Accuray Inc (ARAY) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Accuray Incorporated's earning conference call for the fourth quarter fiscal year 2008, ended June 28th, 2008. 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 call is being recorded. At this time, I would like to turn the conference over to Mr. Tom Rathjen, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Kevin, and good afternoon, everyone. Thank you for joining us today for Accuray's fourth quarter and fiscal year end 2008 conference call. Joining us this afternoon is Dr. Euan Thomson, Accuray's President and Chief Executive Officer, plus Bob McNamara, our Senior Vice President and Chief Financial Officer.

As we did last quarter, we will again be referring to financial data which is found on two slides in a PDF file on the Investor Relations page of the Accuray website at Accuray.com. Please log onto this site to view this information.

Before we begin, I need to remind you that except for the historical information, the information that follows contains certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include the matters described in the risk factors section of our report on Form 10-K for 2007 fiscal year, as updated from time to time by our quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission including our annual report on Form 10-K for the 2008 fiscal year which will be filed in September of 2008.

And now, I would like to turn the call over to our President and Chief Executive Officer, Dr. Euan Thomson. Euan?

Thanks to everyone for joining us today on our fiscal fourth quarter 2008 conference call. I'm going to start the call with a business overview including an update on clinical data and utilization, reimbursements, and the business environment for the CyberKnife as we look forward into fiscal 2009. Bob McNamara, our Chief Financial Officer, will then provide a detailed report of our financial results for the fiscal fourth quarter and full year 2008. We'll then be happy to open the call and take questions.

First let me share some of the financial highlights. Total revenue for the quarter was $50.9 million, a 16% increase over the same period last year. For the full year, fiscal 2008 revenue increased 50% to $210.4 million, in line with our guidance. Net income for the quarter was $191,000 contributing to our first full year of profitability. With fiscal 2008 net income of $5.4 million, or $0.09 per diluted share.

Our recurring services revenue grew to $11.8 million in the quarter, and to $38.8 million for the year. On an annual basis, this represents a 110% increase from the previous year. This growth in recurring services revenue is a very positive result, and services remain a key factor in our future growth profile.

We had an extremely successful quarter for new orders. In total, 28 new contracts are added to backlog in the quarter, representing a total value of $115.5 million. At the end of fiscal 2008, our total backlog was $647 million. New orders contributed $68 million directly to non-contingent backlog, and importantly, the proportion of non-contingent backlog increased to 71% of the total or $460 million.

During the quarter, we installed six CyberKnife systems, three in the United States, one in Japan, and two in the rest of Asia. Bringing the worldwide installed base to 140. Before I get into some specific updates for the quarter, I would like to take a moment to update you on the sales environment for dedicated radio surgery systems in the United States and share with you some of the strategic steps we've taken to improve the quality of and increase the rate of which we sign new sales contracts.

We've been very open about the challenges that we encountered in the sales and installation environment, as we progress through fiscal 2008. Specifically, the entrepreneurial free standing radiation treatment center market was challenged by proposed regulatory changes, the general economy and the credit environment. These factors combined to place pressure on business plans for these centers and during the year, we felt the need to re-evaluate the timing of their installations, and in some cases, remove their contracts from backlog.

During fiscal 2008 we believe we have made significant progress in actively addressing this situation, by refocusing our sales professionals on more established healthcare providers, particularly hospitals. In parallel, we've also carefully examined our backlog each quarter and have removed any contracts that no longer meet our criteria for inclusion.

Our sales focus on hospital-based customers has resulted in a steady enhancement of backlog quality through the year, as evidenced by the continued growth of our non-contingent backlog. The further evidence of the success of our sales team in refocusing their efforts, I can reveal that of the 28 new contracts that we placed into backlog during the fiscal fourth quarter, 24 are associated with hospitals and other high quality medical institutions, far less affected by the issues associated with more entrepreneurial sites.

In the US, we also have had several strategic successes. I can announce today that we've signed a sales contract with Kaiser Foundation hospitals to provide a CyberKnife to their cancer center in South San Francisco. This is a key sale, since it's widely known that nonprofit healthcare providers such as Kaiser are motivated by demonstrated clinical value.

I'm also pleased to reveal that during fiscal 2008, we signed agreements with 15 academic centers. Three in the US and 12 international. And overall, our international business continues to be exceptionally strong. Of the 28 new contracts entered into backlog during the quarter, 17 were international contracts.

Of particular note, we recently announced that the Potemkin Institute of Neurosurgery in Moscow has purchased a CyberKnife. During the past year, we've also announced the first CyberKnife sales in India, Switzerland and Canada, further expanding our international reach.

Today, I can also announce that Hospitale San Bertole in Vicenza will be installing a second CyberKnife system. This is our first confirmed order for a second CyberKnife from a European site and is further validation of the growing strength of our clinical program, leading to increased demand for treatments.

