Accuray Inc (ARAY) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Accuray Inc. earnings conference call for the fourth quarter and fiscal year 2007 that ended June 30, 2007. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded. Now at this time, I would like to turn the conference over to Mr. Tom Rathjen, Vice President of Investor Relations.

Thank you and good afternoon everyone. Thank you for joining us today for Accuray's 2007 fourth quarter and fiscal year end conference call. Joining us today on our call is Euan Thompson, Accuray's President and Chief Executive Officer; and Bob McNamara, Senior Vice President and Chief Financial Officer.

Before we begin, I need to remind you that, except for historical information, the matters presented in this conference call, including statements as to financial guidance, including realization of backlog, procedure, growth and financial market acceptance, product development, clinical studies, health care reimbursement for procedures performed using the CyberKnife System, regulatory review and approval and commercialization of products are forward-looking statements and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The 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 the 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 those 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 March 30, 2007, 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 any underlying assumptions prove incorrect, the Company's actual performance or results may vary materially from any future performance or results (technical difficulty).

Well, with no further ado, let's turn the call over to our CEO, Euan Thompson.

Thanks, Tom, and thanks to everyone for joining us today on our fiscal fourth quarter and fiscal year 2007 conference call. I'm going to start the call with a brief business overview of our fourth quarter and full fiscal year. Bob McNamara, our Chief Financial Officer, will then provide a detailed report of our financial results of the same time period. We will then be happy to open the call and take questions.

So to summarize, we're extremely pleased with our financial and operating performance in the fiscal fourth quarter [and] full fiscal year 2007. We achieved record revenue levels in both periods with dramatic year-over-year increases. We also saw a record year-over-year backlog increase with impressive new contract value being added in the fourth quarter.

In addition, profitability was achieved in the fourth quarter, marking a major financial milestone of which we're very proud. Bob will provide details of financial performance in a few minutes, but revenue for the fourth quarter was $44 million, a 106% increase over the fourth quarter last year. Full-year revenue for fiscal 2007 was $140.5 million, an increase of 166% over the same period last year. But backlog, which is the key indicator of future revenue, reached the record level of $619 million at the end of fourth quarter, growing $187 million during the fiscal year.

This growth in backlog has particular significance in a year when revenue also grew to a record level. The combination of revenue increasing to approximately $140 million and backlog increasing by $187 million in the same period is a very strong indicator of our current growth profile. As I will explain in a minute, we believe that this dramatic growth is driven by changing clinical trends and a definitive move towards radiosurgery as a treatment of choice for cancer patients. At the same time, we believe that CyberKnife has now become established as a brand name in radiosurgery treatment delivery.

So that's some background information. As we continue to explain the CyberKnife story to the investment community, we consistently draw the important distinction between the radio radiosurgery market and that of radiation therapy. To reiterate, radiation therapy is commonly used as an adjunct to surgery and helps to ensure that no cancer cells remain in the surrounding tumor site after removal of the tumor. Radiosurgery, however, is an alternative to conventional surgery itself, providing effective noninvasive tumor ablation in an outpatient setting. The CyberKnife is the world's first and only fully robotic radiosurgery system designed to treat tumors anywhere in the body, delivering a high dose of radiation with sub-millimeter accuracy. Cancer patients with surgically complex or inoperable tumors now have a viable noninvasive treatment option.

Our mission at Accuray is to continue to establish radiosurgery as a treatment option for a diverse range of tumors. As clinically experience and confidence grows, we expect to see increasing utilization for a broader range of tumors and increasing demand for the CyberKnife.

Now on that theme, our clinical update press release last week described the significant increase in the diversity of cancer patients treated with the CyberKnife System that we observed during fiscal year 2007. Specifically, we saw a 75% growth in radiosurgery treatments outside of the brain driven in the United States primarily by doubling in the number of lung cases treated and a quadrupling in the number of prostate cases treated.

And again, as expected, we are already seeing the impact of the increasing diversity of treatments on our sales environment. Radiosurgery throughout the body is now becoming more mainstream. As the range of application increases, the business case our sales force presents to our new customers is getting more and more robust. And as our record backlog indicates, our sales pipeline continues to grow.

In short, Accuray in succeeding in expanding the radiosurgery market while simultaneously establishing CyberKnife as the premier brand in radiosurgery.

Transitioning to the growth in our installed base, we're pleased to announce that at the end of the quarter, we had 195 CyberKnife units installed worldwide. We added 33 new sites during fiscal year 2007, bringing our installed base to 71 in the Americas, 12 in Europe, 15 in Japan and 11 in the rest of Asia-Pacific. Our worldwide profile for the year therefore remains unchanged with approximately 35% of our market lying outside of the United States.

