just logical and pragmatic that, that team's traction is going to increase over time, getting settled into their territories, getting to know their customer base. I would expect the back half of '19 to be more order-intensive than the front half. But I would tell you that the value proposition that we're representing in the marketplace from a clinical innovation and economic perspective is being responded to favorably, and I like our progress.

So I'm going to leave it at that qualitative level, but I very much agree that, that is the metric for 2019.

Chris Pasquale -- Guggenheim Securities -- Analyst

Thanks. And I think some of your comments lead me into my second question, which is it sounds like you made a lot of your progress in terms of getting the people in place that you wanted to when you came on board. What are you looking at for '19 in terms of your key objectives, the things that you like to see to give you an orderly sense of how those investments are playing out?

Scott Drake -- President and Chief Executive Officer

Yes. Chris, I think number one is orders, and I won't be redundant to the first part of your question. So that's critically important to us. Operationally, we have the vast majority of our team in place from a vault readiness standpoint and we've significantly expanded our installation team.

So shrinking that PO to rev rec time frame, progress is under way. I feel good about where we are there. We're proactively engaging now with every single customer on that front. I referenced therapy adoption being driven.

We're training our customers prior to ATP, and it's having the kind of impact that we would like to have. And we're not calling out gross margin as a guidance line item at this point, given how early our team is in place here, but we've driven considerable gross margin expansion. It's being muted by the reclassification that we went through in Q3 of last year, and that will continue to go on for the better part of 2019. But I would really say, kind of end to end, I feel very good about the work that we're doing and customer feedback is favorable.

So I would say pretty solid first couple of quarters for the team, and I'm feeling that we're on track with the plan that we've put in place.

Chris Pasquale -- Guggenheim Securities -- Analyst

Great. Thank you.

Scott Drake -- President and Chief Executive Officer

Thank you.

Operator

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

Anthony Petrone -- Jefferies -- Analyst

Thanks and good afternoon. Maybe, Ajay, and/or Scott, just the geographic breakdown on the paid orders in the quarter, just for a housekeeping question there. And then just in terms of the cash burn guidance, again, appreciate the comments on gross margin, but how much of the reduction in cash burn year over year is specifically to -- related to gross margin improvements, operating expense reduction versus, say, working capital reductions? And the reason I asked that is one can look at working capital reductions perhaps that inventory builds are slowing. So maybe just how to read the cash guidance as it relates to working capital, and I'll have one follow-up.

Thanks.

Scott Drake -- President and Chief Executive Officer

Yes. Thank you, Anthony. I'll begin with the cash part of your question and say that we're keenly focused in that area. I mentioned our vital few and key drivers.

We have heard our investors' voice loud and clear. They expect us and want us to be a growth story. I think we very much are. But at the same time, I think our investors are asking us to be very thoughtful about mitigating any future dilution or, at least, minimizing any future dilution, and we're being very careful on that front.

I think we're pretty well balanced. You see a nice progression from $111 million in cash utilization in 2018 to the midpoint of our range is about $70 million. The majority of that is in working capital coming down. Operating expenses are, of course, going up.

I think we've been pretty overt about those areas that we're investing in from the commercial team to operations, to innovation, and clinical. So you will see an increase in operating expenses in 2019, we think prudently so, but that's a little bit of the breakdown. And then as it relates to the international versus U.S., I think in Q4, we were little bit more heavily weighted on the international side than on the U.S. side.

I don't have that exact data in front of me, but I think that's roughly right, Anthony, and we're happy to have a follow-up with you later. We're talking about pretty small numbers here, so I wouldn't make too much of that in any given quarter.

Anthony Petrone -- Jefferies -- Analyst

Sure. And then at least into the follow-up, which is when you look at the U.S. sort of landscape for capital this year, it's a little bit different for 2019 in the sense that the competitor now has FDA clearance. And so maybe just any high-level thoughts on the competitive environment in the U.S.

and sort of how you're seeing it playing out now that there's a -- now that there's competition and more linear space? Thanks again.

