Accuray Inc (ARAY) 2009 Q2 法說會逐字稿

Good afternoon. My name is Angelea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Accuray Second Quarter Fiscal 2009 Financial Results Conference Call. (Operator Instructions) At this time, I would like to turn the call over to Mr. Rathjen, Vice President of Investor Relations. You may begin your conference, sir.

Hello, and thank you for joining us this afternoon for Accuray's Second Quarter Fiscal Year 2009 Conference Call. Joining us today are Dr. Euan Thomson, Accuray's President and Chief Executive Officer, and Derek Bertocci, Accuray's new 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 logon to 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 the 2008 fiscal year as updated from time to time by our quarterly reports on Form 10-Q and other filings with the SEC.

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

Thank you, Tom, and thanks to everyone for joining us on our fiscal second quarter 2009 conference call. I will start the call with a recap of some of the business highlights of the quarter. Next, I will comment on the current state of the market the CyberKnife. I will then discuss the workforce reduction that we announced today. And then, finally, I will provide a clinical update. I will then turn the call over to Derek, who will provide a detailed review of our financial results and outlook.

So, to begin with, I'd like to provide a review of the financial highlights from the second quarter. Total revenue for the quarter was $57.6 million, a 10.6% increase over the same period last year. Our services revenue was $13.9 million in the quarter, or 24% of total revenue, representing an increase of 56.2% over the same period last year.

We continue to see growth in this recurring revenue stream as very positive, since it represents steady, predictable revenue flow from long-term contracts.

Our net income for the quarter was $1.4 million, or $0.02 per diluted share. This includes a mark-to-market charge to other income of approximately $860,000 related to our negotiated agreement for repurchase of our auction-rate securities. Derek will give more details of this transaction.

During the second quarter, a total of 10 CyberKnife systems were installed, bringing the worldwide installed base to 155 systems. Six of these systems were installed in the United States, helping us reach and surpass the significant milestone of 100 U.S. CyberKnife systems. Internationally, there were four installations including two in Europe. There are also four additional shipments to distributors that we expect to be installed before the end of fiscal 2009.

Of the 10 systems installed, eight were accompanied by commitment to a service agreement, represented continued strong uptake of our high level service programs and giving us a good indication of further future growth of our recurring revenue streams.

We added nine new system orders of backlog in the second quarter, which together with some renewal of premium service contracts represents a total of $50.4 million. Two of the system orders were from the United States, and seven were from international markets. Four of these contracts went directly into noncontingent backlog, representing a value of approximately $20.2 million.

In Q2, the total addition of contract value to noncontingent backlog approximately equaled the revenue recognized from backlog and, as a result, noncontingent backlog remained relatively flat at $452 million. Derek will give a further analysis of backlog in a moment.

Now, I'd like to transition to a discussion of the markets of the CyberKnife. On a worldwide scale, our business has remained relatively strong despite the current economic pressures. Once again, we have had no cancellations from noncontingent backlog in the second quarter, and there has been minimal impact on installation schedules. So far, the only significant impact of the current economy has been during the second quarter we did see some new customers in the US delaying their decisions to commit to a CyberKnife.

This is definitely a United States effect and it did not apply to all U.S. customers. I should also point out that we're still in active discussions with all of these customers, and we strongly believe that they will eventually purchase a CyberKnife. We see the issue more as a matter of timing.

In international territories, although it's still early days, we're yet to see any significant impact of the economic downturn. Currency exchange rate fluctuations have had some impact on the profit margins of some of our international distributors, but the sales environment remains good, particularly in Europe, where we're expecting a strong growth phase.

Last week I was in Europe meeting with our direct sales force and distributors, and I left those meetings optimistic that our strategy is correct and the demand for CyberKnife is increasing. In Japan, we have signed eight purchase agreements since the CyberKnife received regulatory approval for the whole body treatment last June. We have now upgraded three sites in Japan to give them body treatment capability, and we expect them to begin treatment of tumors outside of the head and neck region soon.

We continue development of our international profile and since the beginning of the fiscal year 2009, have signed eight new distributor agreements in seven countries. Whether or not economic trends persist, we view our increasing international strength as a key element of our financial growth.