In addition to strengthening our global profile, the diversity of our installed base also continued to grow. During fiscal year 2007, several health care centers, including Stanford University Hospital, Georgetown University Hospital and Sinai Hospital in Baltimore, installed a second CyberKnife system. The trend towards second systems at a single center is also a reflection of the growth in diversity of clinical applications, creating further demand locally.

Finally, fiscal year 2007 also saw continuation of Accuray's aggressive R&D effort. Our R&D team continues to drive innovation which further differentiates CyberKnife from other radiation delivery technologies. This fits with our mission to maintain the CyberKnife System's established brand-name position in the field of radiosurgery.

During fiscal year 2007, we successfully completed six clinically relevant upgrades, all of which have now been made available to our existing customers through our high-level service contracts. Now, providing upgrades through our service program has several strategic benefits to us and to our customers. Firstly, the majority of our upgrades have clinical relevance to the new and emerging applications of radiosurgery. They're the facilitators of new radiosurgery applications, such as spine tumor and lung tumor treatments. So, the upgrades help to expand the radiosurgery field.

Secondly, provision of upgrades through our service contracts encourages our users to purchase the high-level service contracts, such as our Diamond agreements. The success of this strategy is indicated by the fact that more than 90% of our U.S. installed base have purchased long-term contracts that include access to upgrades. And revenue from these contracts is now beginning to make a significant contribution to our overall growth. As a Bob McNamara will describe shortly, our total services revenue this year grew to $16.9 million, up from only $4.8 million in the previous year. That represents an increase of [248]% in the year (technical difficulty) grew by around 166%. We believe the contribution of our long-term high-level service contracts will continue to grow as our installed base increases.

As the clinical radiosurgery market continues to develop, we expect the demand for upgrades to remain strong and we expect the contribution of the high-level service contracts to our revenue to continue to grow commensurately. Recurring revenue of this type is particularly important to a capital equipment company, and I believe that we have found a unique formula that should really help to build and smooth out our revenue growth over future years.

In summary, fiscal year 2007, and Q4 in particular, showed further clinical development of radiosurgery as a treatment option, as evidenced by the significant increases in both long and prostate treatments. This clinical expansion continued to fuel demand for the CyberKnife and our backlog increased to a record high. Simultaneously, our revenue also rose to a record level.

Finally, Q4 saw us break through to profitability and we have expectations that we will maintain profitability in fiscal year 2008. With that, I would like to turn the call over to Accuray's Chief Financial Officer, Bob McNamara, for a more detailed look at our Company's financial performance. Bob?

Thank you, Euan, and 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 now provide a review of our financial and operating results, business model and discussion of our backlog. We will also provide some top-line guidance to help you with your financial models.

As Euan mentioned, we are pleased with our fourth-quarter and full-year results and believe we are poised for significant growth next year. Our revenue for the fiscal fourth quarter of 2007 was $44 million, an increase of more than 106% over the $21.4 million from fiscal fourth quarter in 2006 and an 18% sequential growth over Q3 '07's revenue of $37.3 million. The fourth quarter ending June 30, 2007 marked Accuray's first profitable quarter as a public company, achieving an important corporate and financial goal. Net income for the fourth quarter was $0.5 million, compared to a fiscal fourth quarter 2006 net loss of $7.9 million.

For the full fiscal year 2007, total revenues were $140.5 million, compared to $52.9 million in 2006, representing a 166% year-over-year increase. Revenue consists mainly of product revenue; that is, CyberKnife, shared ownership revenue and service revenue from our multi-year service contracts. For the fiscal fourth quarter 2007, product revenue was $34.7 million, an increase of 121% year-over-year and 18% sequentially from the third quarter. For the full fiscal year, product revenue was $110.3 million, representing 206% growth over last year's product revenues of $36.1 million.

Revenues were driven by continuing expansion of the CyberKnife sales, both domestically and internationally. For the fiscal year, U.S. sales represented 65% of total revenues, while international sales accounted for 35%.

A strategic part of our business and contributor to our recurring revenues is our shared ownership program. As most of you know, this is a program whereby a CyberKnife system is placed in a hospital or center with Accuray retaining title. The customer is responsible for building the room and making minimal monthly payments to Accuray. Any revenue generated over and above those minimum monthly payments is shared between Accuray and the customer. Fiscal fourth quarter shared ownership revenue was $2.8 million, representing a 24% increase year-over-year. For the full fiscal year, shared ownership revenues grew to $10.1 million, a $2 million, or 24% increase, over fiscal year 2006. This growth was achieved in a year when several customers exercised their purchase option and therefore ended their shared ownership arrangement.

