Accuray Inc (ARAY) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing and welcome to Accuray Incorporated's earnings conference call for the fiscal third quarter that ended March 31, 2007.

(OPERATOR INSTRUCTIONS)

At this time I would like to turn the conference over to Nick Laudico of the Ruth Group. Please go ahead.

Thanks, operator. Joining us on today's call from Accuray are Dr. Euan Thomson, President and Chief Executive Officer and Robert McNamara, Senior Vice President and Chief Financial Officer.

Except for historical information, the matters presented in this conference call, including statements as to financial guidance including realization of backlog, procedure growth and market acceptance, product development, clinical studies, regulatory review and approval, and commercialization of products are forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements speak only as of the date the statements are made and are based on information available at the time those statements are made, and/or management's good faith belief as of that time with respect to future events.

You should not put undue reliance on any forward-looking statements.

Important factors that could cause actual performance and results to differ materially from the forward-looking statements the company makes include fluctuations in results of operations, reimbursement for the CyberKnife procedure, market acceptance of the company's products, government approvals of the company's products, intellectual property protection for the company's products, competing products, funding requirements, and other risks detailed from time to time under the heading Risk Factors in the company's report on Form 10-Q for the quarterly period ended December 30, 2006, as may be updated from time to time by the company's other filings with the Securities and Exchange Commission.

If one or more these risks or uncertainties materialize, or if underlying assumptions prove incorrect, the company's actual performance or results may vary materially from any future performance or results expressed or implied by these forward-looking statements.

The company assumes no obligation to update forward-looking statements to reflect performance or results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws.

I would now like to turn the call over to Dr. Euan Thomson.

Thanks, Nick. Thank you, everyone, for joining us today on our first investor conference call since becoming a public company.

I think to start we'd like to thank the investors who participated in our initial public offering, and the analysts for taking the time to understand our business model and growth strategy as we continue to build the market for radiosurgery. In summary, this was a very positive quarter for us, growth in all areas of our business.

I'll start the call with a brief overview of our business strategy and the competitive landscape. This will help to highlight some of our key accomplishments during the quarter.

And then after my initial report, Bob McNamara, our Chief Financial Officer, will provide a detailed review of our third quarter financial results and performance metrics, including a detailed review of our current and historical backlog.

Following Bob I'll provide some brief summary remarks and then open the call for your questions.

We're extremely pleased with our financial and operating performance this third quarter. We believe these results reflect the continuing recognition of radiosurgery, and particularly the CyberKnife, as an effective and preferred treatment for a growing range of clinical cancer applications.

Our revenue was at a record level of $37.3 million, a 129% increase year-over-year and a 42% increase on a sequential basis.

As an additional indicator of our rate of growth in a quarter of record revenue, our total backlog also reached the record level of $559 million. This represents a 60% increase year-over-year and a 9% increase on a sequential basis.

The combination of record revenue and backlog growth within the same quarter confirms the acceleration of our business model to broaden the market for radiosurgery, as well as a growing acceptance of the CyberKnife as a premier radiosurgery technology.

Bob McNamara will provide a detailed review of backlog in his prepared remarks.

The Accuray business strategy is to build the market for radiosurgery. We define radiosurgery as a very localized, very accurate, high-dose course of radiation designed to destroy a tumor as an alternative to surgery. Radiosurgery is generally delivered in a single or up to five treatment sessions.

As such, it differs from traditional radiation therapy, which is a course of treatment usually delivered to a larger volume of tissue, typically administered daily over the course of several weeks.

Where radiosurgery is often an alternative to surgical removal of a solid tumor, radiation therapy is typically an adjunct to surgery, designed to ensure that no tumor cells remain after surgery is complete.

At Accuray we work closely with our customers to explore and evaluate potential applications to radiosurgery.

As a general principal, while revenue and backlog growth are indicators of continued business success, the growth in the number and diversity of clinical applications is an indicator of the acceptance of radiosurgery as a clinical technique. Initial experience of radiosurgery is primarily with treatment of brain tumors.

Today however, CyberKnife radiosurgery is receiving wide acceptance in treating additional complex cancers, including treatment of tumors in the lung, liver, spine, prostate and pancreas.

We see this accelerating adoption of radiosurgery as a reflection of the success of our business plan and the market recognition of our technology as a preferred means for treating cancer.

I will outline those successes in just a moment after I briefly review the advantages that CyberKnife offers in treating cancer.