Scott Drake -- President and Chief Executive Officer

Yes. Thank you. I -- we welcome the presence of unity in the marketplace and the megaphone that elective brings to driving awareness about the benefits of MR Linacs. I think it's a net positive for the company.

They are opening doors for us to have competition and go head to head with them in any given clinical setting. I would imagine in certain instances, we're probably opening the door for them as well to put their best foot forward. I would tell you that from a macro perspective, the competition is cone-base CT linacs. That's the vast majority of the market today.

And I think a significant proportion of the market will go to MR Linac's out into the future. And as it relates to head-to-head competition, we feel very good. Our feature set compares very favorably. We are not full of hubris on that front.

It's exactly why we are investing so heavily in our innovation pipeline. We fully expect that our competitors will make progress on their own respective innovation pipeline. But I would say, I think as objectively as I can, that we have an innovation lead, and it's our goal to extend that lead moving forward with our pipeline.

Anthony Petrone -- Jefferies -- Analyst

Thank you.

Scott Drake -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Suraj Kalia with Northland Securities. Your line is open.

Suraj Kalia -- Northland Securities -- Analyst

Good afternoon, everyone.

Scott Drake -- President and Chief Executive Officer

Hi, Suraj.

Suraj Kalia -- Northland Securities -- Analyst

So, Scott, I know you have rightfully so reject a lot of internal systems, processes. A couple of things that caught my attention, I was curious if you can shed some additional color. You mentioned operational rigor and process rigor, and then you mentioned you're looking at shorter PO to rev rec. I'm curious if you can -- compared to a year ago, what was missing? What was the gap analysis? And you said, "You know what, we got to change the process.

This is how we are going to get there." Any color you can provide?

Scott Drake -- President and Chief Executive Officer

Of course, Suraj. Great question. I think, the -- at the most kind of macro level, the company is transforming really before everyone's eyes, from being run as a start-up company to being run as a more mature public company. And so the opportunity to drive process and operational rigor abounds.

I would say at the very front end, watching Jim Alecxih and his team drive the pipeline and the weekly calls that we're all on as it relates to the pipeline are dramatically different from where they were a year ago to where we are today. A year ago, we were not proactively engaging from a vault readiness perspective. We now have a large group of engineers that are out there proactively engaging with our customers, speeding that path from PO to rev rec and we're even speeding the path from rev rec to first patient treated. And not just to get that first patient treated, but to fully leverage and utilize the capabilities of the MRIdian System.

We have increased our process rigor as it relates to our technical service team, so -- and the training as well that we're doing with customers. So, it is an extraordinary amount of work that we're doing. I am very pleased with the effect of that work and the pace with which it's occurring, but it's a considerable amount and, as you can see, it's just about enterprisewide.

Suraj Kalia -- Northland Securities -- Analyst

Got it. And two follow-ups, Scott. First is -- and forgive me if I missed this, CFDA approval status on MRIdian linac. Obviously, that is a 1,500-unit prospect for all the players in the space over the next few years and I'm curious when you guys are going to be in China for the linac.

And the second thing, more broadly speaking, Scott, can you give us a color on the number of patients cumulatively treated with MRIdian? The number we have on Unity is about 100 patients treated so far worldwide. I'm curious if you'll have any updated numbers that you all could share, just to give us a perspective or comparative on utilization between the two platforms. Thank you for taking my questions.

Scott Drake -- President and Chief Executive Officer

Yes, of course. Thank you, Suraj. Thanks for your questions. First as it relates to China.

We currently have no plans that we have made public about entering into the Chinese market. We do not have CFDA approval, and I would say that we are not currently actively engaging on that front. We currently have access to over 70% of the global market and we like the traction that we have within those markets and we're focusing there first. If we believe that China would be a compelling opportunity for us and one that we would be worth reallocating resources or growing resources to capitalize on and we have the right partners to drive that regulatory approval and then commercialization of the system, we would reconsider that position.