This shared ownership program is unique to Accuray and very beneficial to both parties. The customer mitigates the upfront costs and can build up the patient volume before considering a purchase of the system outright. For us, we get economic benefits and the closeness to the customer gives us great R&D ideas and helps us to truly understand the business our customers are in and the needs they have. In addition to adding to our recurring revenues, it's a real positive for all parties.

Moving to services revenue, services revenues continues to grow and contributes significantly to our business. For the fiscal fourth quarter, services revenues reached $5.7 million, a 217% growth over last year's fiscal fourth quarter's revenues of $1.8 million. For the full fiscal year, service revenues reached $16.9 million, up from $4.8 million last year and representing 248% growth year-over-year.

As you know, premium service contracts, including the Diamond contracts, 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 priced at $460,000 per year. This is a unique program and is very popular with our customers, evidenced by the fact that over 90% of our U.S. customers have signed premium service contracts with upgrades. As Euan noted, these service packages leverage our upgradable platform to provide customers with the latest technology. This recurring revenue from service and shared ownership agreements provide a base revenue component that we expect to grow as a percentage of revenues and to provide additional long-term stability and growth.

We improved our overall gross margin during the fiscal year relative to fiscal year 2006. Fourth quarter 2007 gross margin was 56.6% compared to gross margin of 48.7% during the same period in fiscal year 2006. For the full fiscal year, Accuray's gross margin was 57% compared to the gross margin of 48% in fiscal year 2006.

Backlog at the end of the fiscal year 2007 is $619 million, up $60 million sequentially, or 11% from the third quarter balance of $559 million. Compared to last year, backlog is up $187 million, or 43% above Q4 '06's ending balance of $432 million. Backlog, as you remember, is defined as signed contracts that have a substantially high probability of being recognized as revenue in the future.

Operating expenses for the fourth quarter 2007 were $25.3 million with $7.5 million invested in R&D and $17.8 million in SG&A. For the full fiscal year, total operating expenses were $88.6 million with an R&D investment of $26.8 million and SG&A expense of $61.8 million. Operating loss for the fourth quarter was $419,000, representing a year-over-year improvement of $7.5 million over Q4 '06's operating loss of $7.9 million. For the full fiscal year, our operating loss narrowed to $8.5 million from last year's operating loss of $33.5 million. Excluding non-cash compensation charges of $3.9 million in Q4 and $12.6 million for the year, we recorded an operating profit of $3.4 million in Q4 and $4.1 million for the full year.

Net income for the fiscal fourth quarter was $0.5 million, or $0.01 per diluted share. Excluding non-cash stock compensation charges, the earnings would have been $3.3 million and earnings per share would have been $0.05.

For the full fiscal year, our net loss was $5.6 million, or $0.18 per share, a significant improvement over the net loss of $33.7 million in the full fiscal year 2006. Excluding non-cash stock compensation charges, earnings would have been $2.6 million and earnings per share would have been $0.05.

Assessing our income statement we're very pleased, with our quarterly and annual performance.

Moving to the balance sheet, cash and cash equivalents at the end of the 2007 fiscal year were $204.8 million, up from the $27.9 million at the end of fiscal 2006. The Company has been cash flow positive for the last three years and this year continued to generate positive cash flow of $6.4 million, net of IPO proceeds. The Company has zero debt. Total assets are $332.1 million.

Now I would like to turn to discuss backlog a little further, how it relates to economic value created and for guidance purposes, its relation to future revenue. Let's start with what backlog is. Backlog is defined as signed contracts that Accuray believes have a substantially high probability of being realized as revenue in the future. It can be used to analyze both historical activity and future activity. Historically, the change in backlog, combined with the revenue recognized, can be used to determine the approximate economic contract value created over the past year. For example, the change in year-over-year backlog is $619 million, less the beginning balance of $432 million. This difference, $187 million, plus our annual revenue of $140 million that came out of backlog, equals a rough approximation of the economic value of the contracts signed last year that went into backlog. This total is $327 million.

So that's a great way to look at the historical activity at the Company.

Moving to the future and guidance for going forward, Accuray's backlog provides excellent visibility into future revenue, again, since nearly all revenue comes out of that backlog number. Total backlog from signed contracts at the end of the fiscal year is $619 million. It is comprised of two components -- $321 million associated with CyberKnife System purchases, and $298 million associated with service agreements and the minimum monthly payments from shared ownership programs. Although revenue recognition is dependent primarily upon system installation, which is in turn dependent upon customer facility readiness, we can use backlog as a foundation for guidance. We believe that the CyberKnife System portion of backlog generally will be realized over the next 18 months. We expect that the recurring component of backlog will be realized over the next 60 months.

