Accuray Inc (ARAY) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter Accuray earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Tom Rathjen, Vice President of Investor Relations. Please proceed, sir.

Thank you, Jeremy. Hello, and thank you for joining us this afternoon for Accuray's conference call as we review the fourth quarter of fiscal year 2011. Joining us today is Dr. Euan Thomson, Accuray's President and Chief Executive Officer and Derek Bertocci, Accuray's Senior Vice President and Chief Financial Officer. As we have done in past quarters, we will again be referring to backlog data which are found on PDF files in the Investor Relations page of the Accuray website. 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, but are not limited to, statements relating to revenue guidance, the TomoTherapy integration, installations, backlog, gross margins, operating expenses, profitability, clinical acceptance and regulatory approvals. These and other risks are more fully described in the Risk Factors section of our annual report on Form 10-K, as updated from time to time by our quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. And now I'd like to turn the call over to our President and Chief Executive Officer, Dr. Euan Thomson. Euan?

Thank you, Tom. Thanks, everyone, for joining us for our fourth quarter and fiscal 2011 year-end conference call. This is the first quarterly call we've had since the acquisition of TomoTherapy Incorporated. The release of our fourth quarter results has taken longer than normal due to the complexity of accounting for the TomoTherapy acquisition. Although this 1-time process required considerable time, it was important that we gave it appropriate attention to detail. There's much to discuss and update you on regarding our industry changing acquisition but the main message is that our Company is well-positioned to meet the expectations of our shareholders and our customers and to fulfill our mission of developing personalized treatment solutions that help cancer patients live longer, better lives.

This afternoon I'll discuss the sales of CyberKnife and TomoTherapy systems and the global sales environment, the competitive positioning of our Company, provide insight into our plan to improve the reliability of the TomoTherapy system, outline Accuray's planned path to sustained profitability, provide guidance for fiscal 2012 and present a list of milestones that will help you track our progress. Then I'll turn the call over to Derek Bertocci who will give you a detailed financial review.

Today I'm pleased to announce a strong fourth quarter of orders and backlog expansion for both systems. During the fourth quarter, we had 19 CyberKnife system orders with 1 cancellation, adding a net of 18 orders to backlog under Accuray's backlog criteria. In addition, 17 TomoTherapy systems were placed into backlog under TomoTherapy's historical backlog criteria. During the fourth quarter, 15 CyberKnife systems were installed and 10 were shipped. There were 9 TomoTherapy systems installed and 10 shipped in the quarter.

For the full year of fiscal 2011, Accuray added 58 CyberKnife systems into backlog, received 6 cancellations and shipped 35 units globally. This positive book-to-bill ratio is a key indicator of future growth. The core CyberKnife business showed considerable strength and was profitable in the fourth quarter, though the Company incurred a loss resulting from the TomoTherapy related losses and the costs associated with the acquisition.

Reviewing each region in turn, the Americas sales region continues to see a growing pipeline of viable customers. Of the 19 CyberKnife system orders in the fourth quarter, 8 were from the Americas in addition to 8 of the 15 installations. During the quarter, 4 of the 17 TomoTherapy system orders were from the Americas region. Although funds are available in (inaudible) the United States, some hospitals remain cautious in committing resources due to ongoing economic uncertainty.

The Europe, India, Middle East and Africa, or EMEA, region remains particularly strong for Accuray with the team reporting generally solid sales trends. 7 of the 19 new CyberKnife system orders came from the EMEA region including 2 multisystem deals. 4 TomoTherapy system orders were received. In Japan, 2 CyberKnife system orders were placed by customers during the fourth quarter.

The Asia-Pacific region continued to show strength in the quarter with 2 new CyberKnife orders coming from China, a market of obvious potential for Accuray. 9 TomoTherapy system orders were obtained from the APAC region. Expanding clinical data continues to be a primary driver for [procedure] growth in CyberKnife sales. Clinical outcome studies reinforce the efficacy of full body radiosurgery, encouraging changes in clinical practice and referral patterns.