We view the continued strengthening of our international profile as another key aspect of our future success. As I stated before, international markets are driven very much on clinical validation of new technologies, and our international success is therefore a good indicator of the strengthening of our clinical program.

We'll continue to invest in international business in 2009. Specifically, we will continue to expand our sales coverage to increase our sales penetration in new markets.

In summary, there continues to be a significant growing sales opportunity for the CyberKnife and we're encouraged by the robust number of leads we have in our sales pipeline and the clinical knowledge, experience and capability of our customer base.

As we've explained in recent conference calls, the sales process for CyberKnife is significantly different to that of traditional radiation therapy equipment. Radiation therapy equipment is most often sold as a replacement to an existing machine that's at the end of its useful life.

In most cases, the budget and space has already been established. Because the CyberKnife is still a relatively new technology, with new clinical applications, we have little to no replacement business. Often, there's no budget or space allocated for a dedicated stereotactic-quality radio surgery program at our customer's sites when we initiate the sales relationship. In addition to being a challenge to completion of the sale, this can also add a layer of complexity in converting a sale to an installation.

Following on the recent success of our sales program in the fourth quarter, we planned during fiscal 2009 to expand our resources in the sales support area, with the goal of accelerating the process and turning contracts into installs. This has historically taken longer in the hospital market than in the free-standing market.

So we're conscious that as the profile of our customer base changes, we'll need to work hard on accelerating installations. We're currently building a team of dedicated relationship managers who will assist our customers for developing installation programs following the signing of a CyberKnife contract.

The new team will assess and evaluate each customer situation as the contract moves towards installation, addressing and identifying any specific issues that may arise. Our intention is that this initiative will also improve both our visibility and capability of forecasting revenue based on enhanced customer relationship and better understanding of their individual needs and challenges during the preinstallation process.

I'd like to now give you a brief update on our treatment planning service business, which we announced in the third quarter of fiscal 2008. We now have proof of concept for this service, and have had our first plan accepted by (inaudible) at Georgetown University Hospital.

Our focus at this point has been ensuring we can deliver plans of the highest quality. During fiscal 2009, we'll begin to focus on growing volume and demand. While we do not expect significant revenue from this service during fiscal 2009, we do expect this service to begin to add to our recurring revenue streams in the mid-to long-term.

The immediate strategic value of the treatment planning service is that it will increase the treatment planning capacity of our customers and therefore increase their patient throughput. This is particularly important at a time when there's a worldwide shortage of medical physics personnel, which can cause a barrier to entry for prospective CyberKnife customers.

The growing strength of our clinical program is reflected by the growing number of CyberKnife publications. In fiscal 2008 there were 76 papers written on various clinical applications of the CyberKnife, compared to 42 in fiscal 2007. Overall, there are now close to 300 clinical papers available, demonstrating the unique benefits of CyberKnife radio surgery. We're particularly pleased to report that the clinical study comparing treatment outcomes with surgery versus CyberKnife treatment in early stage operable lung cancer is being led by the M.D. Anderson Cancer Center, will begin enrollment this fall.

Also the peer review clinical study of inoperable lung patients was recently published in the July issue of Clinical Lung Cancer, by the University of Pittsburgh Medical Center. This significant study further demonstrated the clinical superiority of the CyberKnife in the treatment of lung cancer.

The study was conducted on 51 patients with a median follow-up time of 12 months and it concludes that the CyberKnife is an effective treatment for patients with medically inoperable recurrent or metastatic lung cancer. The data were compelling. Local control was 85% for stage one non small cell lung cancer, 92% for recurrent lung cancer, and 62% for lung metastasis.

The study goes on to compare these results with conventional radiation therapy, which is typically associated with poor local control rates in similar patients. This is clearly a significant publication and further validates CyberKnife's efficacy in treating lung cancer.

Articles such as the UMPC publication definitely help to drive clinical utilization and adoption by the medical community as evidenced by the utilization trends at our installed CyberKnife sites. On this topic, I can announce today that we recently reached a major clinical milestone with more than 50,000 patients now treated on the CyberKnife. During fiscal 2008 alone, approximately 17,000 patients were treated, representing more than one-third of the total patients ever treated on the CyberKnife.

The growth area is still extra-cranial radiosurgery, the field created by the CyberKnife. Approximately 56% of CyberKnife treatments in the United States are now being delivered to extra cranial sites.

In March, we announced that approximately 90% of worldwide CyberKnife centers outside of Japan were treating lung cancer. The CyberKnife is particularly promising in the lung because of the capabilities of our real-time tracking and our synchrony system, which automatically tracks and corrects for tumor movement during treatment.