While the quality of our backlog continues to increase with 76% of our contracts being noncontingent, during the second quarter we did remove eight orders out of the contingent category. Our removal of these contingent orders was due either reduced confidence or to a customer cancellation. Of the eight contracts removed from contingent backlog, only one was cancelled as a result of the capital freeze. Two were cancelled as a result of failure to obtain certificates of need, and the others were removed from backlog as a result of our reduced confidence that the contracts would lead to a near-term [install]. It's now nearly a year since we had a cancellation for noncontingent backlog.

So, to summarize our current backlog performance, net of only one cancellation, we have added 57 contracts to noncontingent backlog over the past four quarters. Since we have seen so little -- seen little to no negative impact on installation schedules and our noncontingent backlog remains strong, we are today reconfirming our fiscal 2009 revenue guidance of $230 million to $250 million.

Further, in a proactive effort to contain costs and to accelerate enhanced profitability, Accuray announced today that it has eliminated approximately 60 positions, or approximately 13% of its US workforce. The decision was based upon a comprehensive management review with a focus on improving corporate efficiency and productivity. We expect this workforce reduction to result in approximately $9 million in annual cost savings, and in these times of global uncertainty, this focus on efficiency is of particular importance.

While this is not an easy decision, we believe that it is a prudent course of action and is in the best interest of our shareholders.

I'd like to take this opportunity to thank all of our employees for their hard work and assure our customers and investors that this will in no way impact the quality of our products, service or innovation.

Moving on to our clinical programs, there continues to be tremendous interest from the medical community in CyberKnife radiosurgery treatments. As a reminder, radiosurgery is distinct from radiation therapy in that while radiation therapy tends to be used as a supplement surgery, CyberKnife radiosurgery is intended to replace surgery. As a result, CyberKnife patients can benefit from a noninvasive tumor destruction process that avoids the need of general anesthesia and an open surgical procedure.

This concept was validated this year at Society of Thoracic Surgeons, or STS Meeting this week in San Francisco. The meeting provided tremendous interest and enthusiasm for comfortable lung radiosurgery. Recent publication of several clinical papers describing the benefits of CyberKnife accurate delivery of high-dose radiation to treat lung cancer have helped to raise the profile of the CyberKnife to this group of physicians.

Discussions led by leading thoracic surgeons, such as Dr. James Luketich, Chief of Thoracic Surgery at the University of Pittsburgh, described CyberKnife treatment outcomes and highlighted the importance of thoracic surgeons embracing stereotactic radiosurgery. They highlighted the benefits of CyberKnife can bring to a thoracic surgeon's practice to treat borderline and inoperable lung cancer patients.

The SDS University session included a teaching lecture delivered by Dr. Richard White of Stanford University for his thoracic surgery residents, imparting his expertise on CyberKnife radiosurgery and the essential role it will play in the future practice of thoracic surgeons.

Dr. Jack Roth, Chief of Thoracic Surgery at M.D. Anderson, and others, extended the potential of CyberKnife radiosurgery even further through several presentations discussing the recently launched M.D. Anderson randomized study of surgery versus CyberKnife radiosurgery. This study is poised to provide evidence that may revolutionize the way operable early-stage lung cancer is treated worldwide.

In the closing address to one of the general surgical sessions, the session moderator stated that more and more patients are asking for CyberKnife treatment and encouraged participants to get themselves involved.

So, in summary, there are clear indications that physicians and patients are increasingly seeing the impact and value of radiosurgery and specifically the CyberKnife in the treatment of lung cancer.

This growing clinical demand was validated in Q2 by our own treatment statistics. The number of patients treated in the United States during calendar year 2008 increased over 30%, when compared to the previous year. In the same period, there was a 43% increase in lung cancer patients treated worldwide with CyberKnife, a 54% increase in prostate patients treated, and 36% increase in liver patients. These statistics indicate a continued strengthening of the demand for comfortable radiosurgery to treat soft tissue tumors, a market that is being developed by Accuray's clinical programs.

I should also remind you that the CyberKnife remains the only dedicated whole body radiosurgery system on the market. It still remains the case that when a hospital has made a decision to embark on a dedicated radiosurgery program, they rarely, if ever, select a technology other than the CyberKnife.