As an example, with maturing data on CyberKnife treatment for prostate cancer, there was a 24% year-over-year worldwide increase in CyberKnife prostate treatments in the fourth quarter. The TomoTherapy system offers a revolutionary well-differentiated technology purposely designed for image guided intensity modulated radiation therapy. Unlike traditional C-arm gantry-based radiation therapy machines, the TomoTherapy system integrates seamless daily CT imaging into the treatment process allowing clinicians to see and easily adjust patient position prior to each therapeutic treatment.

Daily imaging is inherently more accurate than the weekly imaging that is more common on traditional radiation therapy devices. In addition, the TomoTherapy system uniquely couples high speed, high definition beam modulation technology with the versatility of helical or fixed-angle delivery. Small or large field, complex or simple shapes, multi-focal or single tumors are all easily accommodated. The benefit of this unique combination of imaging and therapeutic delivery technology lies in the quality of individualized patient treatments.

It's difficult to improve upon the words of a guest patient speaker who recently addressed our now expanded Accuray team when he said -- it's not only about saving a life, but it's also about saving the quality of life. And that's what the TomoTherapy system did for me several years ago and continues to do for me today.

Given the growth of radiosurgery procedures, other companies whose products are focused on traditional radiation therapy are now positioning their systems as having similar capability to that of the CyberKnife. But the CyberKnife, with its revolutionary design, is the only dedicated full body radiosurgery system and is clearly the brand name in the fast growing radiosurgery market. The CyberKnife system is free from the architectural constraints in the traditional gantry-based systems enabling it to deliver radiation from hundreds of angles all around the patient. And the CyberKnife is unique in its ability to track and automatically correct for tumor or patient movement throughout treatment. This results in a high level of accuracy that is particularly important when treating tumors that are near critical or sensitive structures.

The acquisition of TomoTherapy brings together 2 complementary leading edge technologies to create what we believe is the premier radiation oncology Company, accelerating Accuray's growth strategy. The transaction brings together different delivery options designed to treat complementary patient populations at the same hospital and by the same medical specialty, radiation oncology. The result is a larger, stronger organization, with an increased scale and scope and a significantly enhanced global presence. Our intention is to continue to invest in R&D plus sales and marketing of both product lines, as well as continuing with our theme of investing in clinical evidence to back up the value of our technology innovations.

A key element to our successful integration is to improve the reliability and serviceability of the TomoTherapy system. Before the announced acquisition, TomoTherapy Incorporated had embarked upon a program called FastTrack, designed to focus reliability initiatives on those sites and systems generating the most service cost. Accuray has continued with and adding to FastTrack and I can report that it is having its intended effect. Most of the reliability issues associated with the TomoTherapy system have involved the design of the Radio Frequency or RF chain within the linear accelerator. In addition to the programs already in place, Accuray engineers are identifying further improvements to the RF chain and working towards solutions that can be incorporated into new and existing TomoTherapy systems. These improvements are expected to reduce the number of service calls and parts required, resulting in lower service costs and ultimately improving service gross margin.

1 example of such an improvement is the Twin Peak facility in China which is producing a new generation of linear accelerators for the TomoTherapy system that is more reliable and more easily serviced. Accuray is working on strategies to ramp up the production capacity in China. I can report that as of Q1 in fiscal 2012, all new TomoTherapy systems shipped incorporate this new design of linear accelerator which we expect to improve the performance in comparison with older units.

To further enhance the profitability of the service business, cross-training of our field service engineering team is progressing well. Accuray customers are already benefiting from the geographical overlap of the increased service presence and we'll start to benefit from the geographic overlap of systems as new installations of both CyberKnife and TomoTherapy platforms take place. In a further move to improve the profitability of service on the TomoTherapy platform, we recently announced a new service program that builds on Accuray's reputation as an industry leader in customer support. We've extended our high level service program, known as Emerald Service, to TomoTherapy customers. Emerald Service offers a guarantee of up-time on each machine and as such, is saleable at an industry standard price. By improving service gross margins and continuing to grow our installed base, our goal is to return Accuray to sustained profitability as quickly as possible. The road map is clear as we transition the Company through the integration process.