During fiscal 2008, worldwide CyberKnife utilization for lung cancer grew by approximately 50%, compared to fiscal 2007, and the total number of patients treated surpassed 6,000. We also continue to see significant growth in CyberKnife utilization to treat prostate cancer. Last quarter I discussed the results of the study published in the International Journal of Radiation Oncology Biology Physics, known as the Red Journal, that demonstrated that the CyberKnife's clinical flexibility enabled it to non-invasively deliver complex high-dose rate brachytherapy-like radiation doses to the prostate without the need for hospitalization and anesthesia.

We are also eagerly awaiting the release of long-term clinical studies focused on the treatment of prostate cancer with the CyberKnife. We believe that the publication of these results will be an essential foundation to accelerated acceptance of the CyberKnife as a treatment of choice for prostate cancer.

However, even in advance of these publications, we are seeing incredible changes in clinical practice. During fiscal 2008, we saw approximately 100% increase in the number of patients treated compared to fiscal 2007. In fact, more than half the patients ever treated for prostate cancer using the CyberKnife were treated in fiscal 2008. This is a remarkable acceptance profile and it reflects increasing confidence in CyberKnife radiosurgery for this application.

Another area where we observed very strong traction in clinical utilization is treatment of liver cancer. During fiscal 2008, the number of liver cancer treatments on the CyberKnife worldwide increased approximately 80%.

Liver cancer represents a robust opportunity for growth, especially in the Asian markets, where demographics are weighted towards a higher incidence of liver cancer than in other parts of the world. In fact, acceptance of the CyberKnife for treatment of liver cancer already appears to be stronger internationally, with international growth being 133%, compared to fiscal year 2007. This compares with 52% growth in treatment numbers over the same time period in the US.

Very recently, we've seen much publicity around use of the CyberKnife for treatment of pancreatic cancer. While incidence of pancreatic cancer is fortunately relatively low, compared to some the other applications, we continue to hope the CyberKnife might have an important role to play.

Possibly in response to the publicity around this application, we saw significant growth in CyberKnife utilization for pancreatic cancer in Q4, a record number of patients were treated in this quarter and US numbers increased by approximately 40% over the same time period last year.

Moving on to technological improvements, it's an important aspect of our business model to support the expansion of the clinical applications of the CyberKnife with meaningful hardware and software upgrades. We recently announced that the first patients were treated using the next generation CyberKnife at the Oklahoma CyberKnife center in Tulsa.

This next generation system features new technologies and system upgrades announced at the 2007 Astro annual meeting. Allowing it to deliver state-of-the-art radiosurgery with significantly reduced treatment planning and delivery times.

In fact, the first patient treatment, which was for an intracranial lesion, was completed in only 16 minutes. The next patient treated for non-small cell lung cancer, required only 27 minutes. Both of these times represent significant reductions over previously observed treatment times. This is a significant improvement in patient throughput, allowing healthcare providers to increase revenue generating opportunities and reduce expenses.

One of the customers at the site commented that this new CyberKnife system configuration, and I quote, "allows delivery of radiosurgery almost as fast as radiation therapy treatments." To put this comment in perspective, although radiation therapy is only an option for a subset of CyberKnife patients, typical radiation therapy systems are often quoted as being faster than the CyberKnife system.

What's missed in this comparison is that radiation therapy patients are generally required to visit the treatment center up to 40 times. CyberKnife radiosurgery is rarely used for more than five treatments in as many days. With individual treatment times close to being comparable and only one to five treatment visits on the CyberKnife compared to 40 or so treatments of radiation therapy, there are huge advantages to patients, including far less disruption to their daily lives.

We will continue to gather data on treatment times as the number of installations of the next generation CyberKnife increases. But this initial data is very encouraging, and is great news for patients and healthcare providers.

While we hear reports of competitive products having the ability to perform full body radiosurgery, the fact remains that the CyberKnife clearly dominates this space. Once a healthcare center makes a decision to initiate a dedicated full-time radiosurgery practice, CyberKnife robotic radiosurgery system is the overwhelming choice. It is still the case that the competition that we see from the providers of so called hybrid systems is not from a technological standpoint, rather it's a competition for budget and/or physical space within a hospital.

The CyberKnife technologies are developed, we've continued to protect our innovations with a robust intellectual property strategy. The CyberKnife and its related software are now protected by 30 issued US patents.

I'd now like to take a few moments to discuss recent updates to the reimbursement environment for treatment with the CyberKnife. TMS has proposed Medicare reimbursement rate charges for calendar year 2009. Outpatient technical rates include an average of 6% reduction for robotic radiosurgery, in line with reimbursement changes across the radiosurgery and radiation therapy sectors.

Professional fees are projected to change very little and free standing center payment rates continue to be priced by the regional carriers as in 2007 and 2008. These small changes and adjustments do not seem to have affected our customer's interest in the CyberKnife.

On the private payer front, we continue to make progress towards widespread report of extra cranial radiosurgery. Blue Shield of California recently updated its policy to expand preauthorized coverage for robotic radiosurgery to brain, liver, lung, spine and prostate cancer.