Also on the subject of clinical growth, our Eighth Annual CyberKnife Users' Meeting is taking place next week in Florida, and we have more than 500 surgeons, radiation oncologists, physicists, radiation therapists and administrators registered to attend and learn how to further improve the full body radiosurgery program. This level of attendance is extremely positive and reflects the medical community's continued interest in building successful CyberKnife radiosurgery programs.

Finally, before I turn the call over to Derek, I want to give you an update on the treatment planning service we introduced in January of last year. As a reminder, this service provides our customers and potential customers with access to a dedicated team of remote scientists specializing in CyberKnife surgery treatment planning.

The benefit of this service is starting flexibility and enhance patient capacity of participating treatment centers. This can be especially attractive in an uncertain economy. I am pleased to report the pilot phase of this program, which was conducted with Georgetown University Hospital, was completed during the quarter, and that we have begun to more actively promote the program to our entire customer base.

Our customers have been pleased with the high quality treatment planning that we can provide, and our initial sales efforts have been promising. We have signed agreements with eight customer sites and, in addition, we have entered into a multi-site agreement with another customer. While we do not expect significant revenue from this service during the remainder of 2009, we do expect the service to begin to further enhance our recurring revenue stream in the mid to long term. I believe that we can finalize several more agreements by the end of the fiscal year.

With that, I'll now turn the call over to Derek for the financial review. Derek?

Thank you, Euan. This afternoon I will review our financial operating results for the second quarter of our fiscal 2009. As Euan mentioned, total revenue for our second quarter was $57.6 million, a 10.6% increase over the second quarter last year, and a 3.2% increase sequentially.

During the second quarter we entered into a settlement agreement with the distributor of our auction-rate securities that guarantees repayment of the securities at par value beginning June 30, 2010. As a result, we recorded a charge of $860,000, or $0.02 per share in Q2 to reflect the current fair market value of these securities and repurchase agreement.

Including these charges, Accuray generated net income of $1.4 million for the quarter, or $0.02 per diluted share compared to a net income of $2.3 million, or $0.04 per diluted share during the same period last year. Our strong performance this quarter was due to an increase in shipments and installations of new CyberKnife systems.

Taking a closer look at second quarter revenue, CyberKnife product sales generated $41.3 million. During the second quarter, 10 systems were installed which represents an increase over our average quarterly activity in the past. We anticipate that installations will continue to be above average through the end of fiscal 2009.

Services revenue was $13.9 million, or 24% of total revenue for the quarter. Our services revenue is generally derived from long-term maintenance agreements of four- or five-year terms, whose revenue is ratably recognized over the service term providing stability and predictability to our revenue stream as our installed base grows.

Fiscal second quarter 2009 services revenue represented an increase of 56% year-over-year, reinforcing the growing importance of this recurring revenue stream.

Shared ownership arrangements produced $900,000 of revenue during the second quarter, an anticipated decline from the same period last year. Exiting the second quarter, Accuray had a total of three shared ownership units. The year-over-year and sequential decline in shared ownership revenue was expected following the buyout and recognition of sales revenue on 12 shared ownership units in fiscal 2008. Other revenue for our second quarter was $1.5 million, which includes upgrades for units installed in Japan.

Prior to fiscal 2006, we sold 30 CyberKnife systems in the US under our Platinum program. All of the systems were installed by the end of fiscal 2007. As of the end of the second quarter of fiscal 2009, all required upgrades had been installed on 25 of the 30 systems sold under our legacy Platinum program. We estimate that most of the remaining deferred Platinum revenue will be recognized as revenue by the end of fiscal 2010.

Looking at installations, 10 CyberKnife systems were installed during the quarter, six in the US, and four internationally. Of the four international installations, two were in Europe, one in Japan, and one in Asia outside of Japan. This brought the worldwide CyberKnife installation base to 155 at the end of the second quarter. The geographical breakdown of our worldwide installed base at the end of the quarter was 101 in the Americas, 14 in Europe, 21 in Japan, and 19 in the rest of Asia.

When Accuray is responsible for installation of the CyberKnife system, we recognize revenue only after the installation is complete. In general, when our distributors are responsible for installation, Accuray recognizes revenue upon shipment to the end customer. It is therefore important to note that a period of time often lapses between shipment and installation of the CyberKnife unit in these arrangements.