Fiscal 2012 is expected to still generate a loss as costs associated with integration are realized and investments are made in future profitability and accelerated R&D. However, to balance this investment, cost synergies will be recognized and efficiency measures will be put into place. We expect to return to profitability during our fiscal year 2013 which ends in July 2012. Derek will provide further details of our guidance, but for fiscal 2012 we expect Accuray's revenue to be in the range of $400 million to $415 million.

With the acquisition of TomoTherapy Incorporated, Accuray is now an execution story. We should be measured by our performance and the success of our integration efforts. As such we encourage our investors to track our progress as we move the Company forward to sustained profitability. To help you to measure our progress, we will report on certain milestones on a quarterly basis. These are the metrics that we suggest you track.

Firstly, improvement in TomoTherapy system reliability. The indicator of progress will be an improvement in our overall service gross margin. Our expectation is that we will achieve a positive gross margin in the first half of fiscal 2012 and a 10% service gross margin by the end of fiscal 2012. During fiscal 2013, we anticipate further improvement in service gross margin, and before we exit the year we expect to have reached 20% or greater.

Secondly, revenue maintenance or moderate growth when compared with Accuray and TomoTherapy Incorporated performance in previous years, while we integrate our service and installation teams and learn more about the installation times for the TomoTherapy system. During this time we also expect to maintain a book-to-bill ratio greater than 1, which is a strong indicator of future growth. This maintenance or moderate revenue growth is reflected in our revenue guidance of $400 million to $415 million.

Thirdly, an improvement in profitability as cost synergies are realized. The indicators will be improving service gross margins and a decrease in operating expenses as a percentage of revenue. Our long-term goal is for operating expenses to be approximately 40% of total revenue, with mid-40s being achieved by fiscal 2013. We encourage you to monitor our progress on these metrics that we feel are key to our success and return to sustained profitability. We commit to update you on a regular basis.

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

Thank you, Euan. Today I will provide a review of Accuray's financial performance for the fourth quarter, an update on backlog, outline the rationale for our recent debt offering and present guidance for fiscal 2012. The results we have reported for the 3 months and fiscal year ended June 30, 2011 include the results of operations of TomoTherapy from the close of our acquisition of TomoTherapy on June 10, 2011 through the end of our fiscal year on June 30, 2011. All amounts will be GAAP results unless specifically identified as non-GAAP results.

Total revenue for the fourth quarter of fiscal 2011 was $75.2 million, which included $64.1 million from CyberKnife products and services and $11.1 million from TomoTherapy products and services. TomoTherapy results of operations were included only for the 20-day period from June 10 to June 30, 2011. Accuray's revenue of $64.1 million is a 4% increase compared to the fourth quarter of 2010 and sets a new record for quarterly revenue.

Excluding revenue previously deferred for systems sold with legacy Platinum Service agreements, Accuray's revenue for the fourth quarter was $64.0 million, up 10% from $58.2 million in the fourth quarter of the prior year. I'm very pleased to report that aside from an immaterial amount of residual service revenue, the fourth quarter marked the end of recognizing deferred revenue from customers with Platinum Service agreements.

Our gross profit margin in the fourth quarter was 42.8% compared to 50.3% in the same quarter of the prior year. The gross profit margin on CyberKnife products and service revenue in the fourth quarter was 51.5%, an improvement of 1.6 percentage points from the third quarter and 1.2 percentage points from the fourth quarter of the prior year. Our newest CyberKnife, the VSI model, began to account for the majority of our product shipments in the first quarter of fiscal 2011. This model's additional features and capabilities enable VSI systems to garner a higher average price than earlier models, which is the main driver of the increases noted above in gross profit margins generated on CyberKnife revenue.

The gross margin on TomoTherapy product and service revenue was negative 6.9% for the 20 days included in our consolidated fourth quarter results, which caused the decline in our overall gross profit margin.