But as of right now, we are not actively pursuing that market in an aggressive way. Notable your comments on how attractive the market is, but we're going after the 70-plus percent that we currently have access to. As it relates to patients treated, on our system, we estimate that we have over 4,500 patients treated on better than 45 or 50 ICD10 codes. We're in about the 5,000 range of adaptive treatments being conducted on our system.

So there is a pretty substantial experience set with MRIdian in the marketplace and I fully expect that our efforts around training, innovation, and clinical data is really going to drive that north.

Suraj Kalia -- Northland Securities -- Analyst

Excellent. Thank you.

Scott Drake -- President and Chief Executive Officer

Thanks, Suraj.

Operator

Thank you. Our next question comes from Craig Bijou with Cantor Fitzgerald. Your line is open.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. Hi, guys. Thanks for taking the questions. Maybe if I could just start with a couple on guidance.

Scott, this is your first year of giving full-year guidance with ViewRay. So I wanted to ask kind of your philosophy on guidance, especially with -- obviously, MRIdian carries a relatively significant price tags. So you could lose some variability in case an install got pushed between quarters or even years. I know you guys provided a range of the install numbers, but kind of wanted to get your thoughts there, and then I'll ask my second one on guidance.

Maybe just any color on the cadence of growth throughout the year. I know you guys don't want to provide too much information quarterly for the very reason that I kind of just talked about, but -- I mean, any way to think about it?

Scott Drake -- President and Chief Executive Officer

Yes, I think so, Craig. From a revenue perspective, as you know, revenue is largely baked a year in advance given the lead times in the business. So I think that's why -- an earlier question was more around orders, which I think you're kind of pushing us on as well. So from a revenue standpoint, it's largely baked 12 months in advance, my first comment.

Second would be, 45% growth approximately at the midpoint of our range on a more interesting, larger base of business, pretty solid growth profile from a company standpoint. And third, I would say on the orders front, we're dealing with pretty small numbers from one quarter to the next. So I implore investors to look at larger horizons than just one quarter. Look at us in a full year kind of context.

I expect the back half of the year to be even more robust than the front half as it relates to our order book and I expect continued shrinking of that PO to rev rec time frame. So we're able to turn those POs into revenue more quickly over time. We've experienced pretty steady progress here recently. I expect that to continue, so I'm feeling pretty good from that perspective.

The other area from a guidance standpoint that we think is relevant, obviously, is our cash utilization. The midpoint of our range is about a little over a $40 million improvement from 2018 here to 2019. We're not sacrificing growth, but we're being very smart with working capital and have our eye keenly on that ball. So hopefully, that gives you a little bit of color there.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Yes -- no, very, very helpful. Next question, just on the data. You obviously highlighted a couple of different peer-reviewed publications that are expected to come out this year. So just wanted to get your thoughts on what -- how big of a catalyst can that be? Is the peer-reviewed papers -- I mean, are those going to be significant drivers of adoption? And I guess -- I mean, ultimately they will be but, I guess, how quickly do you think that could kind of manifest itself in your business?

Scott Drake -- President and Chief Executive Officer

Yes. I think the SMART study that we're doing, the prospective study in pancreas is going to be important to us to continue to prove the absence of grade three or higher toxicity. You saw it in the early study that we had in a lot of the physician-initiated work. You see the accuracy that our system is able to deliver and enables in a blade of dose to be delivered.

So there's a lot of exciting work going on there. I think the prostate data is incredibly beneficial to us if it comes out the way that we hope because it's such a big part of the cancer space and patients are not only concerned about survival, they're also very concerned about lifestyle, ED, and incontinence, in particular. And if we can provide completely noninvasive treatment and mitigate those negative potential side effects with our system, we think that, that has the potential to really move the market in a significant way. I would tell you from a macro perspective, and this is true across the board, the last thing that I want to do is get ahead of our performance with our words.