During the second quarter, we recognized revenue on 13 units, including eight in the US, three in Europe, and two in Asia. Of the US revenue units, six were new system installations and two were associated with legacy Platinum accounts.

We added nine new system orders to backlog in the second quarter, which together with renewal of some service contracts, represented a total addition to backlog of $50.4 million. Two of the system orders were from the United States and seven were from international markets.

At the end of the second quarter, Accuray's total backlog was $598 million, compared to $644 million at the end of the first quarter of fiscal 2009. Noncontingent backlog of $452 million was up $1 million from $451 million at the end of the prior quarter, and represents 76% of our total backlog.

We added 10 orders to noncontingent backlog, four newly signed this quarter, and six from prior periods that cleared contingencies during this quarter. Noncontingent backlog represents orders that have no contingencies. Historically, we have experienced minimal cancellations of noncontingent orders, only one system in the past year. All other customer orders have one or more contingencies that may prevent the shipment of product.

We assess these contingencies to gauge the likelihood they will be cleared. Orders that we believe will probably be shipped and installed are included in contingent backlog. Orders with less certainty are not reported as part of backlog. The lack of precision inherent in evaluating these contingencies can and sometimes does result in orders initially being judged sufficiently likely to be included in contingent backlog, but later being removed.

Given this imprecision, we believe that reporting contingent backlog does not contribute to an accurate reflection of our order of backlog. Some investors have also made this point. Accordingly, beginning with the first quarter of fiscal 2010, we intend to report only noncontingent backlog, which historically has been a reliable indicator of our future system shipments and service activities. We will report contingent backlog only through the end of fiscal 2009.

Contingent backlog of $146 million was down $47 million from $193 million at the end of the prior quarter. Of the eight contracts removed from contingent backlog, only one was canceled as a result of a capital freeze. Two were canceled as a result of a failure to obtain certificates of need, and the others were removed from backlog as a result of our reduced confidence that the contracts would lead to a near-term installation.

Of our total backlog including noncontingent and contingent orders, $311 million is associated with contracts with CyberKnife systems, $249 million associated with long-term service agreements, and $38 million for shared ownership program contracts. Two charts reflecting our backlog have been placed on the Investor Relations page of the Accuray website.

Our gross margins for the fiscal second quarter was 51%, compared to 50.9% in the prior quarter. We anticipate that our gross margins for the balance of our fiscal year will be similar to our second quarter. Total operating expenses for the second quarter were $28.8 million, or 50% of revenue.

Our expenses are up from the second quarter of the prior year due principally to additional costs related to the inventory investigation and higher R&D spending. Our investment in research and development was $8.8 million, or 15.2% of total revenue, reflecting Accuray's ongoing commitment to this important area.

Expenses in Q2 were down from Q1 of fiscal 2009 due mainly to costs related to the ASTRA Show and $1.7 million of employee severance incurred in Q1.

During the second quarter of fiscal 2009, Accuray recorded a noncash stock-based compensation charge of $3.6 million. As a reminder, these noncash charges represent the fair value at the date of grant of stock options calculated using the Black-Scholes option pricing model and restricted stock both amortized to extend over their vesting periods.

During the second quarter, we reached a settlement which commits the financial institution holding our option rate securities to repurchase the securities at full par value beginning June 30, 2010. However, as a result of this agreement, we must now account for these securities as trading securities and recognize that current fair value, which resulted in a charge to other income loss in Q2 of approximately $860,000, or $0.02 per share.

The financial institution agreed to repurchase these securities at the full amount that we paid for them. Therefore, ultimately we anticipate incurring no cumulative gain or loss. Between now and the date of repurchase, we will continue to earn interest income on these securities, and we anticipate that the market value will gradually rise towards the par value of those securities.

Accuray is taking steps to enhance its ability to weather the potential impact of the current global economic downturn and to position itself for success in the long-term. The Company has eliminated approximately 60 positions in the US, representing approximately 13% of its US workforce. In addition, we will focus on improving processes and cross-company collaboration to improve the efficiency of our activities.

It is estimated that the future annualized savings in employment-related expenses will be $8.7 million per year as a result of these reductions. Due to severance pay and the timing of terminations, this action will not reduce expenses in our third fiscal quarter, and savings on our fourth fiscal quarter of 2009 will be limited. The full benefit of these savings will start in the first quarter of fiscal 2010. Most of the affected jobs are located at Accuray's Sunnyvale, California headquarters.