Now as those of you who met us on the road show are aware, CyberKnife is the world's first and only radiosurgery system that uses intelligent robotic technology.

While other technologies may claim to have a radiosurgery capability, CyberKnife is totally dedicated to radiosurgery and is the only machine that monitors tumors in real time for patient and/or tumor movement, delivering high doses of radiation with an unprecedented degree of accuracy.

This high degree of accuracy means the radiation is totally focused on the tumor with minimal destruction to surrounding healthy tissue.

In addition, CyberKnife delivers beams of radiation from between 100 and 200 beam angles, which are believe gives us a superior ability to match the shape of the radiation dose to the exact shape of the target tissue.

Finally, a combination of robotics and advanced image guidance software gives the CyberKnife the ability to automatically track and correct for tumor motion during the course of treatment, even when the tumor is moving with respiration.

We believe, as we stated in our road show, that the U.S. market opportunity alone is nearly 4,000 units and we estimate the worldwide market as over 7,000.

Estimates based on our most recent data indicate that to date more than 30,000 patients have been treated with the CyberKnife system worldwide.

We continue to broaden the clinical applications of radiosurgery from the original brain cancer treatment. Our trends in this regard are very positive.

More than 50% of CyberKnife patients in the U.S. are now being treated for tumors other than brain tumors.

Of these CyberKnife radiosurgery applications, lung cancer is now the second most commonly treated disease site. As you may have seen, we recently announced the 2,000th lung cancer treatment on the CyberKnife system.

This is a remarkable achievement that we feel to be indicative of a definitive change in clinical practice.

Prostate cancer treatments are also rising in number at a remarkably fast rate.

Based on data supplied voluntarily by our customers, we estimate that the number of radiosurgery patients treated for both lung and prostate cancer increased by approximately 30% worldwide in the third quarter over the fiscal second quarter of 2007.

We're also experiencing growth in the treatment of spine, liver and pancreatic cancer.

As I said, we believe these trends represent a dramatic shift in clinical cancer treatment practice and we believe that they will continue to drive our business. As an aside, I'd like to take this opportunity to thank our customers for their voluntary contributions of clinical data.

Without their continued support we would not be able to analyze the market changes that I've highlighted.

I'll now give you a short summary of the reason for the change in our quoted backlog metric. Bob McNamara will also be giving you more detail in his report.

To position ourselves for ongoing growth and to support the increased volume of customer contracts, we've recently streamlined our internal contract process.

Historically our approach was to combine discussion of financial and legal terms in a single negotiation involving all relevant parties at Accuray and at our customer sites.

However, the significant growth in the number of new contracts has guided us to separate discussion of these terms.

Our sales representatives in the United States now generally negotiate the business terms to acquisition and agree to term agreements containing all financial aspects of the transaction.

In parallel, the legal aspects of our contracts have become more standardized and any modifications to these terms are discussed subsequent to agreeing the financial terms of sale.

I can report that this process, as hoped, has proven to be more efficient and has assisted us in the expansion of our sales program.

Now it's primarily this shift in our contractual process that has driven the change in reported backlog. Our old definition of non-contingent backlog precluded mentions of this new contract format.

As the prevalence of these new term agreements has grown, it's become more appropriate and indicative of the state of our business to disclose total backlog.

We also believe that the total backlog number now reported is in line with the industry standard. The timing of this change in quoted backlog strategy really results from our growing experience and confidence in the new contract process.

On balance, we feel confident that 90% of the total backlog reported will be converted to revenue.

To aid interpretation of the backlog number, I'd like to point out what might be considered a fairly obvious point that the total backlog reported this quarter, taken in conjunction with reported revenue, is a good and reliable indicator that the new business generated during a given quarter.

The majority of revenue is shipped from backlog. Simultaneously, new contracts generated by sales activities add to backlog.

Once again I know this is an obvious point, but it explains my previous statement that achieving record backlog in the same quarter that we have achieved record revenue is a very positive indicator of the strength and upward trend in our business.

A key component of our business strategy is to continuously offer our customers innovative software and hardware technology upgrades that increase the system's accuracy, clinical applications, and ease of use.

We believe this continued improvement of the CyberKnife system helps maintain our leading competitive position in the radiosurgery market.

For example, in 2006 we introduced the Xsight Lung Tracking System, which allows for the treatment of certain lung tumors without the need for surgically implanted fiducial markers.

This upgrade is integrated with Synchrony, our proprietary motion tracking system, to continuously track tumor movement during respiration and changes in breathing patterns.