I want our performance to move our stock, not our words. So I don't want anybody to get ahead of themselves. But I do believe that that the data is going to give our larger, capable commercial team some real firepower in going to our customer base.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. If I could squeeze one more just on the bundled payment. Scott, I know you talked about it, but I mean any update from your side that you're hearing on what to expect or even just timing?

Scott Drake -- President and Chief Executive Officer

On what was that, Craig?

Craig Bijou -- Cantor Fitzgerald -- Analyst

Sorry, the bundled payment for radiation therapy, so any -- yes.

Scott Drake -- President and Chief Executive Officer

Yes, yes, sure. So I think from a reimbursement standpoint, we're actually in a really good position, regardless of what path CMS chooses to take. I think if we continue on the current path that we're on and customers deliver on-table adaptive treatment for the benefit of their patients, they get reimbursed fairly for the work that they're doing and the clinical benefit that they're delivering. So that path is one for us that we're very solid in that paradigm.

Conversely, if CMS chooses to go down a bundled path, there too, I think our value proposition stands out perhaps even more clearly. We project that if that were the case, both customers and patients and providers would be driven to do more SBRT treatment. You've heard Dr. Steinberg say publicly that he views MRIdian as the ultimate SBRT machine.

So I think in that environment, we also compete very favorably. So I think we're in somewhat of a unique position that regardless of what path takes place going forward, we're well-positioned.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. Thanks for taking the questions, guys.

Scott Drake -- President and Chief Executive Officer

Thank you, Craig.

Operator

Thank you. And our next question comes from Difei Yang from Mizuho Securities. Your line is open.

Difei Yang -- Mizuho Securities -- Analyst

Hi. Good afternoon. Thanks for taking my questions. Just a couple.

Scott, I wanted to understand Q4 new orders of eight units. I believe that is the highest single quarter new order number. Is that just a good quarter or is that something drastically has changed because of the process improvement?

Scott Drake -- President and Chief Executive Officer

Yes, Difei, thank you for your question. I would say, again, I want investors to take a broader horizon than just one quarter. I think it was a solid quarter that the team delivered. It was the first full quarter that our new senior team has been in their respective positions.

I think it does kind of reflect that our value proposition from an innovation, clinical, and economic standpoint is being well received by our customers. But when you're dealing with order numbers that are that small, I think it's easy to make too much or too little in any one given quarter. So we're really encouraging investors to take a longer horizon than one quarter. I would tell you though, unapologetically, that I believe our larger team with this value proposition will continue to make steady progress as we move forward.

Again, it could fluctuate from one quarter to the next, but I do believe that we'll continue to fill that pipeline and deliver more orders, generally speaking in the time frame that lies ahead.

Difei Yang -- Mizuho Securities -- Analyst

Thank you, Scott, for that color. And then the next question is around PO 2 revenue recognition time frame. I think you have talked about shrinking that time frame from six quarters down to four quarters. Could you talk a little bit more about what timeframe do you think you'll get down to the four quarters? Is it one year worth of progress or maybe two years? Just rough time frame.

Scott Drake -- President and Chief Executive Officer

Yes, I would describe the progress that we've made thus far as being very good, maybe a little bit better than I anticipated that we would be able to make at this point in time. And the team is projecting that we will have similar kinds of progress in Q1, 2, 3, and 4 ahead here in 2019. I do not think we'll accomplish the goal of getting to 12 months in 2019. I think it will take place sometime after that.

And when we get a little bit further down the road, we'll provide more clarity on that front. But I don't think we'll quite achieve it here in 2019.

Difei Yang -- Mizuho Securities -- Analyst

Thank you. And then my final question is around the new improvement on the technology side, I think you talked about the eight frames per second, the faster speed. Could you help us a little bit with regards to how is this -- how will this be useful or be helpful to the patients and the physicians? And is there a theoretical limitation on the speed of the camera, such that beyond which, let's say you go to 16 frames eventually, is there a upper limit where, once we get there, there's no more practical improvements?