Consolidated operating expense for Accuray in the fourth quarter were $57.5 million, which included $20.3 million of acquisition-related expenses. The consolidated result was a net loss attributable to stockholders of $25 million, or a loss of $0.40 per share for the fourth quarter, compared to net income of $5 million or $0.08 per diluted share for the fourth quarter of the prior year.

The acquisition of TomoTherapy generated significant 1-time charges and accounting changes related to the revaluation of assets and liabilities and creation of amortizing intangible assets. We believe that the impacts of these items are not indicative of the ongoing results of operations of Accuray. Therefore, we have provided non-GAAP financial information in our press release to assist investors in their analysis of our results.

As described more fully in our press release on fourth quarter results, revenues from TomoTherapy products and services for the fourth quarter of fiscal 2011 were reduced $2.9 million by acquisition accounting adjustments. Cost of revenues was increased $2.1 million by acquisition accounting adjustments and expenses. Excluding the impact of these items, non-GAAP revenue was $78.1 million and non-GAAP cost of revenues was $40.9 million, which yields a non-GAAP gross profit margin of 47.7%.

Operating expenses included a total of $20.8 million for 1-time charges and acquisition accounting adjustments, $15 million of which was for severance compensation and accelerated vesting of stock-based compensation from employees that were terminated, $2.4 million for fees to investment bankers, and $2.9 million for integration planning, legal and accounting expenses. Excluding the impact of the above items, non-GAAP net income to stockholders was $0.4 million during the fourth quarter, comprised of $1.3 million of profit from CyberKnife activity, and a loss of $0.9 million from TomoTherapy operations.

On a GAAP basis for the full fiscal year, Accuray's consolidated total revenue was $222.3 million and consolidated net loss to stockholders was $26.7 million or $0.44 per share. Again, the loss was driven primarily by costs associated with the TomoTherapy acquisition and integration.

During the fourth quarter, 19 new orders for CyberKnife systems were added to backlog in accordance with Accuray backlog criteria and 1 order was cancelled for a net of 18 orders to backlog. During the fourth quarter, TomoTherapy placed 17 orders into backlog based upon the criteria that TomoTherapy has historically used to evaluate orders, and 3 orders were cancelled for a net of 14 orders to backlog.

During the fourth quarter, Accuray recognized product revenues on 11 new sales of CyberKnife systems. Product revenue was recognized on 11 new sales of TomoTherapy systems during the 3 months ended June 30, 2011, 4 of which were shipped after the close of the acquisition of TomoTherapy by Accuray. Comparing the net dollar value of orders received to revenue recognized, our 4-quarter rolling book-to-bill ratio for CyberKnife systems was 1.3 as of the end of the fourth quarter of fiscal 2011.

Our backlog of CyberKnife system orders at June 30, 2011 was $190.2 million, up 29% from 1 year ago. Charts reflecting our backlog have been placed on the Investor Relations page of the Accuray website.

Prior to the acquisition, Accuray and TomoTherapy followed different procedures to determine when to record an order as entered in backlog. In addition, Accuray reported backlog for orders for products as well as orders for service while TomoTherapy reported backlog only for orders for products. Through June 30, 2011, we have followed the procedures used by each Company prior to the close of the acquisition in determining orders to be added and removed from backlog.

Beginning July 1, 2011, we intend to harmonize backlog reporting as follows. New orders for CyberKnife and TomoTherapy products entering backlog must comply with the objective criteria used by Accuray to evaluate when an order qualifies to enter backlog. Backlog will be reported only for product orders. This is consistent with the approach followed by other companies in the industry. In addition, we believe that service order backlog does not provide information useful in forecasting our potential revenue as it represents orders covering a wide range of terms.

TomoTherapy backlog existing as of June 30, 2011 will be carried forward, less reductions for 3 types of items -- $9.3 million related to customer training and service coverage during the warranty period that will be recognized as service revenue; $5 million related to deferred revenue that was written down as part of purchase accounting adjustments and $13.5 million of product orders that have been in TomoTherapy backlog for more than two-and-a-half years.