Reviewing Accuray's balance sheet, total cash and investments at the end of December 2008 was $154.7 million. This consists of cash and cash equivalents of $29.4 million, short-term investments of $80.2 million, long-term investments of $44.5 million, and restricted cash of $0.6 million. Deferred revenue was $98 million, with $69.5 million in current deferred revenues. At the end of the quarter, Accuray's total assets were $285.6 million, and the Company continues to have no debt.

The strength of our balance sheet provides us with the ability to pursue our business goals without the need to raise capital, an important distinction in a time of economic downturn.

On a personal note, I would like to say how pleased I am to be part of the Accuray management team. Although I have been onboard for less than a month, I am encouraged by the significant potential of Accuray and the tremendous opportunity we have to change the way cancer is treated.

Now, I'd like to turn the call back to Euan.

Thank you, Derek. The second quarter was highlighted by continued revenue growth, steady conversion of contingent to noncontingent backlog, and progress in accelerating installations. Our current services revenue is becoming an increasingly significant portion of our overall revenue and will be bolstered by a treatment planning service as more customers take advantage of this productivity-enhancing service.

Despite the current uncertainty in the economy, we believe that there remains robust clinical demand for the CyberKnife, and we're confident that we have crafted a prudent strategy to efficiently capitalize on this demand.

We would now be happy to answer your questions.

Operator, are you there?

(Operator Instructions) Our first question is from the line of Erik Schneider with UBS.

Hi. Good evening. I heard the number of legacy units, I think I heard two, but could you tell us how much revenue was associated with the product and service revenue of those two units?

The service revenue that came through that was over and above the service revenue for all legacy units, it's not just necessarily those two, was about $1.8 million during the quarter.

There was $1.8 million incremental?

Yes. That's the revenue that is above the revenue -- for service on legacy units, that $1.8 million represents the amount of revenue that is in excess of the service revenue over the full four-year service period for those agreements. In other words, the acceleration of revenue due to the accounting for these units.

Okay. And the product revenue?

$5.8 million, again, for all legacy units in the quarter.

And you noted the 60 positions were mostly from headquarters. Does that mean it's mostly SG&A or is that also R&D, and could it affect gross margin?

It does include all functions in the Company, so it will impact all areas, operations as well as gross margin.

Our next question is from the line of Junaid Husain with Soleil Securities.

Good afternoon, guys. Just an obligatory CapEx question for you, more focused internationally. Could you give us a sense for what's going on with your international customers? What's been the dynamics for securing financing for CyberKnife? Is it easy? Is it hard? And then how would you characterize international hospitals versus US hospitals in terms of enthusiasm for CyberKnife and then the ability to finance this box just given this capital spending environment we're in?

Yes, those are linked questions, I think. So, I think we've spoken about this before, fairly regularly. What tends to drive our international business is more the perceived clinical value of the product rather than the pure economics. I think for that reason we're seeing very strong growth internationally, and I think that's why it seems to have been so robust in these economic conditions. So, overall, I think we're very, very positive about our international business. It seems to be very strong, particularly, as I indicated previously, in Europe, where clinical value, I guess, is the biggest driver of anywhere in the world.

I think the nature of the customer there tends to be -- generically it tends to be larger hospitals and larger institutions. That's just the market is structured. Fewer freestanding centers and smaller centers. And I guess that may be also what makes it more -- a very robust environment.

Thanks, that's helpful. And then last question for Derek, just a housekeeping question. Could you remind me what portion of your marketable securities is levered to auction-rate securities, and would you expect similar charges going forward? Thanks.

Yes. The total value of those from a cost basis of approximately $22 million. As far as those assets, we would expect that there won't be a charge like this in future quarters. We would expect as the time closes to the date when we will be able to sell them back to the financial institution, that this charge that we recorded this quarter will gradually, actually be reversed. And once we get them repurchased by the bank, there will be no loss, and so we will have recouped this accounting entry right now.

Our next question is from the line of Tycho Peterson with JP Morgan.

Hi. This is Sung Ji sitting in for Tycho today. I just had a quick question, which is in terms of, could you comment on the average selling cycle for this CyberKnife in the current economic environment, if there have been any significant changes there?