Scott Drake -- President and Chief Executive Officer

Yes, Difei, I think the benefit that we get out of T1, T2 in diffusion-weighted imaging is pretty significant. We're talking about being able to image the biology of the cancer cells. And we think there's significant benefit in that in terms of how is the tumor responding to treatment. Is more treatment required to have a had enough treatment? Is the cancer responding to radiation therapy? So we think there are very significant benefits from that perspective.

I don't want to go too deep into our pipeline yet. I don't really believe in selling futures. But I would tell you that we've taken any number of customers under NDA revenue in terms of our future innovation pipeline to vet and validate the work that we are doing. I would tell you in one such meeting that I was in very recently, there were three physicians in the room that treat breast, prostate and abdominal cancers, respectively, and the most memorable quote coming out of there, along with gobsmacked and slack jawed, one of the physicians said everything that everything that he had learned about radiation therapy over the last 20 years, he could throw out the window.

So the benefits that we see coming for patients are not just incremental benefits, but really delivering what the field has been looking for, I think for a very long period of time. So we feel as though we're well-positioned, and there's a lot that we can do with MRIdian that we have not yet done.

Difei Yang -- Mizuho Securities -- Analyst

Thank you so much for taking my questions.

Scott Drake -- President and Chief Executive Officer

Thank you, Difei.

Operator

Thank you. Our next question comes from Jason Bednar with Baird. Your line is open.

Jason Bednar -- Robert W. Baird and Company -- Analyst

Good afternoon. Thanks for taking the questions. Scott, I just wanted to come back to some of your sales force expansion comments and training those reps. I mean understand it is a much longer sales cycle for your business than maybe most other areas in med tech, but just kind of curious what's your expectations and when those reps will be effective in driving leads? I mean is that embedded in some of your back half of the year, stronger order growth? Or are some of these reps that are coming on and just being trained now? Should we think of that as a more like a lead generation throughout the year and then more of an order contribution in 2020?

Scott Drake -- President and Chief Executive Officer

Yes, Jason, I'm sitting right next to Jim Alecxih. So I'm going to look him in the eye as I answer your question. I would tell you that the quality of the team, I am incredibly pleased. I would tell you, hopefully in due humility and hopefully a lack of hubris, it's probably the best commercial team that I've ever had the opportunity to work with before.

Evidence of them gaining traction is apparent. I do believe as you alluded to that back half of '19 will be even stronger than the front half. And I would anticipate that we'll be able to say that for some time going out forward into the future. It's going to take that team a little while to get settled.

It's going to take them a little while to get trained and build relationships with their customer base, but there are clearly signals that our pipeline is improving. And I don't think there's much more for us to say about it at this time. I think we got to let our order performance speak for us going forward, and I'm pleased with the progress thus far.

Jason Bednar -- Robert W. Baird and Company -- Analyst

OK. That's helpful. And I'll just follow that with almost a similar question on some of your European comments on the sales teams there and direct -- the direct move there. And then just on the deepening relationships you mentioned as well, just any other color you can provide there would be helpful.

Scott Drake -- President and Chief Executive Officer

Yes, I would say we've made good progress internationally, not as much as we've made in the U.S. in terms of the team. We have increased the size of our direct footprint, our VP of international sales start here early in Q2, so there is a solid progress there and I think the team is kind of moving the ball down the field. But I would say we have not made quite as much progress internationally as we had -- as we have in the U.S.

market, but that is to come and feel pretty good about that as well.

Jason Bednar -- Robert W. Baird and Company -- Analyst

OK. Thanks. Just one final one. I mean I know you mentioned some -- maybe not wanting to talk about the pipeline at all from a technology perspective.