Using this as a backdrop and considering that more contracts have been signed in the second half of 2007 than the first half, we believe revenues for FY '08 should be between $250 million and $270 million. Given the strength of Q4 going from $37.3 million to $44 million, or the 18% sequential growth, we would expect first-quarter revenues to represent flat to modest growth on a sequential basis but to experience accelerated growth as we move through the year.

We are not giving earnings guidance for FY '08 at this time, but I can speak to our long-term goals. Our gross margin long-term target is 60%. Our long-term operating margin goal is between 20 and 30%. In order to get there, R&D would need to be running at about 10% of revenues, while SG&A would be about 20 to 25% of revenues. We feel we can achieve the gross margin targets sooner than the operating margin target. The operating target is more long-term because we want to make sure we continue to invest in the growth of the business to ensure we realize the potential market for the CyberKnife.

And with that, I would like to turn the call back to Euan.

Thanks, Rob, for the financial review. So to summarize before we take questions, fiscal year 2007 demonstrated outstanding clinical performance and growth, record revenue with a growth rate of 166%, fourth-quarter profitability, continued positive cash flow, backlog reaching $619 million and a year-end cash balance of $205 million quarter zero debt.

Okay, operator, we are now ready to take whatever questions our callers may have.

(OPERATOR INSTRUCTIONS) Thom Gunderson, Piper Jaffray.

Let's start with the guidance that you just gave us. The $250 million to $270 million I realize is coming out of backlog, but as you look forward into the next four quarters, are you continuing to generate new contracts with the same size sales force, or do you expect that to increase? -- is part one of that. And the second part is -- should we just continue to go with the 65/35 split on U.S./O-U.S. on those revenues for '08?

Sure. The first question is just kind of regarding the investment in headcount and where we're going to put headcount. Our sales organization will grow next year, there's no doubt about that. And, although we don't disclose the exact growth, it's an area where we want to make sure we're investing. So it wouldn't be unreasonable to think that there's going to be more heads out there -- or I'm sorry, more salespeople. And then you second question regarding --.

Geographic mix.

Yes, that generally will be about the same. 65 to 35 is what we've been running at, and --.

Yes, we have seen growth in both U.S. and international. I think that the significant growth in the U.S., which is such a strong market for us, is maintaining the balance, compensating somewhat for the increased global presence that we're actually having.

And then, Euan or Bob, could you talk a little bit about -- you increased sales this year, if we look backwards, $88 million, and as Bob pointed out, you increased your backlog by $187 million. And this is steep incline, and that's good. Can you talk a little bit about the manufacturing expansion that is required to fill this backlog?

I think one of the good things about the business is our ability to predict and plan, which is why we can obviously give you the sort of guidance we've just been able to give. I think that, through the year, we've actually managed to expand our manufacturing capabilities and we feel that we're well positioned to manufacture the systems that we'll need to manufacture during the next fiscal year too.

Okay, and then just a couple of detail ones for Bob, if you can kind of go through the units for the quarter. Were any of the installs shared units, and were there any installed in Q4 under the old Platinum contract?

Yes. There was one installed under the old Platinum, so that is all of the Platinum. There was one shared ownership. So right now -- and there was also one buyout. So we actually remain at 10 shared ownerships and 99 CyberKnife outright purchases.

And, did you say you used up the last Platinum shipment?

Yes, the last Platinum customer that was not installed is now installed.

Mark Richter, Jeffries & Co.

Clearly, we thought -- or $619 million in backlog was clearly better than we suspected or we had modeled for. Can you just talk about what is driving that? As well as, if my math is correct, you did about $104 million in new orders in the quarter; where that's coming from, and what is driving that?

Yes, I can take that one. It's really very diverse. I think that what's fundamentally fueling it is the clinical diversification of radiosurgery and the fact that CyberKnife really if the only whole-body full-time solution for the radiosurgery market. So that is the basic fuel that goes into the engine. I think how it materializes in terms of customers is also pretty diverse. We're seeing, as we mentioned, hospitals that have been established for awhile, clinical demand locally is really driving them towards purchase of a second CyberKnife system, and we're mentioning that because it's definitely a trend that we would expect to see continuing.

Also, we're seeing, coming into the market sort of the larger group players, so like some of the -- and we're not -- as you know, we don't discuss individual contracts per se, but we can talk as a trend that we're getting increased interest from the stand-alone centers and some of the providers of multiple stand-alone systems. So it's really the complete spread; the big, high-end hospitals, community hospitals, the stand-alone centers, it's a very diverse mix.

And then the proposed rulings came out for an increase in the stereotactic radiosurgery reimbursement by about 10%. That is clearly better than we expected. All things being equal, why would one choose a less profitable IMRT-IGRT system that is seven times less profitable for 35 fractions, versus your treatment modality for three to five fractions for SRS, again, if all things being equal?

