Accuray Inc (ARAY) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Accuray Inc. earnings conference call. My name is Kiana and I will be your coordinator today. At this time all participants are in a listen-only mode and we will accept your questions at the end of this conference. (Operator Instructions). As a reminder today's call is being recorded.

I would now like to turn the call over to Mr. Thomas Rathjen, Vice President of Investor Relations. Please proceed.

Thank you, Kiana. Hello and thank you to all of you for joining us this afternoon. We would like to apologize for some technical difficulties that created this delay in getting this call started. Joining us this afternoon on our fiscal year 2012 first quarter call will be 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 be referring to financial data which will be found in PDF files on the Investor Relations page of the Accuray website.

Before we begin, I need to remind 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, our sales pipeline, insulations, 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 on our quarterly reports on form 10-Q and other filings with the Securities & Exchange Commission. Now I would like to turn the call over to our President and Chief Executive Officer, Dr. Euan Thomson. Euan.

Thank you, Tom. Thanks to everyone for joining us today for Accuray's first quarter fiscal year 2012 conference call. Today marks our first full quarter of reporting since the acquisition of TomoTherapy, Inc. which closed on June 10, 2011. I am pleased to report that the integration process is proceeding well. Our core business is strong and growing and our company is on track to return to profitability on schedule.

As we previously forecast, the quarter was characterized by improvements in revenue, gross margins, and operating expense on a non-GAAP basis compared to the aggregate of the two companies in the prior year quarter. This afternoon I will report on the milestone that is we announced last quarter as key to our success in integrating TomoTherapy and returning Accuray to sustained profitability.

I will then discuss the global sales environment for our technologies, update you on procedure growth, comment on the recent Astro meeting, and review Medicare's payment rates for calendar year 2012. I will then turn the call over to Derek who will give you a detailed financial review.

For the next several quarters we will provide both GAAP and non-GAAP numbers so that you can compare the two easily. When Derek talks later he will refer to both measures. But for the sake of clarity I will refer only to non-GAAP numbers since they give you a clear picture of Accuray's ongoing core operations.

Last quarter we laid out three milestones to help you track our progress through integration and to return to profitability. The first milestone that we gave you was to maintain or modestly grow revenue. As a Company with significant opportunity to gain market share, it is important for us to avoid losing focus on sales as we integrate the two companies.

I am pleased to announce today a stronger than expected first quarter of revenue growth. As revenue increased to $95.7 million compared to $81.7 million of combined revenue from Accuray and TomoTherapy for the quarter one year ago. This higher than expected growth puts us in a good position to achieve our revenue guidance of $400 to $415 million for the year.

The second milestone is to create a profitable service business. The scale of our install base now gives us the opportunity to make the service business a significant and stable part of our revenues. We also need it to enhance rather than detract from our overall profitability.

You will recall that our goal was to reach a positive consolidated service gross margin in the first half of the current fiscal year with a 10% service gross margin by the end of the current fiscal 2012 followed by 20% or greater service gross margin by the end of fiscal 2013.

Our first quarter performance puts us ahead of where we expected to be. Service gross margin was approximately 12%. I will talk in a few minutes in more detail about service gross margin and the reliability of the TomoTherapy system.

Our third and final milestone is a return to profitability during the second half of fiscal 2013. Besides improving service gross margin we aim to reduce operating expenses to approximately 45% of revenue by the end of fiscal 2013 with a longer term goal of reducing operating expenses to approximately 40% of revenue.

In the first quarter we held operating expenses to 46.7% of total revenue. This enabled us to report a net loss attributable to stockholders for the fiscal first quarter of $11.0 million or $0.16 per share which is better than expected.

Having reviewed financial results and integration milestones, let me now turn to an overview of current market conditions. The America sales region continues to see significant customer interest in both CyberKnife and TomoTherapy technologies with increasing opportunities across selling.

While there is a growing pipeline of potential Accuray customers the US hospital market remains generally cautious driven largely by continued economic uncertainty. The Europe, India, Middle East and Africa or the EMEA region remains particularly strong for both Accuray systems.