But just kind of in context of like the recent 510(k) you got on the imaging side or improved imaging modality and then also as you do show some of these customers some of your -- what you do have in the pipeline, I mean, how is that changing the conversation or is it changing the conversation as they compare your system to Elekta's Unity?

Scott Drake -- President and Chief Executive Officer

Yes, I mean, I think we're putting our best foot forward. I like the response from our customer base. The response in particular to the innovation pipeline that we have that lies ahead is particularly noteworthy in my estimation. I think as I alluded to earlier, when it's a head-to-head competition, I like our chances.

But look, we've got very good competitors, not only in Elekta but others as well. And we've got -- we hold them in high regard and they're going to do everything they can to make our life difficult. We recognize that and I feel like we're in a good position. I think our approach to the marketplace, leading with innovation, clinical data, training our customers, the economic value proposition that we have, frankly, is right in line with what patients, physicians, providers and payers want.

So I like our position, but I also recognize that we compete against some pretty stout companies. And like I said, they're going to do everything they can to make our life difficult but I really like our chances.

Jason Bednar -- Robert W. Baird and Company -- Analyst

Great. Thanks for taking the questions.

Operator

Thank you. Our next question comes from Andrew D'Silva from B. Riley FBR. Your line is open.

Andy D'Silva -- B. Riley FBR -- Analyst

Good afternoon. Thanks for taking my questions. So I'll start off with just couple quick bookkeeping, just looking for depreciation, amortization, stock-based comp, cash flow from operations, and capex. And then also I know the third quarter had some high severance and transition-related costs.

Any onetime costs going on in the fourth quarter?

Ajay Bansal -- Chief Financial Officer

Yes, so on the depreciation front for Q4, Andy, we had about $2.6 million. For the fourth quarter, we had about $900,000 for depreciation, we had $4 million for stock-based comp, and we had $900,000 for amortization. No, the stock compensation were all booked in Q3, so nothing there. I think as you will notice probably in our P&L, we had a big gain in other income.

And that was related to gain on awardings as our -- we value up [Inaudible] to market at the end of every period. So that was a big onetime change. And of course, as you look at the cash flow statement later, you will see some changes related to the extinguishment of this debt from PRG there as well.

Andy D'Silva -- B. Riley FBR -- Analyst

OK. Great. And then with guidance, what hypothetically would need to take place for you to come above that range from a revenue standpoint? And is that possible to actually happen?

Scott Drake -- President and Chief Executive Officer

Well, we want to be very thoughtful about the guidance that we set, Andy. We're obviously early in the year. We think we've put it in the right place. Midpoint of that range, as I mentioned, is about 45% growth over prior year, and we feel good about that on an expanding base of business.

So if we got to the point where we felt like a change were warranted, we would certainly make The Street aware of that, but we think we've set it in an appropriate place. I would tell you from a revenue perspective, I feel really good about our capability and expanding capability of turning purchase orders into revenue recognition. I think the team is doing very thoughtful work. Our goal is to get those right and solid versus doing them as quickly as we can.

That is a change from how the company was being operated previously, so I am in no rush to try to drive revenue falsely north in any way by hurrying an installation. I am much more interested in delivering customer delight. We believe fervently in the opportunity that lies ahead and the size of that opportunity, and the value proposition that we bring to that opportunity yields a certain amount of patience that we have to get things right and to do them very solid going forward.

Andy D'Silva -- B. Riley FBR -- Analyst

Right -- no, I understand what you're saying. I'm actually a little bit more interested just in your capabilities in general. Are you capable of actually going out of that range? Or is this kind of the capacity from either an installation team or a supply and an inventory standpoint that you're able to do per year? Is this like --

Scott Drake -- President and Chief Executive Officer

I get you. Sorry. I think I misunderstood your question. Yes, we have the capability of going outside of that range.

Andy D'Silva -- B. Riley FBR -- Analyst

OK. OK. Good. That answers the question.