Was that a question or an answer, Mark?

A little bit of both.

I think that -- I mean, those points are very good, and actually, we are seeing a strategic shift in the market. I don't want to comment too much on the reimbursement changes, because they are proposed changes right now, and the actual changes won't be known until later. But I think, generally, the profitability of the CyberKnife goes with the question. And one thing that has changed in the market, the kind of changing dynamic we're seeing, if you look at the way that radiation therapy companies used to be able to sell, they really had -- the largest plan in the market, as an example, has always said that they get 60 and 70% of their market from repeat orders, from their existing customer base really replacing their existing radiation therapy units. An I think that has been the stability in the market in that particular market for some time. What we are seeing amongst our customer base are people who are no longer just allocating that budget or that treatment room or that space to the IMRT, their radiation therapy systems. But they are because of the profitability and some of the factors that you just mentioned as well as the need to provide a more diverse competitive range of clinical services for cancer patients -- we are seeing them start to look at applying those [budgets tool] in the radiosurgery fields instead. So it could -- it's all speculation, but when I've heard some of the radiation therapy companies talk and they discuss slowdowns or contracts taking longer to negotiate, from our side, we are feeling like we're now getting access to budgets into space within hospitals that we really did not have before, and those really are the space and budgets that would be have been applied to those IMRT or radiation therapy machines.

Okay, perfect. And then it sort of boggles my mind when I talk to investors, but maybe if you could help us understand, can you talk about your view on the addressable market for SRS versus IMRT/IGRT? Varian has done a phenomenon job of trying to confuse people and sort of lump them into one. But sort dovetailing, on that, what are the most profitable procedures that you're seeing for stereotactic radiosurgery whether it be lung, brain, pancreas, liver, etc., and how those differ from traditional IMRT/IGRT patients.

Okay, again, that is several questions in one, but I think that the profitability is fairly universal. I think that there might be slightly increased profitability in the treatments which are delivered in a larger number of fractions. So for radiosurgery for the CyberKnife, you're talking usually anywhere between one and five fractions. And prostate and lung are generally delivered in three to five fractions. So they're at the upper end of the fractionation, which generally means the upper end of the revenue scale for hospitals. So these new areas, new clinical areas, are going to probably increase profitability and increase revenue from CyberKnife units.

I think what we are seeing in the IMRT field in radiation therapy is it's kind of flat from our perspective. And of course, we have more data about our business than we do about anybody else's business, but I our perspective from the outside and from talking to customers is that business is relatively flat. And I think it's obviously in therefore the interests of radiation therapy providers to try and bundle them together and talk about overall growth, trying to capture somewhat on the momentum in the radiosurgery market. Certainly from our perspective, this is the high-growth area. And as I said several times in the presentation just now, we really truly believe the CyberKnife has become the brand-name in the field of radiosurgery for the whole body. Once a hospital has made a decision to go into a radiosurgery program or a provider has made a decision to going into a radiosurgery program, we're not really facing an awful lot of competition from anybody else.

Dave Khtikian, J.P. Morgan.

Congratulations on the quarter. I guess first, just to confirm sort of for the balance of the systems as far as the breakout, is it right, you did eight in the U.S., three in Europe and one in Asia? Is that correct to get to the 109?

Run that by me again -- did you say eight, three and one?

Yes.

Yes, eight inside the U.S., four outside the U.S.

The eight in the U.S. includes one shared ownership?

That is correct.

And then I guess, can we move over to the gross margins? One thing that kind of jumped out at me was the gross margins on the service line. Is there something in particular that kind of drove that?

Nothing in particular. There were some, as we upgraded some of these systems that are out there, there are certain hardware costs associated with that upgrade process in bringing back the old system. We tend to keep some for reserve, but then write off -- even though they're working units, we tend to write off some of those units. So that contributed to it, and there was a little bit of year-end cleanup in there, in terms of inventory as well.

Is there a way to think about a longer-term run rate there?

Yes. One of our goals, clearly, and I did mention the overall long-term gross margin goal of 60%, but one of the ways we can drive that is really by improving the service margins, not only leveraging the existing footprint of the service organization that we have, but also managing the upgrades. If more are software oriented as opposed to hardware, that will improve the margins. But, really, it will come down to I think leveraging the existing infrastructure as we get more and a larger installed base.

On the balance sheet, is there a way to break out, give us a breakout of deferreds from customer advances for the (MULTIPLE SPEAKERS)?

The total deferred is $154 million. So if you look at -- you can just break it out that way. That is both current and noncurrent. The remainder is the customer advances.

Junaid Husain, Soleil Securities.