Blue Cross Blue Shield of Louisiana recently expanded their coverage to include spinal and lung treatments. During fiscal 2009, we plan to launch an enhanced strategy to engage in discussions with private insurers about the clinical and economic benefits of the CyberKnife.

We feel that this initiative is timely as a result of the ever-expanding body of clinical literature on CyberKnife treatments. We hope and believe that this strategy will lead to further acceleration in coverage by insurance plans with extra-cranial indications of CyberKnife.

Finally, before I hand over to Bob for financial summary, I would like to draw your attention to our recent significant breakthrough in Japan. During the fourth quarter of fiscal 2008 we obtained regulatory approval in Japan known as a Shonen to market the CyberKnife for use in treatment of extracranial tumors. This was a combination of many years work and effectively opens up what is still widely viewed as the largest market outside of the United States.

We already have 20 units installed in Japan for treatment of intercranial and neck tumors and there's widespread knowledge and experience with CyberKnife technology. We're currently working with our Japanese distributor to upgrade some of the systems already installed in Japan to support the expanded extracranial use and expect that these upgraded systems will contribute to our increased volumes in that market and serve as foundation for us to launch our extracranial radiosurgery sales campaign.

To summarize, we believe we are well positioned to increase our leadership position in the expanding radiosurgery market as we continue to build evidence that the CyberKnife is changing the cancer treatment paradigm and in many cases can replace surgery and/or radiation therapy.

During fiscal 2008, we weathered the majority of the effects of a rapid change in US market conditions, while still producing revenue growth of 50%. We feel that our Q4 sales results are extremely encouraging and demonstrate that we have successfully refocused our US sales strategy on hospital customers, while the international markets who have been relatively unaffected by the US challenging conditions have shown excellent sustainable sales growth.

I would now like to turn the call over to Bob who will review our financial results. Bob.

Thank you, Euan and again thank you all for joining us on today's call. This afternoon I will review our financial operating results for the fourth quarter and 2008 fiscal year end.

Total revenue for the fiscal fourth quarter was $50.9 million, a 13% sequential decline from Q3 but a 16% increase over the fourth quarter last year. Accuray recorded net income of $191,000 for the quarter, and was break even on a per diluted share basis compared to net income of $502,000 or $0.01 per diluted share in the fourth quarter last year.

During the fourth quarter, Accuray recorded a non-cash stock-based compensation charge of $4.1 million or $0.07 per diluted share. It is important to keep in mind that these are non-cash charges. Approximately 90% of which are the result of stock based grants during fiscal 2007 and earlier periods. Total revenue for full fiscal year 2008 was $210.4 million, a 50% increase over fiscal 2007. While we are pleased with this growth, we recognize that this is at the low end of the revenue range we provided at the last earnings call. This illustrates various challenges we face each and every quarter.

For example, one CyberKnife system that was scheduled to be installed during the quarter had to be delayed when contractors discovered that the soil was not up to specifications and additional concrete needed to be poured. In another case, an international customer pushed out installation by at least six months because of permitting and personnel issues, not foreseen earlier.

Net income for the full year 2008 was $5.4 million or $0.09 per diluted share. This compares favorably to last year's loss of $5.6 million or a loss of $0.18 per diluted share. For the year, Accuray recorded non-cash stock-based compensation charges of $16.9 million or $0.28 per diluted share.

Taking a closer look at revenue for the fourth quarter, CyberKnife product sales generated $35.6 million. The sequential decrease from the third quarter was primarily due to the significant revenue in the third quarter from the sale of eight shared ownership programs. These site issues that I previously discussed also affected the quarter.

Services revenue was $11.8 million or 23% of total revenue for the quarter, marking a year-over-year increase of 110%. As a reminder, services revenue is primarily associated with long-term maintenance agreements, generally over four years with revenue recognized ratably over the respective service period. This important stream of predictable recurring revenue continues to increase as a percentage of total revenue.

Shared ownership contributed $2.2 million for the fourth quarter, a 19% sequential decrease, primarily as a result of shared ownership buyouts in previous quarters of 2008. During the fourth quarter, two shared ownership systems were bought out by their respective customers and one new system was installed, yielding three total shared ownership programs installed at the end of the fiscal year.

Going forward, we anticipate revenues from our shared ownership arrangements to comprise a small part of our ongoing business. However, it continues to be our policy to encourage CyberKnife ownership with our shared ownership program as a means of transitioning to full purchase ownership. As we have said, we anticipate eventual buyout of these units before or after installation.

Other revenue for the fiscal fourth quarter was $1.4 million, consisting primarily of upgrade products sold into the Japanese market. Fourth quarter revenue contribution from legacy platinum accounts converted from deferred revenue was $9.8 million. Of this $9.8 million, $6.3 million was from platinum CyberKnife systems.