And then from a install standpoint, what are you seeing right now in the backlog or with recent installs? Is it more essentially of a replacement market, where there's not a substantial vault overhauling going on or is it a complete vault redevelopment? And then also how do you view your workflow in the current competitive landscape, obviously, with the new competitor coming online last year?

Scott Drake -- President and Chief Executive Officer

Yes. I would say the majority of the installations that we're doing are replacements. There are some exceptions to that. I was with a customer, gosh, Jim, a week or two ago.

They came into the meeting thinking that they might be interested in one system. We believe that even more recent conversations may yield their desire to have two systems. So, we do have a little bit of positive signal and variability on that front, but I would say the majority of them are replacements into current installed or current vaults. What was the last part of your question, Andy?

Andy D'Silva -- B. Riley FBR -- Analyst

Related to the workflow of your system, how you view it relative to the current competitive landscape. Competitors have been talking about just some of their workflow advantages, nd I'm just interested on what -- how you view those comments and what you see as potential ways to improve it going forward?

Scott Drake -- President and Chief Executive Officer

Yes, I've shared previously our view on that. Workflow improvement is absolutely one of the areas that we're investing in that our customers want to see us improve upon, so I want to be very transparent on that front. I think we know very much what our customers are looking for, and we're working on those things. I don't want to tip our hand at this point in terms of what those things are.

But we are certainly working on workflow improvements.

Andy D'Silva -- B. Riley FBR -- Analyst

OK. And just a couple more quick questions. You -- a previous question was asking about China, and you weren't really focusing on it. If memory serves me correct you had, I believe two systems already like shipped to China, but hadn't been installed yet.

What's going on with that? And why was there such a shift, I guess, in the thought process over there?

Scott Drake -- President and Chief Executive Officer

Well, look, I would tell you that we look very carefully at the NPV of any opportunity that we're going to pursue. We are not going to emotionally go into a market because we believe it's attractive or we think The Street would respond favorably. We're doing very methodical work across the board in any key driver or vital new initiative that we pursue. If China became really attractive from an NPV perspective, which certainly it could, but today in the current configuration, it is not, then we're going to continue to deploy capital in those areas that we believe have a greater return for shareholders, for customers and for teammates.

So that's where we are today. I don't want to comment too much on what the previous team was doing but that's how we're approaching it. And to give you maybe a little bit of insight there, Andy, we get together every six months and we go deep into our strategy, and our best ideas compete for investment. We just had our second such meeting last week, and we feel as though the prioritization of projects that we're pursuing is right.

And at the moment, it does not include any kind of significant investment in China.

Andy D'Silva -- B. Riley FBR -- Analyst

OK. Fair enough. And then just the last question for me. You were mentioning the PO to rev rec shortening and how to focus on that.

I'm just curious, when you start looking at your backlog, you kind of do back of the envelope, it's several times more than what you could actually install in any given year and it's growing faster than actual installs year over year could, at this point at least. So I'm curious, at what point -- how many times your annual install rate you see the backlog new orders kind of tapering down. I assume most customers wouldn't want to be in the backlog for three or four years. It's probably more of a one- to two-year process for them, I'd at least expect based on my due diligence.

What are your takes on that?

Scott Drake -- President and Chief Executive Officer

Yes, I think that's right. I mean, my goal is to get to the point where we're installing systems at the speed that our customers desire. And I would say that historically kind of us not proactively engaging from a vault readiness standpoint was probably the biggest reason for that average of 18 months from PO to rev rec versus where we're heading, which we think is roughly 12 months. Now there is going to be some variability from one customer to another.

The way we're looking at it, which is I think consistent with kind of industry norms, is that 80% of our purchase orders would convert to revenue in roughly that 12-month period of time. There are some customers that have asked us to get in queue and they really want to move faster, and so we're considering those versus others who might be willing to be more patient. So there's not a hard and fast there, but I do think you will see that timeframe come down as we have indicated before.