Bob, could you help us with pricing on CyberKnife? Is it up, down, net neutral in the quarter? And then I cannot recall, is CyberKnife pricing different between U.S. and O-U.S. market?

It is. I will answer the last question first. Outside the U.S., we typically work through distributors. So the distributor has to make their margin. So typically if we work through a distributor, they're going to get a price break. And so that price would be lower than what the U.S. price would be. Now there are occasions internationally where we might go direct, and sometimes that actually would give us a price that's north of the U.S. But in general, outside the U.S. is going to be lower than the U.S. price. And then, looking at the exact pricing in the U.S. and in general, one of the benefits of the upgrade program and the base technology of the CyberKnife is that as we add upgrades, we add those to the base configuration. And what that has been able to do for us is preserve, protect and even increase the ASP on an annual basis. And so over the last several years, we have actually been able to increase that price on an annual basis.

That is helpful. And when I look at the service in shared ownership backlog, it seems to have gone up at a higher rate sequentially, about 17% from the last quarter, when the last three quarters we were averaging at about 10%. Is this just because you're starting to sell more service plans as you start to place more boxes, plus the expiration of the older service agreements with hospitals renewing their service agreements? Is that the correct way to look at it?

Well, certainly, it is our objective to sell more service plans as we go forward, but also it will flow out more slowly, because remember that this is over a four-year period. So while we would recognize the CyberKnife up front as soon as we install, that shared ownership revenue or the service revenue is going to be recognized over the course of the year.

Going back to the whole issue of manufacturing, are you currently at 100% capacity, and how many shifts are you running?

No, we're not at 100% capacity. We're running about 1.5 shifts right now and we also have [correct] capability as we've indicated before of putting in another test [vault], which is kind of the bottleneck in the manufacturing process and taking it up to even three vaults of their existing insulation. So we really don't have any capacity concerns right now. We've capacity within our existing resources.

Euan, with regards to the Sunnyvale plant, do you have enough room to expand out should you choose to grow out your production?

Yes. During this year, we took on another building locally here, just across from our main office, and we are kind of spreading out -- in the process of spreading out into that right now. So we certainly have got overflow. I think that we don't have any great concerns in that respect, although the Company's obviously growing quite fast. The other thing to remember is that some of our growth in terms of headcount is actually occurring distant from the office. The investment in the sales force and the investment in the service organization, which are large a proportion of our investment as Bob indicated, those tend to be field people so they don't necessarily need to have office space.

Last question for Euan. There are couple of big meetings coming up over the horizon, the Congress of Neurological Surgeons in San Diego, and then of course ASTRO. Anything we should be watching for relative to data dumps on CyberKnife with your academic colleagues?

Sure. I think that -- obviously I cannot put predictors on the academic publications that will finally make it through, but we do know that a number of our users have made submissions of pretty interesting data, and there have been a few papers that have come out recently which will probably make it through to the podium as well. So I think that it would certainly be a very -- ASTRO in particular probably because it represents the fastest-growing area of radiosurgery, that and sort of extracranial is stronger probably stronger than the intracranial. That will be a very interesting show. Historically of course, ASTRO has also been the trade show where most companies do product releases. It's a very technology driven show, so in the past we've certainly done that. And, again, out wanting to make any predictors of the future, but that has been the history of all the radiation companies.

Amit Hazan, CIBC World Markets.

Just a few questions from me. Just on the new orders, if we could just talk about backlog and new orders for a second. What was -- if new orders were $104 million, what was that as a percentage in terms of year-over-year increase?

Looks like we don't have that at our fingertips. I would suggest -- one way of looking at that is to just go back and look at the quarterly backlog changes as Bob ran through in the call. Looking at the change in revenue and the change in backlog in each quarter, and that should calculate it out. I think Q4, you will find Q4 was certainly very strong in terms of new order growth.

Last year as well?

Yes. Last year it was too. I would have said, probably on balance through the year, and this is kind of a gut feeling, I haven't actually done the detailed analysis. But my gut feeling is that Q4 last year represented probably a higher proportion of total orders in the year than Q4 this year, because we did actually have strength in the other quarters this year too, relatively speaking. But usually Q4 is our strongest and I think -- my belief is that it's the strongest quarter of this year as well.

Okay, and then in terms of the backlog, I would like for a second if we can just to focus on the product component, and you were kind enough to give that to us. If I look at that component and I try to break out what the new orders were in terms of just the product, I am coming out to about $50 million. If you take product backlog from this quarter versus product backlog that you gave last quarter versus the product revenue you just put out, you get about a $50 million number. That's about 15 unit orders. What am I doing wrong there, or did you just have a lot of shared unit orders in the quarter? I just can't get to the $104 million, because a lot of it seems to fall into the service or shared ownership component.