Together we believe this system represents the most accurate, least invasive treatment for lung cancer today.

We also recently introduced our RoboCouch patient positioning system. RoboCouch provides intelligent positioning of the patient prior to treatment, increasing accuracy and decreasing patient setup time.

We believe the advance into the CyberKnife system through upgrades included in our multi-year service plans represents an attractive recurring revenue stream that will continue to drive our long-term growth.

This quarter we can also confirm continued customer uptake of our long-term service offerings with more than 95% of U.S. installed customer sites having support coverage via our Premium Service contracts.

As we stated in our release, at the end of the quarter we had 97 units installed worldwide, 63 in the Americas, 25 in Asia and nine in Europe.

We recently held our Annual Users Meeting and that was attended by over 400 of our customers.

These are valuable sessions that allow us to hear firsthand feedback from our customers and for them to share clinical information on their system and experience in treating patients.

Presentations at this meeting also confirmed a continued and growing interest in the new clinical applications of CyberKnife radiosurgery.

Finally, yesterday we issued a press release describing a completed agreement with CyberHeart Inc.

CyberHeart will now explore use of CyberKnife radiosurgery to treat cardiac arrhythmia. CyberHeart's business will be focused initially on product development and long-term clinical studies. Significant product revenue is not expected for at least years.

Cardiac ablation using the CyberKnife does however represent an interesting possibility for long-term business growth.

I'd now like to turn the call over to Bob McNamara, our CFO, to cover the financials. Bob?

Thank you, Euan. Let me add my thanks to all of our investors and analysts. We look forward to speaking to you each quarter and updating you on our progress.

I will not provide a review of our financial and operating results, business model review and a detailed discussion of our backlog.

Our revenue for the fiscal third quarter of 2007 was $37.3 million, representing an increase of 129% over the fiscal third quarter of 2006 revenue of $16.3 million and a sequential increase of 42% over fiscal second quarter of 2007 revenue of $26.3 million.

Now let me refresh your memory on our business model.

Our business model includes three main sources of revenue, product revenue, Shared Ownership revenue and Services revenue.

Product revenue is generated from the sale of our CyberKnife systems, which is a capital equipment purchase for a hospital or radiation treatment facility.

For the fiscal third quarter of 2007 product revenue was $29.5 million, an increase of 141% year-over-year and 53% sequentially.

Our second source of revenue is our Shared Ownership program. Our Shared Ownership program is a program whereby a CyberKnife system is placed in the hospital with Accuray retaining title.

The customer is responsible for building the room and making minimum monthly payments to Accuray. Any revenue generated over and above those minimum payments is shared between Accuray and the customer.

Fiscal third quarter of 2007 Shared Ownership revenue was $2.4 million, an increase of 14% year-over-year and a decrease of 6% sequentially.

As seen by the slight decrease quarter-to-quarter, Shared Ownership revenues can fluctuate due to timing of payments to Accuray, patient volumes, and actual collections.

The third revenue generator is our service contracts, which are typically signed for a four- to five-year period and in most cases include six technology upgrades, when and if available, during the four-year period.

Our U.S. Diamond service contracts are approximately $460,000 per year.

As Euan noted, these service packages leverage our upgradeable platform to provide customers with the latest technology.

Fiscal third quarter of 2007 service revenue was $4.6 million, an increase of 304% year-over-year and 25% sequentially.

We also generate a limited amount of revenue defined in our financials as other revenue. These revenues relate to the sale of linear accelerators outside the healthcare sector, as well as specialized upgrade services previously sold into the Japan market.

Total gross margin for the fiscal third quarter was 59% compared to gross margin in fiscal third quarter of 2006 of 41.6% and gross margin in the second quarter of 2007 of 55.8%.

The improvement in margin reflects an increase in production efficiency and the associated leverage of fixed costs, a higher average selling price and an improvement in our service margins.

Also, recall that last year's cost of goods included additional costs associated with the transition to the latest generation of CyberKnife.

Those costs dragged down last year's margins.

Operating expenses for the quarter were $22.9 million compared to $14.3 million for the fiscal third quarter 2006 and $22 million for the fiscal second quarter 2007.

Included in those operating costs are R&D costs of $7.0 million in the fiscal third quarter compared to $4.1 million in the fiscal third quarter of 2006 and $6.1 million for the fiscal second quarter of 2007.

This is a very important area for us and we will continue to invest as we progress forward.