As you recall, once the sixth and final upgrade has been installed on these contracts, we then ratably recognize the value of that agreement over the remaining life of that contract. Exiting the fourth quarter, all 30 of these legacy platinum systems are installed. We have recognized all of the revenue on two systems, and we are currently recognizing revenue on 17 systems. Of the remaining 11 systems, most have less than two upgrades to deliver before we begin to recognize that revenue and we estimate having all platinum related upgrades delivered by the end of fiscal year 2010.

Accuray's gross margin improved to 52.8% for the fourth quarter, primarily due to product mix and fewer shared ownership buyouts compared to the previous quarter. Total operating expenses for the fourth quarter were $27.5 million, or 54% of revenue, a year-over-year improvement of 4%. Our investment in Research and Development was $8.4 million, or 17% of total revenue, representing our continued focus and investment in this very important area.

During the fourth quarter of fiscal 2008, Accuray booked 28 new contracts into backlog with a value of $115.5 million. Of the new contracts, 17 were from international customers, six of which are within our European operations. This strength of international contracts is evidence of the growing demand for CyberKnife outside the US as well as the successful selling effort from our sales team. Of these 28 orders, 24 were operational in nature, which we categorize as hospital based or experienced CyberKnife system users. This reinforces that our sales force is refocused on selling into the more stable hospital based environment.

Moving to installations, six CyberKnife systems were installed during the quarter, three in the US, one in Japan, and two in the rest of Asia. This brings the worldwide CyberKnife installation base to 140. The geographical breakdown at the end of the quarter was as follows; 90 systems in the Americas, 12 systems in Europe, 20 systems in Japan, and 18 systems in the rest of Asia.

As we have discussed in previous quarters, we recognize revenue upon installation of the CyberKnife when Accuray is responsible for doing the install. For those international customers working through distributors who are responsible for installation, Accuray recognizes revenue upon shipment to the end user. With these distributor sales it is important to keep in mind that there's often a period of time between shipment and installation of the CyberKnife unit.

During the fourth quarter, we recognized revenue on 12 systems. Three of which were in Asia, one in Europe, and eight in the US. Of these eight US revenue systems, three were new system installations, two were shared ownership buyouts, one was a new shared ownership installation, and two were the initiation of revenue from legacy platinum accounts.

Moving to backlog, I'd like to draw your attention to the two charts that have been placed on the Investor Relations' page of the Accuray website. At the end of the fourth quarter, Accuray's backlog grew $45 million to $647 million, with $359 million associated with contracts for CyberKnife systems, $255 million associated with long-term service contracts, and $33 million for shared ownership program contracts.

As we established last quarter, this chart provides further transparency into our backlog segmentation. As you can see, of the $647 million total backlog, $460 million or 71% is associated with non-contingent contracts. This reflects a net increase of $74 million or a 19% increase into the non-contingent category. The remaining 29% or $187 million of backlog are contracts which may include standard contingencies, such as Board approval or certificates of need. Of this contingent segment, more than half represent operational accounts, principally hospital based customers.

Now, I'd like to call your attention to the second chart shown on our Investor Relations website. Again, in an effort to provide greater detail on backlog, this bar chart shows non-contingent and contingent backlog trends over the last eight quarters.

A few key points to note. One, total backlog continues to increase annually, though with some quarterly fluctuation. Two, non-contingent backlog shown in blue increases annually with some quarterly fluctuations. And is generally increasing as a percentage of total backlog. And three, contingent backlog shown in red, peaked earlier in the year but has decreased the last two quarters and hence has been a smaller percentage of total backlog.

The net results of these trends is that backlog is of a higher quality with a greater degree of certainty of becoming revenue. Our challenge is less with the revenue itself, but the timing of that revenue, which depends so much on the customer's build-out of a facility.

Of the 28 orders that went into backlog for the fourth quarter, 18 of these, or 64% went directly into non-contingent backlog, which represents $68 million. In addition, approximately $50 million moved from contingent backlog into non-contingent backlog. In total, $118 million flowed into the non-contingent backlog this quarter.

Finally, we did have eight orders which we adjusted out of contingent backlog, either because we received notification from the customer that the order was cancelled or our confidence level decreased to a level where future revenue recognition is currently in question. Of these eight orders, all were within the contingent category. The total value of these adjustments was approximately $39 million, again, all of these adjustments came out of contingent backlog and are reflected in the balance shown on the chart.

Reviewing Accuray's balance sheet, total cash and investments at the end of June, 2008, was $159.5 million. This consists of cash and cash equivalents, short-term investments, and approximately $37 million in long-term investments. Deferred revenue was $114.2 million, with $87.5 million in current deferred revenues. Total assets at the end of the quarter were $295 million, and the company continues to have zero debt.

Last August, Accuray's Board of Directors approved a stock repurchase plan, providing the company the ability to acquire up to $25 million worth of its common shares in the open market. During the fiscal fourth quarter, we purchased approximately 260,000 shares of Accuray stock for $2.3 million. For the fiscal year ended June 2008, we purchased approximately 2.1 million shares of Accuray stock for $24 million. Hence, we have just over $1 million remaining in the program.