The major factors in the purchase decision of radiation oncology units, especially in Europe, are clinical capabilities and product differentiation along with supporting clinical data and quality of treatment. This bodes favorably for CyberKnife and TomoTherapy systems with differentiated state of the art technologies purposely designed for advanced radio surgery and radiation therapy producing superior treatment options.

Momentum continued in the Asia Pacific region. TomoTherapy systems were installed in five countries including China. This builds on an already strong install base. The Japan region continues to produce new orders as the demand for extra cranial radial surgery procedures expands the market for CyberKnife systems.

During the quarter Accuray added $39.2 million of new system orders to backlog which fits our usual pattern for Q1 orders. It is also important to note that the quarter's new system orders were impacted by a difference in the criteria that the two legacy companies applied for entry into backlog.

Some of our TomoTherapy distributor agreements do not yet require distributors to place deposits. In keeping with Accuray's criteria, orders placed in Q1 without deposits were not included in backlog. Derek will provide further financial and backlog details in a few minutes.

Let me add some color to this picture from our recent personal experience. Since the acquisition closed I have traveled to each of our regions and met with many of our customers. I am encouraged by what I am hearing in these meetings and from similar encounters with many clinicians at our industry's major trade show Astro.

Two points are worth mentioning to you at this stage. First, is that the cross-selling opportunity which I drew to your attention while we were in the process of acquiring TomoTherapy is real. The profile of a purchaser of either of our state of the art platforms is similar. A customer who is interested in treatment solution that conform themselves most precisely to each patient whether it be image guided intensity modulated radiation therapy or full body radial surgery. As our integrated sales force gained experience following cross training, we expect to begin to harvest these obvious opportunities.

Second, my listening tour has given me a richer understanding of how customers use the competitive advantages of our two systems. Our new chief commercial officer, Kelly Londy, has completed a similar tour in her first month and our combined learnings will help us better differentiate each system as well as positioning the two side by side to compete most effectively in the market place.

Meanwhile, growth for CyberKnife procedures continues to be strong. As you know, prostrate cancer treatment is a major segment in radiation oncology. During the first three quarters of this calendar year there have been a 23% worldwide increase in CyberKnife prostate procedures.

Over the same period both lung and liver CyberKnife procedures experienced double digit growth with liver cancer treatments up 48%. We report from time to time on CyberKnife procedure growth because it is an indicator of how fast we're expanding the radial surgery market.

The intensity modulated radiation therapy market is of course better established so our focus there is to increase awareness of the advantages of the TomoTherapy system. It integrates seamless daily CT imaging into the treatment process allowing clinicians to see and easily adjust patient position before each therapeutic treatment. This is unique. No other system routinely images every patient, every treatment, every day.

It is not hard to imagine the benefits of knowing exactly where the target is on a daily basis. We'll work to translate this obvious benefit into future orders.

Let me say a few words now about the investments that we're making to improve the reliability of the TomoTherapy system. In general our focus on investments and improving the reliability of TomoTherapy systems is yielding encouraging results. We have seen a 20% to 30% reduction in warranty costs in the past twelve months indicating a significant improvement in reliability of the newer systems. In fact, both newer systems and older systems are now showing a reduction in spare parts utilization and service labor with new systems leading the way.

This gives us confidence that the Company is on track to meet the service gross margin milestone that is key to our return to profitability. One example of our pending investments in this area is the RF optimization initiative. We plan to retrospectively fit improvements to multiple elements of the Radio Frequency chain.

These new features will make each system more efficient and more able to deliver consistent performance. Customers will see improvement in reliability and performance. Over the next three quarters we will invest in retrofitting more than 200 installed systems with an RF chain improvement package at a total cost of between $1 and $1.5 million to Accuray.

Today every TomoTherapy system shipped has these upgraded elements. The expected pay back period from these investments is less than 12 months and we therefore view this as a good investment both for us and our customers. We expect this and other measures we're taking to cause a temporary decrease in service gross margins in Q2 and Q3 that these investments support the goal of 10% or greater in Q4.

Early October gave Accuray the opportunity to show our integrated offering for the first time at Astro. As Accuray is the largest marketing and sales event of the year, our booth was busy throughout the three day conference with non-stop product demonstrations and customer meetings. Our sales team saw significant interest from existing and prospective customers with a strong number of sales leads generated.