CyberKnife product order backlog will be reduced by $9 million for the portion of the product orders related to customer training and system installation. This portion of product orders will ultimately be recorded as service revenue, not product revenue. As of June 30, 2011, CyberKnife backlog was $453.9 million and TomoTherapy backlog was $135.1 million. Net of the adjustments described previously, as of July 1, 2011, backlog for CyberKnife products is $181.2 million and backlog for TomoTherapy products is $107.3 million. This represents $288.5 million of total product backlog for Accuray as of July 1, 2011. The time between a product order entering backlog and generating revenue after shipment can vary considerably but is generally between 6 months and 24 months.

Accuray consolidated revenue during the fourth quarter included $0.2 million of revenue previously deferred for systems sold with Platinum Service agreements, all for service. Fourth quarter revenue also included $11.1 million of revenue for TomoTherapy products and services, $4.8 million from products, $6.1 million from service, and $0.2 million for other revenue. For the full fiscal year 2011, consolidated revenue included $3.3 million of revenue previously deferred for systems sold with Platinum Service agreements; $1.9 million of this for products and $1.4 million of this for service.

Excluding revenue previously deferred for systems sold with Platinum Service agreements, CyberKnife product revenue increased 7% and 1% in the fourth quarter and full year of fiscal 2011, respectively, over the comparable periods of fiscal 2010, and CyberKnife service revenue increased 10% and 8% in the comparable periods, respectively.

During the fourth quarter, operating expenses totaled $57.5 million, an increase of $32.5 million from the fourth quarter of the prior year. The increase in operating expenses was driven by $20.8 million of 1-time costs associated with the acquisition of TomoTherapy, $5 million of operating costs incurred by TomoTherapy from June 10 to June 30, 2011, $2.1 million of sales and marketing previously forecast to support growth of the CyberKnife, $2.6 million on R&D previously forecast to support development of new CyberKnife technologies, and $2.4 million higher G&A expense.

As of June 30, 2011, Accuray's cash and cash equivalent balance was $99.1 million. As previously announced, last month Accuray issued $100 million in 3.75% convertible notes to support the long-term growth of the Company by enabling the Company to pursue opportunities to augment our product portfolio, should they present themselves, and to ensure customers are confident in the financial strength of the Company.

We believe that we have opportunities to further enhance the lead role of the CyberKnife in radiosurgery through continued investment in R&D. We also believe that we have opportunities to increase global awareness of the benefits of treating cancer patients with CyberKnife radiosurgery through clinical studies and focused marketing efforts. In addition, our R&D team will be working on improvements to the TomoTherapy system, initially to increase its reliability and improve serviceability. We anticipate that this effort will help reduce the cost, servicing TomoTherapy systems and is a key to generating gross profits from servicing TomoTherapy systems. In addition, our R&D team will be working to advance the technology in the TomoTherapy systems to improve performance and ease of use for customers.

We believe that progress towards these goals will be critical to maximizing the long-term growth in revenue and profitability of Accuray for our shareholders. Accordingly, we plan to maintain spending in these areas as previously discussed.

On June 10, 2011, we announced the close of the TomoTherapy acquisition. We had identified 3 elements that we believe are the keys to making this a successful acquisition from a financial standpoint for Accuray shareholders. Improvement in TomoTherapy systems reliability is the first 1. This indicator of progress will be an improvement in our overall service gross margin. Our expectation is that we will achieve a positive gross margin in the first half of fiscal 2011, and a 10% service gross margin by the end of fiscal 2012. During fiscal 2013, we anticipate further improvement in service gross margin and before we exit the year we expect it to have reached 20% or greater.

Revenue maintenance for moderate growth when compared to Accuray and TomoTherapy Incorporated performance in prior years while we integrate our service and installation teams and learn more about the installation times for the TomoTherapy system. During this time we also expect to maintain a book-to-bill ratio of greater than 1 which is a strong indicator of future growth. This maintenance or moderate revenue growth is reflected in our revenue guidance of $400 million to $415 million. An improvement in profitability as cost synergies are realized.