Andy D'Silva -- B. Riley FBR -- Analyst

All right. Great. Hey, thank you so much for the time, and I'll talk to you guys offline.

Scott Drake -- President and Chief Executive Officer

Thanks, Andy.

Operator

Thank you. Our next question comes from Jonathan Demchick with Morgan Stanley. Your line is open.

Unidentified speaker

Hi. This is Mason on for Jonathan today. Just a quick one for me. The gross margins ended the year in the high single digits.

I was wondering if you could give us a sense of where these could potentially go longer term. Like what's an appropriate level we should be thinking about? Thanks very much.

Scott Drake -- President and Chief Executive Officer

Yes, sure, Mason. I would tell you that the reclass that we did in Q3 of 2018 dampened margins pretty considerably to that high single digit number that you referenced. That will continue to dampen what our margins look like in 2019 until that anniversaries later in this calendar year. Operationally, I would tell you we have given considerable gross margin improvement already.

We have built the team purposefully that has a great track record in driving gross margin expansion. It is not the highest priority today even though we've had improvement. And what I would point to as a first stop is getting our system gross margin profile first to where the overall industry is in the 30s, and then we'll talk about once we get there how aspirational we can be. A big drag on our gross margin is service.

And we'll leverage that service organization going out into the future as we install more and more systems. But short term, we want to make sure that we're delivering real customer delight and it's expensive and it's inefficient right now, but we will leverage that over time. So first off, industry standard gross margin profile from a system perspective. And once we get there, we'll provide you a more updated point of view on what we believe we can achieve with a higher ASP that we warrant in the marketplace.

Unidentified speaker

Great. Thanks very much.

Scott Drake -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And we have a follow-up from Anthony Petrone from Jefferies. Your line is open.

Anthony Petrone -- Jefferies -- Analyst

Maybe just a quick follow-up on sort of how the funnel looks heading into 2019 this year versus last year. And the reason I ask is because obviously, the sales force is revamped, new leadership and the number of feet on the street is larger, so I'm just wondering how makeup of the funnel looks like. And maybe in particular, are there multi-system orders that the company is working on? And if so, how does sort of pricing and financing play into all of that? Thanks.

Scott Drake -- President and Chief Executive Officer

Yes, Anthony, I guess -- I don't want to be overly repetitive. You probably heard me say enough about the strength of the team and that we think they'll have more and more effect going forward. One thing that you pointed to that I have not touched on, at least on this call, is our national accounts team. They are talking to multiple customers about multiple system orders.

We've had some success with that, as I think you're aware, with one particular customer but we're engaging with others as well. So those opportunities do exist. But again I'll just repeat, I don't want to get ahead of ourselves with this -- with our story. I feel good about where we are.

I like the call points and the response from our customer base, but let's let that unfold over time.

Anthony Petrone -- Jefferies -- Analyst

Fair enough. Thanks.

Scott Drake -- President and Chief Executive Officer

Thanks, Anthony.

Operator

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Scott Drake for any closing remark.

Scott Drake -- President and Chief Executive Officer

Thank you so much. Thanks everybody for joining our call. We appreciate your interest in the company and we look forward to doing this again in a not too distant future.

Operator

[Operator signoff]

Duration: 59 minutes

Call Participants:

Michaella Gallina -- Senior Director of Investor Relations

Scott Drake -- President and Chief Executive Officer

Ajay Bansal -- Chief Financial Officer

Chris Pasquale -- Guggenheim Securities -- Analyst

Anthony Petrone -- Jefferies -- Analyst

Suraj Kalia -- Northland Securities -- Analyst

Craig Bijou -- Cantor Fitzgerald -- Analyst

Difei Yang -- Mizuho Securities -- Analyst

Jason Bednar -- Robert W. Baird and Company -- Analyst

Andy D'Silva -- B. Riley FBR -- Analyst

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