Sales, marketing, and administration expenses totaled $15.9 million in the fiscal third quarter compared to $10.2 million in the fiscal third quarter of 2006 and $15.9 million for the fiscal second quarter of 2007.

Although flat in total quarter-to-quarter, there was an increase in sales reflecting our additional investment in that organization.

Net income for our fiscal third quarter 2007 was $100,000 or earnings per share of approximately $0.00 on a GAAP basis compared to a net loss of $7.7 million in the fiscal third quarter of 2006 and a net loss of $7.3 million in the fiscal second quarter of 2007.

Our results included stock compensation expenses of $3.7 million for the fiscal third quarter of 2007, $2.0 million for fiscal third quarter 2006, and $2.9 million for the fiscal second quarter of 2007.

The company effectively broke even on operations and achieved positive cash flow of $7.7 million during the quarter, with the proceeds of the IPO and interest earned of $1.3 million, cash balance at the end of the quarter was $193.4 million.

Headcount during the quarter grew from 386 employees to 425 employees. We added 39 employees with most growth occurring in the sales organization.

I will now turn to a discussion on our current and historical backlog.

As of March 31, 2007 the company's backlog, which the company now defines as backlog under signed non-contingent contracts as well as backlog under signed contingent contracts that the company believes have a substantial high probability of being booked as revenue, was approximately $559 million.

This represents a 60% increase and a 9% increase, respectively, over total backlog computed in accordance with the definition of $350 million at March 31, 2006 and $513 million at December 31, 2006.

Of the company's total backlog at March 31, 2007, $306 million was associated with the CyberKnife system purchases and $253 million was associated with the company's Services and other recurring revenues.

Contingencies under customer contracts included in backlog include customer acceptance of the company's legal terms and conditions of sale, hospital Board approvals, customer establishment of necessarily financing or legal entities and in certain U.S. States, government approval of the Certificate of Need or CON for the operation of a radiosurgery system.

On a quarterly basis the company will review each contingent contract to determine whether progress towards satisfaction of contingencies is sufficient to support inclusion of the contract within backlog.

We look at a number of factors including any investment made by the customer, the progress on contingencies and the level of engagement by the customer.

Depending on the nature of the customer's activities relative to these factors, we will include it in backlog. We have confidence that at least 90% of the quoted backlog will convert to revenue.

Going forward it is the company's intention to provide information each quarter regarding total backlog, in accordance with the definition I've just described.

Recall that our previously reported fiscal second quarter 2007 backlog of $328 million included only contracts that contained no contingencies or for which all contingencies had been met.

We believe that our current definition of backlog is a more meaningful metric for Accuray as an indicator of future revenue.

Using this definition, total backlog for our last four fiscal quarters, on an apples-to-apples basis, is as follows.

In fiscal Q3 '06 backlog was $350 million, in fiscal Q4 '06 backlog was $432 million, in Q1 2007 fiscal year backlog was $436 million, in Q2 2007 fiscal year backlog was $513 million, and now we've announced that fiscal Q3 2007 backlog is stated at $559 million.

In terms of roll out, the flow of backlog, meaning the flow of backlog to revenue realization is really dependent on the nature of the contract. For system revenue we are dependent on the customer having the facility ready to install.

Currently we expect to realize system revenue from backlog within s6 to 18 months. For Services and Shared Ownership revenue the realization period is typically one to four years.

In addition, we will have revenue from the upside of our Shared Ownership program over and above the minimum monthly payments included in backlog, and any contracts that come in and out of backlog.

That is to say the contracts are signed and converted to revenue within a 12-month period.

I would now like to turn the call back to Euan for closing comments.

Thanks, Bob. So in summary we continue to make progress in our strategy to build the market for radiosurgery.

We've worked with our customers to successfully broaden the use of radiosurgery as a clinical treatment, as demonstrated by the number and diversity of patients treated by our CyberKnife system.

We believe that radiosurgery has the potential to treat complex tumors anywhere in the body.

In many cases these tumors have previously been deemed inoperable or would have required invasive surgery. Accuray is committed to building awareness of radiosurgery and the benefits it offers physicians and patients.

Our combined results of both record revenue growth and record increase in total backlog demonstrate the success of our business model, but most important in providing cancer patients with the most effective care available today.

I'd now like to turn the call over for your questions.

(OPERATOR INSTRUCTIONS) And we'll take our first question today from Thomas Gunderson with Piper Jaffray.

Hi guys, actually its [Amy]calling in for Tom.