The indicators will be improving service gross margins and a decrease in operating expenses as a percentage of revenue. Our long-term goal is for operating expenses to be approximately 40% of total revenue with mid-40s being achieved by fiscal 2013. We encourage you to monitor our progress on these metrics that we feel are key to our success and the return to sustained profitability. We commit to update you on a regular basis.

By maintaining profitable new system revenue, making service activity profitable, and reducing operating costs from organizational synergies, we expect the TomoTherapy product line will begin to contribute profits to Accuray in our fiscal year 2013, with increased profitability in the following fiscal years.

Looking at fiscal 2012, we expect this to be a unique year as we attend to the integration of TomoTherapy. This process will not happen overnight but we are confident that this process will be successful, placing Accuray in a better position to achieve increased revenue and profitability for our shareholders.

As we have indicated previously, we expect to generate losses in fiscal 2012 as we address TomoTherapy service issues and complete the integration of the 2 companies. Our goal and expectation is for the combined business to turn profitable in the latter part of fiscal 2013.

For the full fiscal 2012, we expect revenue to be in the range of $400 million to $415 million. For the first quarter ended September 30, 2011, we expect revenue to be in the range of $80 million to $85 million.

For fiscal 2012, we expect our overall gross profit margin on a GAAP basis to be approximately 25% in the first quarter, improving to approximately 35% in the fourth quarter as we make progress improving TomoTherapy service margins. As we announced at the end of the acquisition, we expect to bring TomoTherapy's service margin past break-even by the end of fiscal 2013.

Cost of product revenues will include approximately $14.5 million of charges for amortization of intangible assets related to the acquisition of TomoTherapy. Excluding these charges, non-GAAP gross profit margin is expected to be approximately 3 to 4 percentage points higher each quarter. For the first quarter of fiscal 2011, we expect operating expenses to be approximately $50 million. Now I'd like to turn the call back to Euan.

Thank you, Derek. With that, we'll now be happy to take your questions.

(Operator Instructions) Our first question comes from Tycho Peterson with JPMorgan. Please proceed.

Hi, good afternoon. Maybe just with regards to the integration, if you could talk a little bit about where you stand with the sales force, how we should be thinking about cross-selling, some of the other things beyond improving the service component of the business, that would be helpful.

Sure, that's a good question. So we now have an integrated structure. We saw ourselves through the end of last -- the end of Q4 before we made any structural changes to the organization, and we introduced the new structure soon after the beginning of this Q1. Well received by the sales force, well received by our customers.

We focused on maintaining existing relationships with customers through prior product relationships, even if we've moved individuals around to optimize the effectiveness of the total sales force. And for a while there will be some overlap there.

As far as cross-selling activities are concerned, we have already found that the strengthened relationship for 1 product is impactful on a customer's willingness to consider the other product, and that has been one of the initial focuses for the combined sales force, so generally good feedback from the field. Also I think a recognition from the customers, from customers generally that we now represent a significantly larger organization than we did before, very much not the single product, small player in the field, but now a Company with a -- more of a global presence and an extended range of products.

Can you just touch on the cancellations, you noted 3 for Tomo during the quarter. Was that in line with what you've been anticipating, and how do you manage the risk of cancellations? And maybe just touch on the competitive dynamics as you go through this integration as well.

As you know, Tycho, there are -- in this business, we do have cancellations periodically. There was nothing particularly unusual about the cancellations that occurred at TomoTherapy, and they have -- if you look back over time, there have not been a significant number of cancellations by the TomoTherapy product line. Just as with the CyberKnife product line, periodically there are a small number of cancellations.

There was nothing related to the acquisition. There was no, I would say, impact from any of those sites from the acquisition. They were unrelated factors.