I think internationally I would say that we haven't noticed any change in the selling cycle. Topically, and it's pretty small data samples that we have right now, we did see some customers that we expected to sort of sign purchase agreements during Q2 that just delayed their final decision. It wasn't that they decided not to buy a CyberKnife, it's just they really wanted to do one more round on their business case and their business plan before they signed up. So, as I indicated, we're still talking to those customers and we expect them to sign in the end.

I think overall, when you translate to the other side of the business, which is just as important or more important maybe, is the transition from a signed agreement into installation. We haven't seen any significant delays there at all anywhere in the world. So, the installation schedule that we've put together, I would say we haven't really had impacted by the change in economic environment. So, I think once people have made the decision and they've got their -- they've got everything in a row, then it doesn't seem that we're experiencing any delays.

Great. Thank you.

Our next question is from the line of Mark Arnold with Piper Jaffray.

Yes. The noncontingent backlog was flat, but the distribution between systems and services changed a little bit, and maybe you mentioned this in the prepared remarks and I just missed it. But can you comment on what's driving that? Did you shift a couple of systems into shared ownership, and do you see that kind of trend continuing?

There was a slight increase in the amount of service backlog, and a slight decrease in the amount of system backlog in the noncontingent. That was the main reason for the shift that you're talking about, and there was a slight increase in the amount of shared ownership backlog.

Okay, but what would cause that shift? Is it just selling more upgrades in services and taking a couple more out of the CyberKnife product, a couple of orders out of there, or did those orders actually shift to the shared ownership? How do we think about that distribution?

The shared ownership is a matter of just looking at what -- it's a relatively minor thing. As far as the CyberKnife, it was reflecting shipments of orders, plus new orders coming in, and we had more service contracts that we also signed in terms of follow-on agreements for existing customers.

Derek, correct me if I'm wrong, but we didn't have any shift to shared ownership, as far as I'm aware. No customers who were planning to buy shifted to shared ownership.

No. No.

I don't think that was a feature.

Our next question is from the line of Amit Hazan with Oppenheimer

Hi. This is actually Angela [Woodall] calling on Amit's behalf. My question is actually -- I'm going to go back to the guidance and just ask you, you mentioned that you've done some checks and you haven't seen any delays in your install schedule. And I'm just wondering if you could help us gain a little bit of confidence in that and just kind of tell us how frequently do you do these checks, how many customers have you talked to? Just make us a little bit more secure in your guidance for the year?

Sure. Since the beginning of this year I think we've definitely accelerated investing in our points of contact with prospective customers to give ourselves that sense of security, too. So, we now have a team of people who have multiple points of contact inside each customer, each hospital.

So, we'll be talking to the original physicians, we'll be talking to the CEO of the hospital, we'll be talking to the facilities group who may be organizing and coordinating the installation itself, the physical installation. So, we have multiple points of contact now with each of the hospitals. And each one of them inside our planned installation schedule has had that level of contact.

So, we feel fairly secure, as much as we can. The unknowns, of course, are shipments in -- sorry, slippage in installation schedules, which can occur for a number of reasons. The uncertainty always comes from the fact that each one of these units carries a high dollar value in itself. So, it can change with one or two units being moved around as a result of unforeseen circumstances, but in terms of our own points of contact and our due diligence, I think we have -- we've certainly accelerated that and invested in that during this year.

Great. Thank you. And on gross margin, you've had some fluctuation obviously in the gross margin, particularly for your product sales and your services. And I'm just wondering, you said that your gross margin of 51% is a little bit lower than it has been in the past couple of quarters, and you expect it to remain around the same level for the rest of '09. Can you just talk a little bit about what's going on within the gross margin line and how we should think about that going forward? Thank you.

Hi, Angela, this is Derek. The factors that are affecting the gross margin are the mix of products between direct and indirect. In other words, if we're going to sell the product we're selling through distribution. The other factor that affects our margin is service, and service is gradually growing as a component of our revenue. The service business has a lower margin than the sale of product. The combination of those factors yields our outlook on the gross margin.

Our next question is from the line of Peter Bye of Jefferies & Company.

Hey, guys, thanks. Appreciate you taking the question. Just a couple, I guess. First is just to follow-up on sort of the time horizon there. So, the 10 systems that were installed, what was the average length of the contract from when it was signed? Do you have that?