During the meeting new products were introduced for both CyberKnife and TomoTherapy systems. Among the products introduced was an advanced version of our long optimised treatment software system that enabled fiducial free treatments for any lung tumor procedure on the CyberKnife. More than 90 abstracts addressing the use of our technologies were presented as part of the scientific program.

Finally, a few words on the changes in Medicare payment rates that will go into effect on January 1st , 2012, which were announced last week by CMS. In the hospital setting the final payment rates for CyberKnife robotic radio surgery treatments were better than CMS's earlier proposal with the 2012 rates, versus 2011, showing a fractional increase in the total per patient payment rate.

The comparable code for radial surgery performed using a gantry based hybrid system was cut by nearly 8%. As a result, the relative advantage that CyberKnife has over gantry based systems has widened. Meanwhile, intensity modulated radiation therapy or IMRT performed by TomoTherapy systems in a hospital setting, will receive a modest increase with a main delivery code gaining 4.5%.

As expected, the payment for IMRT in a freestanding setting will decline by 8.6% which will bring total payments for IMRT in this environment into close realignment with payments of the same procedure in a hospital setting.

Before I turn the call over to Derek for financial review, let me summarize my view of the past quarter. Revenues were stronger than expected. Our progress on service and overall gross margin is better than expected, and our customer base has validated the potential advantages of selling both systems.

In short, we are on track to achieve the revenue and profitability targets that we laid out following the close of the acquisition. Now, over to

Thank you, Euan. Today I will be reviewing our non-GAAP results. If I refer to GAAP results, I will specifically state so. We believe our non-GAAP results reflect the activity that is most representative of our ongoing core business. In addition, non-GAAP results are used by our Board of Directors to evaluate the performance of the management team.

In our press release announcing the results for our quarter ended September 30, 2011, we provide details of the adjustments between GAAP and non-GAAP results. For comparative purposes, in the press release we also provide pro forma results for the quarter ended September 30, 2010, which represent the combined total of the results reported separately at that time by Accuray and TomoTherapy as stand alone companies.

To arrive at non-GAAP results, we have adjusted the GAAP results to remove the impact of purchase accounting entries related to the acquisition of TomoTherapy that increased or decreased revenues or expenses from the amounts that would have been reported in the acquisition had not occurred.

We have also adjusted the GAAP results to remove the costs of TomoTherapy integration activities such as employee retention and severance compensation and the conversion of TomoTherapy processes and procedures to Accuray's ERP system. We expect to complete integration activities during fiscal 2012.

The quarter ended September 30, 2011, is the first full quarter during which our financial statements include revenues and expenses for both CyberKnife and TomoTherapy products and services. When I compare Accuray's total revenues and expenses for this quarter to results achieved in prior periods, I will be comparing to the combined total of the results recorded by Accuray and TomoTherapy as separate companies in the same period of the prior year.

Results of operations for Q1 were ahead of our expectations and ahead of the combined total of the results reported by Accuray and TomoTherapy as separate companies in the same period of the prior year. These results demonstrate the progress we are making towards the goals we identified when we first announced our agreement to acquire TomoTherapy.

Revenues in the first quarter of fiscal 2012 increased 17% from the combined total of the revenues recorded by Accuray and TomoTherapy as separate companies in the same quarter of the prior year. Product revenues generated growth of 14% due to an increase in systems shipped and installed.

Because of our dependence on customer schedules, system shipments and installations are challenging the forecast with precision. During the quarter slightly more systems completed shipment in installation than earlier forecast.

Service revenues generated growth of 22% due to a number of factors. The most significant was the growth we forecast in the installed base of systems being serviced. In addition, we experienced higher than forecast payments from cash basis customers, spare parts sales to distributors, and utilization of training services.

The gross profit margin in the first quarter fiscal 2012 rose to 36.4% from 30.9% calculated from the combined total revenues and costs of revenues recorded by Accuray and TomoTherapy as separate companies in the same quarter of the prior year.