Okay. Couple other quick ones. Can you just touch on the payer dynamics; have you seen any change? We saw Blue Cross-Blue Shield in Massachusetts come out with a decision a while ago. Anything that is shifting in terms of getting additional pushback from either the private -- or mainly from the private payers?

Nothing radically new. No major changes to report, I think, from the last status update that we gave. General progress, I think, on accepting prostate reimbursement as you can see by the increase in the numbers of prostate cancer patients treated. So that's a trend that just continues, backed by clinical evidence, clinical confidence and also payer acceptance.

Okay. And then last one -- the debt deal, is that to keep powder dry for additional acquisitions? I mean, it seems like you've raised a little bit more than you need here. Can you just talk to your appetite to do additional, presumably smaller deals going forward?

As I mentioned, there are 2 items that we were looking at. One, to have resources, should an opportunity arise. We don't have anything in particular that we're looking at that's significant right now, but should something arise that would be -- we would want to be positioned for that. And then secondly, just wanted to make sure that we had the level of financial support as the Company has grown larger to ensure that customers are confident of our financial staying power when they're contemplating buying a long-term piece of capital equipment.

Okay. Thank you.

Thanks, Tycho.

And our next question comes from Anthony Petrone from Jefferies. Please proceed.

Gentlemen, one on the breakdown in product and service across both of the businesses. I notice that you consolidated those numbers. I'm wondering if you could break out the product and service margin specifically on the Tomo side of the business?

The product and service margins were both impacted heavily by the accounting adjustments, so they were both slightly negative in the range of 5% to 10% for the quarter. That is on the separate TomoTherapy service business -- product line.

And service, again, so service specifically was -- service margins specifically to Tomo in the quarter was --?

The results were, as I said, impacted by the purchase accounting transactions.

Okay.

They were both negative. If we think in terms of what they would normally be, the service margin, at least in the prior quarter for TomoTherapy service business was around 30%, and the profitability on the sale of equipment was in the close to 50% range. This would probably be more representative of what their ongoing results were for the fourth quarter.

That's very helpful. And in terms of, just if we go back when the deal was initially announced, the Company was targeting $25 million in aggregate cost synergies through FY 2013. I'm wondering if that number still holds with the guidance you've given here today?

Yes, we're still working towards that $25 million number. There has been no changes or adjustments in our expectations there. And just to remind you, they were identified as being, to a large part, driven by reduction in G&A expenses, and reduction in the cost of some duplicated marketing activities such as (inaudible) trade shows, as well as certain other expenses.

Just want to spend a minute on Tomo service business. In terms of FastTrack, you mentioned that it's still ongoing. I'm wondering if Tomo specifically is still relying on third parties to execute some of its service offerings, and where the Company is in terms of addressing that issue, if they're going to move away from third parties? And then secondly, has Accuray attempted to renegotiate service contracts with the existing Tomo installed base?

I don't want to go too close into the commercial areas, so I'll keep it fairly high level, if that's okay with you?

Sure.

Generally, yes, we're aware of those third party service relationships, some of them work extremely well. Others of them, I think, there are probably better ways for us to optimize, and for all parties, including our customers and in some cases even the people delivering the service today. So we're really going through it pretty systematically, country by country. It is a focus for us. It is one of the areas we expect to be able to generate some increased profitability from.

And with that in mind, going to your second question, I think we've definitely started to look at service offerings too amongst existing customers, and really trying to work out how we can provide them with the best possible service and the best possible value for money. We, as you know, I think, have a very good reputation in this area. Accuray has an excellent service record -- very, very strong in terms of providing high reliability on our machines and our equipment, as well as delivering service efficiently and in the best interests of our customers. And we've already put together offerings such as our Emerald contract with the TomoTherapy product line in mind, and we're in the process of rolling that out to our customers now with, I would say, some initial quite positive responses.

Anthony, this is Derek. I just wanted to mention 1 thing. In the earlier question, you asked about service margins. I had said that the service margin was 30%. I wanted just to clarify. I meant that that is negative 30%, in case I was not clear on that.

No, that's helpful. Thank you.