Turning to guidance, based upon projected installations and other anticipated revenue for the upcoming year, we believe that total revenue for fiscal 2009 will be in the range of $230 million to $250 million. While we are offering top line guidance for the fiscal year, the movement of systems from one quarter to the next can have a significant effect on revenue in a particular quarter. We remain dependent upon our customers to build out an appropriate facility to house the CyberKnife and cannot install the system until construction is completed.

With that, I will turn the call back to Euan.

Thanks, Bob. We'll now open the call for questions.

(OPERATOR INSTRUCTIONS). We'll go first to Thom Gunderson with Piper Jaffray.

Good afternoon. I guess for my two questions, one would be Euan, six units shipped, we've got a tough economy out there. These are profit centers for hospitals. Our eye ball on this would have been that there was somewhere in the neighborhood of 15 or 16 units that were aged long enough that could have been activated. What do you think is going on in the market out there that only six in a quarter are being activated when the need seems so great?

I think it was eight units shipped, as I recall, but six completed installations. But I think that generally, demand is high. The trouble is that we obviously have relatively small numbers involved right now, and I think what you're seeing is there will still be quarterly fluctuation. And the overall trend as we've gone through the year is to build up the non-contingent element of backlog.

In our original installation plan for the year, we certainly had more systems and because of the environmental changes that took place, we had to remove those from our installation program. But I think we're seeing -- we're coming through that now and we're seeing some light at the end of the tunnel.

It will obviously take a while for those systems that we brought into backlog in Q4 to push their way all the way through to revenue. But these quarterly fluctuations will really always be there. They're just dependent on so many factors, as Bob indicated. Things changing on the permitting line for a particular site, delays in construction, changes in personnel. There are just so many factors out of our control.

What we will be doing, though, as I mentioned in my script, we are definitively investing in this area, both to speed up the installation process and to give ourselves a better handle on exactly when these systems will go in. And the people I talked about bringing into the Accuray team are really people that will take over after the sale is completed. Start to build a relationship, not just with a doctor who is interested in buying, but with the facilities team at a hospital who is responsible for completing the construction program. And I think in that way we'll definitely be able to have better visibility and our hope and belief is that we'll also be able to decrease the time that the systems sit in non-contingent backlog.

Then for the second question, Japan. Can you help us a little bit understand what the reimbursement picture is there? Traditionally with other medical devices, you get regulatory approval but then there is a lag before there is reimbursement. As you go from intracranial to extracranial, are there any other hoops that you have to jump through to get reimbursement for that?

We have cranial reimbursement already, systems have been around there for some time. We do have a process to go through now as it relates to extracranial reimbursement. We've obviously started that process off by working with a distributor out there to get everything moving along.

I think on the good side, we do have a very strong clinical knowledge, a lot of the existing users in particular the CyberKnife, have been aware that the Shonen has been pending and I think the next phase of that market is really to get some of the existing sites up and running with extracranial treatment. Get some local experience and then they can help us with the reimbursement inquiries and the reimbursement applications as they come through.

We'll go next to Tycho Peterson with JPMorgan.

It's [Tee Sport] sitting in for Tycho. Thanks for taking the question. Just a question about the new CyberKnife system that you have coming out. Is that a technical upgrade? Is that a software upgrade? Give us some color around how that will impact either current customers in backlog or current customers and sort of margin in relation to that. If it's more of a physical versus software component.

Well, it's actually a combination of each. These are the upgrades that we talked about and described actually at last Astro show, which was about 11 or so months ago, maybe 10 or so months ago. We launched several new upgrades. They were high output linear accelerator, just producing radiation at a faster rate. We had a new variable type Collimation system which we called the Aries Collimator, which can actually change the size of the radiation treatment, radiation field during the treatment.

And also, on software, optimization for planning and optimization for treatment delivery. So the overall package is a combination of hardware and software. And it's those things together, getting one site had all of these installed together, that really only happened during the last quarter. So we were to be honest, we were somewhat surprised ourselves at the combined impact when we looked at those first couple of treatments.

Of course, it's a relatively small number of data points right now. It is still in the early stages of evaluating what the impact will be across the board. We were quite frankly amazed that when you combined all of these new upgrades together we were getting such short treatment times.

And then just the follow-up on margins, then, as it relates to if the new upgraded systems will impact margin. Also when you are edging up international sales growth through distributors. Do you expect a margin decrease as more sales go through those distributors?

To answer the second question first, we wouldn't expect a margin decrease as more sales go through distributors. Specifically, although clearly if that takes on a larger percentage of total sales versus direct, then that would impact the gross margin. Because the gross margin on direct sales is better than the sale through distributors.