We would have to see the detail that you have there in order to comment precisely on it.

Let me take you through the math.

We don't actually discuss the actual orders.

But is it correct that you had about $305 million in backlog, in product backlog in the March quarter? And now, you have $321 million?

Yes, that is correct.

And you have $321 million now, and you had about $35 million in product revenue. The difference is $50 million. If you take a $3.3 million ASP, that is about 15 unit orders. I'm just wondering what the other (MULTIPLE SPEAKERS)

Again, I can tell that it's wrong, the 15 unit orders for sure, but I'm not sure what your math is. Are you -- maybe it's because you're not taking into consideration the revenue that is dropped out of the backlog, because if you're just taking the incremental increase, you're missing the revenue piece on the orders.

I can ask you off-line. I have that in there as well. I guess the basic question is, did you have any orders in the quarter that came from the shared ownership program?

As you know, there is always a mix of orders. Some of them come from international sources and represent sales we make through distributors, which are at a lower number. And the shared ownership ones we only put in the, as you know, the minimum payments. So there's more detail there then you are taking into account in your calculation, which is probably why you're not getting to the right point.

I am wondering if you can give us a little bit more color as it relates to reimbursement. We have seen kind of -- I don't know maybe I don't understand it -- well but from the private insurer side, it seems like a good number of them currently don't cover for body stereotactic radiosurgery for things like lung and prostate. When I think a Blue Cross Blue Shield or Aetna or CIGNA considering it investigational, and particularly for prostate, but also for lung as well. And I know that it will eventually change if we have data. But can you give us an idea of how your customers are currently getting reimbursed for this if enough private payers are not reimbursing?

Again sort of a wrong start point for the comment. I think that we have generally pretty good coverage. I think we -- obviously people don't necessarily get payment automatically, but we all know from personal experience that nothing generally gets paid automatically, so it all has to be fought for. I think that lung coverage generally, my impression it's pretty good with the private payers. I think that prostate is probably the newest, and therefore you would expect it to be the one which is probably challenged more frequently more often. But I think looking across the country, we're getting pretty good feedback about overall coverage.

Okay, but if prostate is challenged and it still is, as you as refer to it as one of the fastest-growing indications, I'm just wondering how are these people getting reimbursed?

Well, clearly they are, because it's growing. So the stories I get are that they get paid and they get reimbursed after taking their case a little bit further and pushing a little bit harder. That is the general overview. (MULTIPLE SPEAKERS) I can say that Medicare covers prostate as well. So overall, I think the coverage is improving and increasing and I think that the new applications, it's actually pretty strong.

And the last one is with regard to Stark 3. I'm just wondering, with the new Stark 3 kind of proposals out there, if you had thoughts at all if it impacts your customers at all or what you think about those proposals that might come into effect next year?

Well I think everybody's in a little bit of a wait and see mode with that. I don't want to go into too much comment on that because it's really, it's a pretty complex legal area and there have been various comments about CMSs, proposed comments that they've put out in an area. People look at different business models, and right now, they're in the position of trying to second-guess exactly what the final ruling will be and the final CMS ruling will be. So I think it's kind of a wait and see, it's a little bit early to comment on those. But overall, we're not seeing a significant impact on our business from that proposal.

So not to expect anything material?

Correct.

And then the last one from me is just in terms of installations. If my numbers are right, it looks like installations in the U.S. were somewhere around -- if they were 20 this year, this fiscal year for you, they were about 19 last fiscal year. Your competitors have had a little bit of a slowdown in installations, and especially in the last quarter, but we've seen in now for six months or so. I'm just wondering, are you seeing any kind of a slowdown in installations for any reason relative to your historical years or any thoughts on that?

No, I don't think so. I think we're seeing the same kind of rollout. We are continuing -- as you probably heard Bob say, we're continuing the same kind of guidance in terms of rollout from backlog that we have always given. I think we see an acceleration in sales that takes a little while to work its way through to installations, which is why the backlog increases. But no significant changes. I think one thing that's a positive for us is there's probably increased access to the radiation therapy rooms that we probably didn't have as much of before as people kind of look at switching their budgets and switching their practices towards radiosurgery, as opposed to radiosurgery always being a kind of an additional project, an additional business development program for a hospital. So I think, that I would say is more of a trend than any kind of slowdown. We're not really experiencing that.

Kristen Stewart, Credit Suisse.

I was wondering if you could talk a little bit more about the number of hospitals that have a second unit installed. I know you mentioned three within your prepared remarks, but I was just wondering, of the current installed base, how many of those would represent second units?

I'm sorry, the actual question is --?

Of your current installed base, how many of those are second units?