And the final 2 from me, just on legacy relationships, both on the Tomo and Accuray side, just wondering on the Tomo side -- if the Amerinet GPO contract continues uninterrupted, and then on the Accuray side of the business, just want to clarify the 8-K that was out in early August regarding the Siemens relationship. Thanks very much.

So, we would rather not comment specifically on specific contracts and relationships. We can talk a little bit about the Siemens relationship. So, we are still in sort of ongoing discussions with Siemens. Things have progressed or are progressing somewhat on the sales side with some moderate progress in terms of individual accounts and distribution agreements. I think as we've disclosed before, the R&D relationship was changed during last fiscal year. The product relationships were rediscussed, and we're feeling that they're less likely to make a significant contribution now going forward.

Thanks again.

Our next question comes from Drew Jones with Stephens. Please proceed.

Hi, guys. Thanks. I guess, first, just on the guidance -- can we get a little more color between how that's split between the 2 technologies?

Well, we're thinking, Drew, in terms of, as we run the Company, the way we look at the Company is actually in terms of selling products and then generating service over the long run. So, we look at these not as 2 product lines, but rather the sale of products and the generating of service business. In terms of the 2 products, there will be quarters where there is -- it's up and down movement across the 2 products, but we're looking at it as 1 combined holistic business.

Okay. So I guess, any sort of ideas in terms of the split between products and services for next year?

Sure. So, services has generally been approximately one-third of our business, and we would expect that it will be in that range next year. The service business grows as we continue to sell equipment because each 1 generally represents a sale of a new system to a new customer.

Okay. Just thinking about Europe and macro situations there, can you talk a little bit about what you're seeing in the geographies where you guys have historically been strongest, and how those have held up recently?

I think when we look at the 2 individual product lines, I think the impression, I think, probably everybody has from following us is that we've been particularly successful with the CyberKnife in the EMEA region. TomoTherapy was also successful selling the TomoTherapy system in the EMEA region, but we've been especially strong with the CyberKnife. And in the Asia-Pacific region, I'd say TomoTherapy were particularly strong as demonstrated in fact by last quarter's new orders.

Putting the 2 things together, really means that we can capitalize on the best distribution channels in each case, capitalize on existing customer relationships where we're selling direct. And those trends and those strengths of those regions we would hope would extend now to the other product lines, and we can really build ourselves up in all regions across all products.

Can you break out the countries where you're strongest?

That would take a little time, but I can say that throughout Europe we've been having increasing success in France, following an evaluation of each technology, in fact, and a central government decision that they consider them to be a valuable clinical -- make a valuable clinical contribution. We've had increasing success in the UK, and that's actually matched by TomoTherapy's success with the TomoTherapy product line. So both CyberKnife and TomoTherapy have been accelerating in terms of adoption in the United Kingdom.

Germany is obviously 1 of the major markets in Europe, and it's strong for both product lines. Italy has been strong; Turkey has been strong. We have growing markets in eastern Europe. I would say they've accelerated faster for the CyberKnife than they did for the TomoTherapy system, and there's some opportunities there for us to leverage that expansion. We've expanded CyberKnife activities into Latin America; it's been strong for us lately with -- over recent years.

And in the Asia-Pacific region, China is obviously a market that everybody pays attention to. Japan, we are -- we have a direct sales force and a direct organization for the CyberKnife product line, and the TomoTherapy line is being sold for us by Hitachi. So we have fairly extensive and diverse distribution channels for the 2 products. I think that probably covers the major markets.

Okay. And then last one, just as far as ASTRO is concerned, is there anything we should pay specific attention to?

There will be more on that actually at ASTRO itself. So we're not actually giving any preview of ASTRO today.

Okay. Thanks, guys.

Thank you.

Thank you.

At this time, there are no questions queued. And I would like to hand it back to Euan.

Thank you. Thank you for joining us on this afternoon's call. I want to take a moment to acknowledge Accuray employees globally for their hard work and dedication during the integration process and beyond, and we look forward to speaking with you on our next call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.