Hi, Amy.

A couple of quick things, I'm wondering if you can give us any more color on actual systems installed and recognized in the quarter?

Sure. Yes we recognized nine systems during the quarter, split between 40% outside the U.S., 60% within the U.S..

Okay.

That's the balance between U.S. and outside the U.S. that we tend to see. It's still the science of small numbers. We don't have a large enough shipment volume within a quarter not to see fluctuation. It's the overall number that's probably still most important to us.

Okay got it. And then you mentioned that most of the growth in the employees came from sales, if I recall I think you were around 23 at the end of the calendar year on the direct sales reps. Can you tell us where you are now?

Sure. We've got about 25 in the Americas and then eight outside the U.S., plus of course we use distributors.

Okay. And then where do you see that going say over the next 12 months or so?

Well I think we'll grow it, but we'll try to manage it responsibly certainly. But you won't see it doubling or anything close to that it'll just be a managed growth of the sales organization.

Okay thank you. That's all I have.

We'll take our next question today from Mark Richter with Jefferies & Company.

Good afternoon, guys, and fantastic quarter.

Thanks, Mark.

Thanks, Mark.

Backlog grew nicely in the quarter, do you feel you were gaining share against Electa's Gamma Knife and Varian's Trilogy?

I think we see the competitive environment slightly difference, which probably answers your question in a different way than directly.

Gamma Knife historically, of course, was the radiosurgery unit but it was really limited to intracranial treatments.

And the more we see the applications of radiosurgery broaden out, the less I think our sales force are really seeing direct competition from the Gamma Knife on a sort of practical day-to-day basis.

The other systems, Varian's Trilogy, Electa's Synergy and the other sort of hybrid systems as we call them, they're really intended for radiation therapy and they claim the capability to do some radiosurgery intracranially and extracranially as well.

We don't see them used particularly highly and I think you may have seen one of our press releases during this quarter, which actually was from an independent market survey that broke down the utilization of those units quite extensively.

And in reality they seem to be, according to our data, very much still radiation therapy machines rather than radiosurgery machines and I think in the sales environment we see that.

The way we see it really is that we kind of compete for budgets and maybe for space with radiation therapy companies and, if people are really ready for a full-time radiosurgery program, then we don't see a lot of competition from any other systems.

If they're kind of not sure or they want to try it out in a few patients, or their IMRT workload is very high and they've got a lot of pressure on their radiation therapy services generally, then they may stick with radiation therapy for a while. But they don't come off our customer list, it's just more of a delayed decision.

Does that answer your question?

Yes thanks, that's very helpful. And then if we think about backlog and where it's coming from, can you help us understand U.S. versus OUS and if it's still roughly two thirds/one third?

Yes that's a good approximation.

Okay perfect. And then you mentioned nine units were placed in the quarter, how many of those were revenue generating?

Well nine were generating, so there were nine units that we recognized revenue on.

We have shipments that kind of span the quarter sometimes, because we don't recognize revenue usually until the unit's actually installed, unless it's going to the distributor who is responsible for the installation.

So occasionally we do get units that ship out that we don't recognize revenue for and so shipments is not always that clear an indicator of the revenue.

Yes and we shipped eight, we had one Shared Ownership ship and then we actually installed eight units during the quarter.

Okay that's what I was after, thanks. And then just in terms of the Siemens' deal that was announced on the CT scanners in the quarter, can you just help us understand how you look at this contributing to '07 revenues and beyond?

I really don't see it as a significant contributor at all. I think that the CT unit is staged as one of the many upgrades that we offer and I think it's one of the upgrades that's fairly specific to a particular profile of customer. It's not one that probably we'd expect to ship widespread.

Primary use is really for visualizing not so much the target, because the CyberKnife is tracking the target, but really to visualize any organs at risk which may be mobile within the patient, and for certain applications that can be beneficial.

But I think, like I said, it's really only certain users probably that will feel the real necessity for that.

Okay thanks. And then the last question just in terms of the CyberHeart agreement, you talked about commencing clinicals in the next 12 to 18 months, any additional guidance on time lines, and just sort of the makeup and how you're thinking about the construction of these trials?

Well we're not carrying out the trials so I'm not going to go into too much detail on that. You know they're an independent organization.

We have an agreement with them that if and when these trials should be successful, then we will be the supplier of radiosurgery equipment to them. Because I believe they recognize the CyberKnife is the best radiosurgery equipment there is.