The products gross margin of 52.2% in the first quarter this year was unchanged from the comparable quarter of last year indicating that our overall product revenues and costs remained in good balance. The services gross profit margin of 12.1% in the first quarter of this year was much improved from the negative 1.8% gross margin in the comparable quarter of the prior year.

The improvement was due to a number of factors. As I mentioned, service revenue was higher than forecast which contributed to the improved margin. As we forecast our install base systems under service coverage has grown which increased service revenue and improved the efficiency of service labor and support costs.

Finally, we saw continued reduction in service material costs per system for both products. The reduction in TomoTherapy service material costs per system reflected the benefit of numerous programs under which we retrofit systems in the field with new components which improved the reliability of these existing systems and reduced service costs.

These programs also improved the reliability of newly produced systems. As Euan described we intend to undertake additional initiatives in the future to further improve system reliability which will also drive down service costs.

Operating expenses showed an overall decline of $2.3 and the combined total of the operating expenses reported by Accuray and TomoTherapy as separate companies in the same quarter of the prior year. We expanded our investment in R&D by $4 million in the prior year quarter to develop new technology related to both our CyberKnife and TomoTherapy products.

We believe these R&D investments will be instrumental in helping us grow revenue and profit from systems sales and service in the future. We reduced expenses incurred for sales, marketing, and G&A combined by $6.3 million from the prior year quarter which reflects the progress we are making in realizing operating expense synergies and the combination of the two companies.

The improvements that I have described enabled Accuray to lower the net cost to shareholders to $11 million from $16.6 million combined total of the net losses to shareholders reported by Accuray and TomoTherapy as separate companies in the same period of the prior year.

These results demonstrate the progress we are making towards the goals we identified when we first announced our agreement to acquire TomoTherapy. From a bookings standpoint this quarter was the first during which we applied our backlog criteria to orders for TomoTherapy systems as well as CyberKnife systems.

Current agreements with some distributors at TomoTherapy systems do not yet require that deposits be paid with orders. New orders received from these distributors that are not accompanied by deposits were not included as an order booked in the quarter.

These orders will be included in backlog in the future and our backlog criteria are met. As we noted in the past, beginning July 1, 2011, we are reporting backlog for systems orders only. Net new systems orders out of the backlog during the quarter totaled $39.2 million.

Our orders are typically lowest during the summer quarter ended September 30. Backlog decline 6% during the quarter.

During our first quarter we used approximately $52 million of cash ending the quarter with approximately $143 million of cash including restricted cash.

The use of cash was caused principally by the loss from operations, a reduction in accounts payable from an unusually high level to a more normal level, payment of various accrued liabilities including severance compensation, annual bonus, and refund of over payments from distributors customers.

We anticipate that future cash flows will be influenced mainly by operating profits or losses, non-cash expenses, and capital expenditures. We continue to forecast that revenue will be in the range of 400 to $415 million for fiscal 2012 on a non-GAAP basis.

We expect revenue to increase gradually across the remaining quarters of fiscal 2012. For GAAP reporting purposes we expect that 9 million of revenue related to purchase accounting adjustments will be recognized in fiscal 2012 bringing GAAP revenue to the range of $409 to $424 million for fiscal 2012.

We expect that our non-GAAP service gross profit margin will be lower next quarter since we do not anticipate some of the unexpected revenue increases to recur. We plan to incur significantly higher costs over the next two quarters on programs to upgrade systems in the field to improve reliability and reduce service costs in fiscal 2013 and beyond.

These costs will put downward pressure on our service gross profit margin during the next two quarters as compared to the first quarter but should help us achieve our target service gross profit margin of 10% by the end of fiscal 2012 and 20% or greater by the end of fiscal 2013.

We continue to believe that Accuray will achieve profitibility on a non-GAAP basis during the latter part of fiscal 2013. Now I would like to turn the call back to Euan.

Thank you, Derek. As we discussed, revenues are stronger than expected. Our progress on service and overall gross margin is better than expected, and our customer base has validated the potential advantages of selling both systems. In short, we are on track to achieve the revenue and profitability targets that he we laid out following the close of the acquisition. With that we'll now be happy to take your questions.

(Operator Instructions). Our first question is from Anthony Petrone with Jeffries. Please proceed.