So, I'm just looking at the number now. So we have five currently installed second units.

And those include the three that were installed this quarter?

No, there wasn't three installed this quarter. That was three -- I think that was three that I highlighted for the year.

Okay, but there's five in total?

Right.

And of your I guess new orders, are a lot of those (MULTIPLE SPEAKERS)

I could say without being specific, we do have other customers coming through that you will see with seven systems going in. And I'm sorry, the second part of your question?

I was just going to say, in terms of the new orders, how many of those -- can you give us a sense of, in terms of how many of those are a second unit?

I don't want to give a specific number on that, but it is definitely a trend that we're seeing and it doesn't look like it's slowing down at all, that's for sure.

And what's sort of the patient level that you're seeing these institutions get to before they start thinking about the second units? I think (MULTIPLE SPEAKERS) talking about 200 patients on an annual basis?

Yes, I think it's still about the same. What we've said in the past is, when hospitals or providers transition between 200 to 300 patients, that's usually the range they start looking at a second CyberKnife. And we're seeing -- that number is a pretty good guide. When we look at the ones which we have under contract and installed, which I think you would find by checking with them too, it was usually about that point when they started to look toward a second system.

Okay. And then on the deferred revenue, I think Bob, you had mentioned, there was $154 million that was on the balance sheet at the end of the quarter?

Right.

How much of that is current?

Do you have any other questions while Bob is looking that up, Kristen?

I was just trying to get a sense for your guidance for next year kind of on an apples-to-apples basis, because I know that there's a little bit of -- I know this year, there probably wasn't a whole lot that was the recognition of deferred revenues, but based on kind of the aggregate number on the balance sheet of customer advances and deferred, I'm just trying to get a sense for what sort of the economic growth in revenues is.

About -- call it 32 million of it is current.

32 million is current?

Correct.

So the remaining balance is all customer advances?

No, no, no. Of the deferred revenue, $32 million is current deferred revenue with noncurrent deferred revenue being about $118 million.

Okay. So your customer advances really increased during the quarter then, is basically what you're saying on your balance sheet?

That is a conclusion you can draw from there.

(OPERATOR INSTRUCTIONS). David Khitikian, J.P. Morgan.

On the guidance, Bob, you talked about you're looking at sort of flat to modestly up in the first quarter. Is there any sort of specific reason -- it looks like with the backlog increasing this much, it kind of makes the back half of the year somewhat back-end loaded. Is there is specific reason? Is it based on your understanding of timing of installs?

We have visibility there, particularly in the near-term, and so we're just kind of stating what we see as the install schedule.

Overall, we've run some pretty detailed and in-depth statistical analysis on when we believe customers will be ready, and I think the further out, the more statistical it gets. As you get closer, then it gets more actual names and actual sites and we have pretty good visibility. So we have gotten pretty good at that over the recent years.

Okay. So you have sort of done that same analysis for all four quarters, and just based on what you came up with the 1Q, that is the number?

Yes. And we've done this sort of thing on past years and sort of worked out pretty much how things look. So we're saying this I think with a fair degree of confidence.

[Nancy Sangeedy], SIO Capital Management.

Bob, this is just a follow-up question to Kristen's deferred revenue question. You said that current deferred revenue was $32 million?

Current, yes, meaning current as opposed to noncurrent.

Alright. And the figure that you have on the balance sheet for current customer advances and deferred revenue is about $90 million?

No, $90 million in customer advances.

And deferred revenue?

Oh -- I'm sorry, so.

I was just trying to reconcile, because --

$90 million I'm not seeing.

There is a figure -- 90.656 that is customer advances and deferred revenue under current liabilities.

Right, yes. So if you back out -- so of that, call it $21 million is customer advances, both current and noncurrent.

Okay, but -- alright, I guess I need to work on these numbers. Thanks very much.

There appear to be no further questions at this time. I'd like to turn the conference back to Mr. Rathjen for any additional or closing comments.

Well thanks everybody for joining us this afternoon. We appreciate your involvement and we certainly look forward to speaking with you next quarter. Let me turn this back to Euan for some final thoughts.

I just wanted to thank everybody for joining us today. Just to briefly summarize, Q4 fiscal year 2007, we have had very, very good positive periods here, outstanding clinical performance and growth, record revenues with a growth rate of 166%, fourth-quarter profitability, continued positive cash flow, backlog reaching $619 million, a year-end cash balance of $205 million with zero debt. I would like to take this opportunity to thank each member of the Accuray team for their dedication, hard work and focus to making fiscal year 2007 another record year. Thank you very much and we look forward to visiting with you on the next quarterly call.

Once again, that does conclude today's conference call. Thank you for your participation, you may disconnect at this time.