So it's really only once they've completed the trials, should those trials be successful, should safety and efficacy be established that revenue would be generated. And we don't really see that happening for at least three years or so, that in fact comes from their statements.

Right got you. Okay perfect, thanks again and congratulations on a great quarter.

Thank you.

We'll take our next question today from Tycho Peterson with JPMorgan.

Hi guys, it's actually Dave calling in for Tycho, how are you?

Hey, Dave.

Hi, Dave.

Just some quick questions, one I notice that there's no guidance, can you provide any sort of color on expectations for next quarter? Or are you holding off on that?

We're really holding off on that. What we use as a tool for guidance is really to look at the backlog and how it might roll out over the next couple of years.

And so we're currently using that as the metric for future revenue when people build their models.

Okay that's fine. And then if we can go to backlog I guess, and kind of break it out a little bit, as far as looking at the backlog and how it's comprised, is deferred revenue still the same piece? Or have we now kind of rearranged everything? I mean do we still look to the balance sheet for that piece of it?

That's correct.

Okay. So if we kind of compare this quarter to last quarter and we pull out the deferred, do we see the contingent contract piece increase about 25 million?

Well based on your model, I'll let you calculate that.

Okay.

We don't address the specific contingent/non-contingent piece.

I sensed there were two questions there, you were --.

Yes I guess if I back out the deferred from both pieces I get another number right? You called it committed future payments, that piece is the -- there's two pieces, correct, to that?

Yes. So you've got your deferred, you've got your contingent and you've got your non-contingent effectively.

Right. But have the historical deferred numbers changed as well?

No they would not change.

Okay good. And then --.

But you can get those from the balance sheet.

Correct. Right. And then you said about 90% of the backlog will eventually convert, is that going to be something, will you notify when you lose pieces of the backlog, as far as trying to back into the net orders or if we go to quarter-to-quarter if we back out the revenue?

Yes you know what we'll do is, when we're reporting the backlog, you'll see it kind of go, whether increases or potentially decreases.

But we are going to be reviewing it on a quarter-by-quarter basis and basically looking at the contracts that are in there and looking at how engaged is the customer, how much of an investment has the customer made, have they started building, what are the contingencies and progress on those contingencies. So we'll be evaluating those.

And when we say 905, we know that every single contract isn't going to become a revenue unit for us. And so while we don't know which ones may fall out, we assume that there may be some portion that would fall out.

Okay. And then I guess one last question, did I hear you right, did you say you had -- how many systems did you install in the quarter? Did you say eight?

Eight.

Eight okay. Because I'm just trying to back into the number, you have 97 installed now and we had 91 as of the end of last quarter, is that correct?

There was a unit last quarter that we thought it was at the customer, the ATP wasn't signed, the acceptance document wasn't quite signed, so it was signed this quarter. So we've now just adjusted that.

Oh, okay great. Thanks for answer the questions, guys, good quarter.

Thank you.

And for this question we'll go to [Michael Cho] with [Civic Global Healthcare].

Hi, a couple quick ones. One is just help us with this transition of giving us new metrics, can you give us what the backlog would have been this quarter using your previous methodology?

Well you know what we've decided is we are not going to disclose that because we really think that this metric, the total backlog is really a better metric for the business.

Okay.

It really comes down to we created essentially a contingency and we switched to the term agreements, on balance, may never put the contract into non-contingent backlog until the unit actually ships to the hospital. Because many people are not really satisfying the original criteria, if you follow me.

So it's like we could go straight from a term agreement to a shipment, we see the room is being constructed, the unit's arriving and in the same quarter suddenly it would flip. So it's just not a useful metric any longer for the contract process that we're using.

Okay. And I know during the road show you talked about the sales cycle for the backlog turning into revenue, I think it was six to 12 months and you can correct me if I'm wrong.

Given the new backlog definitions, what's your assumption on that backlog converting to revenue? And I apologize if you talked about that already.

Well yes, so in looking at the backlog the way to kind of think about it is, on the Systems piece of it, it should roll out between six and 18 months is when that revenue would be realized. And then on the Service and the Shared Ownership side, it really rolls over one to four years.

Okay. And then just to go back to the previous question, you have the --.

Yes sorry, you know I can tell you that if we had reported on a previous definition, that that number would have increased.

But again what we're trying to do is get away from that number and really give a picture using a better metric, that being the total backlog.

Okay good. And then will you give us pending units?