We don't have details of that. I can tell you this, that it's a big spread, as there always is. And it becomes, as we work on our process of minimizing the time between contract signing and installation, what we're seeing are success stories very often that we're bringing in installations based on contracts that were signed some time ago. So, we ourselves really assessing what best metric to use for that success. Sometimes it can be that the contracts have been there for some time, and we've been successful in sort of shaking them out of that phase and getting them installed. Other times, our success just comes from a very short installation time.

I would say my perception of it right now is there hasn't been a particular shift, and there is still a fairly wide spread. But we'll certainly try and keep track of that. We are trying to keep track of that for our own benefit, and as we gain more sort of insight into exactly how to value that, we'll pass it on to you.

All right, great. And I'm not sure if I heard you correctly, but I think you said you haven't lost any orders in the contingent -- in the noncontingent backlog.

There is one in the past 12 months (inaudible) --

Okay.

-- last February or so. So, it seems to be a very robust measure. The measure we're using for noncontingent contracts appears to be very robust, which is why we're feeling that much confidence in it.

And our last question is from the line of Larry Haimovitch with HMTC.

Good afternoon. During your prepared remarks you touched a little bit on some of the areas which were showing strong procedure growth. Could you give us a little more color on some of the -- maybe a couple of the areas you are particularly excited about, where you see some real uptake in the market, and where you see this particular procedure might become a very significant, very important procedure to drive future unit installations?

Yes, thanks, Larry. So, I think we're still seeing strong and steady growth in the intracranial and generally in the CNS procedures, and spine a little bit less so than intracranial. And that's still, as we always have done, seeing that as sort of the base market, the one we started with. The one with the longest experience, clinical validation, and one where people understand it most from a referral pattern point of view.

I think that the ones we're most excited about going forward are the ones that I called out in the scripted portion. I think lung is increasingly becoming known, lung radiosurgery, particularly -- almost exclusively with the CyberKnife is becoming known in the thoracic surgery world. And it was a great conference for us this last week, with a lot of specific calling out of the CyberKnife itself. And they almost have a call to action from some of the participants for thoracic surgeons to pay attention to the CyberKnife, because it would definitely have an impact on their practice, which we think is a very good sign. And that coupled with the strong growth in our own treatment numbers gives us a very good feeling about that one.

I think prostate still remains not a critical part probably at the sales process, but it's still the fast growing application. And I think inside the CyberKnife world amongst people who have experience with the CyberKnife, I think, when they see its application in other areas, that gives them the confidence to move ahead possibly faster than people who don't have any experience of the CyberKnife.

So, that's kind of a -- it's a little bit of a mixed bag, as far as prostate is concerned right now. But we're seeing very, very strong growth, as I indicated, and I think for the future, of course, that has to be one of the biggest, if not the biggest potential application.

Okay, and a quick follow-up --

Yes, go ahead.

-- to that question is do you see correlation between the growth of procedures and installations? You've got several that are growing very, very nicely. I would assume that over time that does drive new installations or even second installations at some hospitals. Is that a fair proxy that as procedures grow, we should see that driving placements as well, Euan?

Yes. I think particularly where you see growth which is faster than growth in the installation base, because that indicates changing of the market and growth in the overall procedure demand. So, we've seen, for example, CNS treatment, brain treatments, in particular, tend to track pretty much with the install base. And that doesn't indicate a change in the dynamic of the market and necessarily a future change in the potential demand for the CyberKnife. But I think where you see such strong growth, particularly lung, liver and prostate, those are all really growing faster than the rate of installation, which indicates a growing clinical demand. And, of course, we believe and expect that will translate into increased CyberKnife demand.

There are no further questions at this time. Presenters, do you have any closing remarks?

Yes, thank you. For the second quarter was highlighted by continued revenue growth, steady conversion of contingent and noncontingent backlog, and progress in accelerating installations. Our current services revenue is becoming an increasingly significant portion of our overall revenue. Despite the current uncertainty in the economy, we believe that there remains robust clinical demand for the CyberKnife and we're confident that we've crafted a prudent strategy to efficiently capitalize on this demand.

So, thank you for your time today. We look forward to talking to you on our next call.

This concludes today's conference call. You may now disconnect.