And then regarding the upgrades, we -- I won't speak specifically to that but what I can say, I can speak to next year's gross margin that we believe will be in -- similar to what it is now in the low 50s.

Some of the technology aspects, just a little bit on the margins, we were providing a linear accelerator before. Now, we were providing a higher output linear accelerator. We were providing a collimation system, now we're providing a variable collimation system.

Obviously software, one software version versus another software version is certainly low impact on margin. So I don't think we're expecting any significant changes in margin as a result of this upgrade profile.

We'll go next to Eric Schneider with UBS.

Hey, Eric.

Hi, good afternoon. First, thanks for providing a little more information on the backlog. Particularly the historical split between contingent and non-contingent, which brings to mind a question. On the non-contingent piece, it had been growing in sort of the mid-teens rate year-over-year, the growth in your fourth quarter was stunning compared to that so do you think that is a typical sort of sales fourth quarter phenomenon where things are being pulled forward from the first quarter of next fiscal year? So do you expect a drop in that? Or is that reflecting some other change dynamic in the market that nobody else has seen yet?

Well, I think as we've seen historically, our fourth quarter is typically our largest quarter in terms of orders for all the reasons that every sales organization has. As you enter towards your last quarter, where the annual objectives are trying to be met, fourth quarter comes in to play more than the other quarters.

So to that extent, I think that that's one reason why the actual dollars went up for non-contingent. But the other piece is focusing again, as we talked about a little bit on the call, the quality of the orders that are coming in. And the quality of the orders moving more away from the entrepreneur customer more to the hospital based customer has clearly affected favorably the non-contingent mix as well as the international order flow has also favorably affected the non-contingent mix in Q4.

Okay. And a portion of that non-contingent is the deferred revenue from the legacy contract. So is -- do we estimate right or it looks like, looking at the balance sheet movement, that about $50 million of next year's expected revenue comes from legacy contracts flowing through. Is that about right?

Currently have within the backlog, there's about $60 million of CyberKnife deferred revenue.

We'll go next to Junaid Husain with Soleil.

Good afternoon. Relative to the Stark laws, seems that the folks at Congress are moving forward with the tightening of the rules, relative to the other arrangements. It would seem at least on first blush that Stark is not outright prohibiting the other arrangements but almost evaluating them on a case by case basis. Could you very quickly walk us through this very complicated piece of legislation and then talk about what these new rules could potentially mean to your business?

I think we've actually touched on that several times over the past year. There is no doubt it was one of the things that we faced very much during the first part of the year. The changes are taking place. One is related to under arrangements which is a free standing center delivering a treatment on behalf of the hospital and then billing the hospital. The hospital itself then billing for a Medicare reimbursement. And CMS continues to tighten up on that.

There's some recent -- little bit more recent information came out in the inpatient prospective payment schedule and it does appear that they really are pushing hard on tidying that, what they consider to be a loophole up.

I think in terms of how that affects our business, I believe we've already taken the impact of that over the first part of the year. I think as we see the situation gain greater clarity, in essence it's really helping us because people are then able to structure their business models knowing that, rather that sign a contract in the hope that something will happen and that everything will work out and they'll still be able to persist with the original plan that they had.

We're sorting out who are good customers early on, which enables our sales force to either focus on them or not focus on them. All in all gives us much greater clarity. We're fairly positive at this point.

And I think looking at the backlog again, seeing the influx of non-contingent backlog, what that tells you is that we really don't have a bunch of new contracts that are so heavily weighted towards people sorting out their financing, sorting out their arrangements with hospitals, their joint venture structures. So we're getting a much cleaner group of contracts all around. So that's really the biggest impact area for us.

In terms of Stark, and such and ownership, there really hasn't been an awful lot of change in that. I think it's always been the case that referring physicians are not really supposed to own the system and benefit from it financially. So that's an area that doesn't really change very much and I think all of our customers have always known that that's the environment they're working in.

That's helpful. And then could you tell us what portion of your backlog I guess it would be the contingent backlog is reflective of these entrepreneurial centers.

It's certainly less than half of that contingent is reflective of what we call entrepreneurial. So more than half of it is the hospital based operational.

(OPERATOR INSTRUCTIONS). We'll go next to Peter Bye with Jefferies & Company.

Hey, thanks, guys, appreciate it. Just a couple questions, maybe -- there's obviously questions about orders and units shipped and quality of backlog over the last several quarters. So how long does it take, once a hospital starts construction to finish the site? And then how many people have placed orders are under construction today?

Well, let me give you a little bit of view about the -- kind of the time to install and such. We actually think it has expanded over the last year or so and let me kind of talk about this relative to -- and we track this based on the units that have been installed, et cetera.

So if you looked at it, say, in '06, it was closer to 11 months. In '07, that extended to about 12 months. And now it's actually closer to 18 months. And so while an average can be very dangerous here because every customer is different and it's bimodal, if not trimodal. But we look at the range right now of being between -- in terms of time to install -- 15 to 24 months.