No because, again, what we're doing is we're not going to be discussing contracts per se, but again the dollars associated with backlog we feel is a pretty good metric in terms of what the revenues might be going forward.

Okay. And then just, I think someone else asked this question about you had I think 90 installs at the end of last quarter and you're adding nine and you have 97? So it is just that one that's causing the delta? Or was there more than one?

It's just that one I believe.

Just that one, okay. So it subtracts from the orders and adds -- okay. All right thank you.

And we'll go now to [Zev Cohed] with FAC Capital.

Hey, Zev.

Hey thanks for taking the question. Just going back, under the new backlog methodology, can you break out the Instrument and Service components of the backlog for fiscal Q1 and Q2 of this year?

We're not breaking that out historically. So what we're doing is we're just starting it out, I don't have the break out in front of me, but we're not breaking that out on a quarterly basis.

We figure we'll break it out now and going forward we can break it out, but we haven't delineated it historically on a quarter basis.

Okay. Is there any way just to give us a picture of the sequential growth maybe in the Instrument component this quarter? Is that on par with sort of the 9% overall backlog for the quarter?

Yes. Here's kind of what you might think about is that Service, as we continue to add Service contracts, the level of service and the amount of service is certainly going to increase.

And so eventually of course you would think that a four-year service contract might overtake the CyberKnife revenue, but that's only about $1.2 million if you think about it, 460 times the four years.

So really 460 over each four of the years, that still doesn't get you even close to one CyberKnife at say $3.5 million to $4 million. So it's going to be 75%-25%, something along those lines.

And having said that, just to add to that a little bit, don't forget also that we signed contracts lately to Shared Ownership programs as well and it's only the minimum payments from the Shared Ownership agreement which would go into the backlog. So that could lead to an under estimate on your part if you were trying to calculate the number of contracts signed.

Okay. And then on the revenue side, is there any seasonality to the revenue? It's hard to tell because you're in early growth mode, but is there any seasonality that you guys pick up on?

There really isn't seasonality to the revenue, although the factors that affect revenue are the customers' ability to install and the timing of that.

There may be some geographic differences, but the real seasonality, if there is any, is in the contract generation in terms of -- and well like any sales organization, the Q4, which is our June 30 year-end, you might see some seasonality there relative to the Q1 because everybody's racing towards their annual goals.

Okay thanks.

(OPERATOR INSTRUCTIONS) We'll go now to Michael Castor with SIO Capital Management.

Thanks very much. On the balance sheet there is a line item in current assets in long term deferred cost of revenue, what is that? It looks like there are costs built (inaudible) the income statement?

Yes sure. So we have deferred revenue but there are costs associated with that. So that's the associated cost of sales with the deferred revenue piece. So it's just matching with the deferred revenue.

In terms of conceptual way to think about it, the deferred revenue, somebody has signed a contract, they've given you a down payment, is the deferred cost of revenue what you would be sending in a contracting team to go and help set up whatever room they have designated for the CyberKnife to be built in? Is that --?

Think of it as you, you know let's just say there was no deferred revenue, let's just say there was revenue and cost of sales.

But you ended up having to defer that revenue, you also end up having to defer those costs associated with that revenue. So that's what it is. So there are manufacturing costs in there for example.

Okay. But you've started to order your systems?

Well depending on what it is, but it would be deferred revenue is revenue where we may not have fulfilled all of the obligations associated with that revenue.

So only when we've fulfilled all of our obligations would we recognize the revenue. And then only when we have fulfilled those obligations will we also recognize the costs associated with that revenue.

Got it. Then you had put in your press release that the backlog in terms of unit systems is $306 million, what was the backlog in terms of systems in the last quarter at the end of '06?

Let's see, I don't know that number off the top of my head. So I'm sorry.

That's okay, that's the questions I had. Thanks very much.

And for our next question we'll go to Morton Cohen with Clarion Group.

Hi, there.

Hi.

I'm wondering about the introduce of Calypso targeting system and whether the move towards more refined targeting would affect your present offerings, or what you're doing to move in that direction.

Well I don't know about moving in that direction, we're already kind of in that direction, obviously we track tumors all the way through treatment.

Calypso, for those that don't know it, they're in the early stages of producing an active fiducial, which is something that's an invasive implant seed which gives some positioning information during treatment. I believe they have approval just for prostate cancer so far

But I don't think we see any kind of direct impact on that, you have to think about the CyberKnife system as a whole and what it's doing.

Really we're detecting, tracking and correcting for any motion of the tumor. The robot not only knows where the tumor is, it response to that motion.

So, if and when, Calypso produce a more widely used product, they'll only have one part of that equation which is kind of the knowing where the tumor is bit.

So you're saying that the robot actually eliminates the possibility of hitting cells which might be around the tumor, which is the major risk of non-targeting, is that correct?

Well basically yes. I mean the CyberKnife is a very, very accurate system. We claim and have proven sub millimeter accuracy for the majority of applications.

And in knowing that accuracy is that high, we're able to restrict radiation dose just to the tumor itself. Now that does reduce dose to surrounding tissues, it also enables physicians to use kind of higher doses in smaller numbers of fraction.

So it becomes a different form of treatment, it's not a radiation therapy treatment. It then becomes a radiosurgery treatment aimed at really destroying the tissue inside the treatment volume.

And you couldn't really do that if you were going to be including a lot of tissue around the treated volume in the treatment.

So you're saying the fact that this is a radiosurgery treatment diminishes the possibility of hitting the surrounding cells, which might damage the surround organs?

No I'm saying the CyberKnife might do that. The radiosurgery element is really a different objective from most radiation therapy treatments.

Most radiation therapy treatments, as I said I think in the prepared comments, take place after surgery as a means of kind of mopping up any stray tumor cells that may been left behind by the surgeon.

There are certainly exceptions to that, but I think broadly speaking that's the objective of radiation therapy. Radiosurgery has a different objective, which is to really destroy the volume of tissue, effectively, inside the treated volume.

Oh, no I understand that, I understand what you're saying, but when you get into radiotherapy, if you talk to radiology oncologists they seem to intimate that an improved targeting system would be of great benefit and provide more efficacy.

Sure. And that's definitely an objective inside the radiation therapy field. I think it's kind of an order of magnitude thing.

I see. I'm trying to pin this down. What you're saying is, as an example, there was a patient recently delivered on Calypso and its ability to hit the target with regard to prostate.

You should really talk to Calypso about this.

Okay. So let's forget Calypso for minute, okay?

Okay.

And let's go back to Accuray, okay, for a moment.

Okay.

So I'm trying to define whether the magnitude of error is so small that the consumer, being the hospital in this case, the radiologist, it wouldn't be that beneficial to him because what you're saying is Accuray provides a close enough fit so that it's really a question of magnitude and the margin wouldn't be that large to move somebody from your equipment.

I'm really not following your --.

Well the bottom line is, would someone else's targeting system, and in this case it's Calypso and I don't want to discuss Calypso because you don't want to, but in this case would the differential in measurement and then would your magnitude of measurement be such so that someone would move from your equipment to let's say another linear piece of equipment which might have the Calypso fit on it?

This is very product oriented and I must say, I'm not really understanding the question in the context of the CyberKnife. Let me just sort of briefly --.

It's not a question of CyberKnife. It's a question of radiology therapy. Go ahead.

So let me just run through the basic parameters again. Our objective is to have a very, very accurate treatment, regardless of whether the tumor moves or the patient moves during the treatment.

And that's what the CyberKnife does as a robotic technology, it tracks the tumor all the way through treatment and it automatically responds to that motion.

So it's an integral system, it's an entire treatment process embedded into the robotic radiosurgery unit.

Now historically the only way that kind of accuracy could be achieved was using a rigid fixation device such as a stereotactic frame, and that was applied to the head and the head only. There wasn't really an alternative for the rest of the body.

So what we're really doing is, as the CyberKnife is being produced and it goes out there in larger numbers, people are exploring a whole range of possibilities that really have the same clinical objective and that is to destroy the tissue as an alternative to surgery in a kind of less invasive or non-invasive way.

So you can't do that unless you get a very, very high degree of accuracy and typically radiation therapy devices cannot achieve that level of accuracy, they're not able to really both track and respond to that motion.

Now the kind of tracking technologies you're talking about may one day be available to indicate the position of the tumor, but you still have to respond to that motion and all of those parameters are way too far in the future for really any of us to comment on.

Okay thank you.

And ladies and gentlemen, this does conclude our question-and-answer session. At this time I'll turn the conference back to Euan Thomson for any closing remarks you may have.

Okay, I'd like to just thank all of the participants today. Again it's our first conference call as a public company and we're very grateful for your continued interest and your continued support. Thank you very much indeed.

Thank you.

Ladies and gentlemen, this does conclude our conference, we appreciate your participation. You may disconnect at this time.