Right. Okay. But do you know how many hospitals, how many sites are under construction today?

Well, we don't -- we actually don't disclose that, that much detail on a public basis.

We'll go next to Amit Hazan with Oppenheimer.

Can you hear me okay?

Hey, Amit.

I'll ask both of my questions at once and then take my answers offline, just in case we encounter technical difficulties. The first one would be just a very straightforward question. Looking historically over the last three years now, you've pretty much installed about the same number of units every year, roughly around 32 in '07, 31 in '08, net. You're expecting a huge jump in '09 to get to your guidance of installations.

I recognize you said maybe you think you might be over the hump with some of the economic issues, but in your strongest quarter, fiscal quarter, is your June quarter, you just put up six installations. I'm wondering what gives you the confidence that you can increase your installations beyond what we've seen in the last three years? That would be my first question.

My second question is on the new orders, we're getting to an ASP of course of about 4.1 million for those new orders. So my first question is why has the ASP gone down so much and also, in addition to that, isn't that going to negatively impact gross margins as that goes through the P&L? Thanks.

Sure. Well, I'll answer your second question first. Our ASP is between $3.5 million and $4 million. It really depends on again, whether it's a direct or whether it is through a distributor. And then your question regarding the growth or acceleration or increase in installations that we're looking for next year. Part of this year, just as we were coming into the fourth quarter, we did run into some issues that were not -- we didn't quite see and so had we been able to handle those properly or the -- we'd been able to make those installs, you would have seen an increase, first and foremost.

But secondly, and we touched on this on the call, is that we really are going after, accelerating those installs. We have this non-contingent backlog and those contracts are good contracts and we want to make sure that we are able to increase the number of installs next year. How do we do that? Well, we focus on it. So we have -- we know what those -- who those customers are. We know where they are in terms of construction, whether it's preconstruction, during construction. A lot of the issue has to do with the actual build-out and whether it's part of a single CyberKnife unit or part of a larger facility build-out.

That is a real challenge for us. But what we want to be able to do is expand our relationships. We have relationships with the clinicians at the hospital. We have relationships with the administrators in the hospital. Where we want to expand this relationship is to the facilities in the hospital. So that we can in fact accelerate those installations. And that is clearly one of our goals for next year.

We'll take a follow-up question from Eric Schneider of UBS.

Hi, just quickly. You were talking about the time to install lengthening and investing in accelerating that. How much is that investment costing? I mean, these are additional people that are out in the field trying to push this process through?

I would say yes, but it's marginal. We have the infrastructure. It's a matter of reassigning some existing resources. We might bring in some additional resources. While it will be a focused program, it's not going to be large enough that you'll really see it negatively affect the financials. In fact, if it's successful, you'll see it favorably affecting the financials.

And on the clinical side, is there any concern that the traditional radiation treatment market, particularly for prostate, is at risk with the recommendation to actually not screen in older patients now?

No, I don't think we're expecting any significant impact in the market from that.

Okay.

We'll take a follow-up from Peter Bye with Jefferies & Company.

Yes, hi, thanks. Just my second one, but just to follow-up on Eric's question. You talked about expanding international sales effort too and given new orders are outclipping the US orders here, where do you think that sales force should go or will go next year? I think we have you around in the mid-20s right now. I don't know if that's right or not. Maybe expand on that a little bit.

I'm not sure I understand your question. Are you talking about the --

Headcount.

Headcount.

Oh, yes.

Well, most of our international sales are managed through distributors. What we focus on there is distributor management. Really, if you look at the sales profile, we really virtually doubled the size of the sales force globally during '07 and '08. Much of that was investment in international management. I think we have most of the infrastructure inside Accuray we now need to manage a pretty large distribution network.

And what we're really focused on is identifying the correct distributors for us. And that can be somewhat of a challenge. This is a pretty unique technology, capital equipment for very specific oncology treatment. So we take some time to find those distributors and it tends to be an ongoing process of interview and review and that's really where we're focusing our efforts. It's just reaching out into the rest of the countries that we're not covering right now.

All right. Great. Thanks.

That does conclude our question-and-answer session. I would now like to turn the call back over to Dr. Euan Thomson for any additional or closing remarks.

Q4 fiscal 2008 was a solid quarter for new contracts. As a result of good sales momentum and very encouraging clinical data, we believe we're well positioned to increase our leadership position in the expanding radiosurgery market.

We continue to build evidence that CyberKnife is changing the cancer treatment paradigm and in many cases can replace surgery and/or radiation therapy.

During fiscal 2008, we weathered the majority of the effects of a rapid change in US market conditions while still producing revenue growth of 50%. Thank you for your time today. We look forward to talking to you on our next call.

Thank you, ladies and gentlemen. That does conclude our conference for today. You may now disconnect.