Thanks, gentlemen and congratulations. (inaudible)

Anthony, can you speak up a little bit we're having difficulty hearing you.

Is that better? Does that work?

Much better.

Okay. Apologies. Just to elaborate, congratulations on the quarter. I want to begin with service revenue and service margin. First, on the revenue side, can you elaborate a little bit more on the surprise in the quarter, specifically was the service revenue related more to Accuray or was it related more to TomoTherapy accounts actually adopting either the diamond or Emerald programs and then on the Accuray side was it new CyberKnife VSI accounts taking up additional service offerings that you have? Just a little bit more color there would be helpful. Thanks.

We did have on the products, on the service side, of course a continuation of CyberKnife customers adopting both Diamond and our Emerald service agreements. As far as the TomoTherapy products, the new service offerings were only recently rolled out, so they have not affected the September quarter yet.

The increases in revenues as I indicated earlier, Anthony, were principally as a result of the increase in the install base which is something that we had forecast. We did also have some additional revenue came in through higher than expected revenue for service part sales, training, and so those are things that were coming in above what we forecast for the quarter. The basic cause for the increase in service revenue was due to the ongoing growth in the install base of the system.

So the diamond and Emerald programs for TomoTherapy were really only Astro. So we're in the middle of customer discussions from those but as Derek said they haven't impacted financials yet.

Okay. Just on system orders that you mentioned last quarter from backlog that dropped out Tomo Systems that dropped out of backlog last quarter and this quarter, can you elaborate a little bit more on the quantity of orders that actually fell out and more so if any of the orders that fell out last quarter actually impacted performance this quarter?

None of the orders that came out of backlog last quarter were part of bookings this quarter. As far as the amount, it was a relatively small amount. I don't remember the exact number, but in the 5 to 10 million range if my recollection is correct, of orders that were taken out of backlog as of July 1st. So it was not a significant amount related to backlog of Tomo System were removed.

Final two for me and I will hop in. Last quarter, Derek, you segregated actually Accuray and Tomo revenues. I am assuming as we go forward that will certainly not be the case, but I am just wondering the second quarter out here if you do have a little bit of color specifically related to CyberKnife sales and Tomo sales in the quarter?

I think that during the quarter what we did indicate that our revenue was higher than we expected partially due to more shipments and installations going through, and that was principally in the TomoTherapy product line.

Okay. And then, Euan, last one for me. Total aggregate cash balance at the end of the quarter. You coming off the raise and it seems there was an additional at least desire to have more cash on the balance sheet going into the deal. How do you feel about the cash balance and what should we be expecting from cash uses over the next several quarters? Thanks a lot.

Let me jump in there on Euan's behalf. This is Derek. I think the cash balance we did have some unusual items that occurred in the quarter in terms of payments related to the acquisition, severance costs, and also the accounts payable was unusually high at the end of June. All of those were drains on cash during the quarter.

Going forward the cash balance is something that as we indicated earlier when we raised the cash it was designed to provide us the resources to make sure that customers first and foremost were confident of the company as a company supplying long-term capital equipment. And then secondly, to put us in a position should we find an opportunity for some technology that was something we wanted to look at. Those all things still stand and I think in terms of looking forward in the long run as we turn the Company profitable, that is the important element in terms of turning the Company cash flow positive.

Our next question comes from the line of Steve Bushaw with Morgan Stanley. Please proceed.

Hello, everyone. Can you hear me?

Yes, we can.

Good afternoon. First question, on the guidance. So the 400 to 415 non-GAAP revenue guidance, this is unchanged from what we heard in September. If you don't take that up, and it looks like out performance in the quarter was something on the order of 10 to 15 million, at least relative to our expectations. Is it fair to characterize some of these phenomena that we're seeing driving the performance in this quarter as a pull forward and if so, can you, Derek, I apologize for making you walk through this again, but walk through the dollar amounts on that delta?

Sure. Let me try to give you some answers to your questions. As far as this quarter and our guidance, we indicated that the revenue was higher than we had forecast significantly because we had some additional shipments that occurred this quarter. And those, as you know, our business is a business of large capital items with a relatively small number of them being shipped in any quarter. And the ability to precisely forecast when a customer will be ready to take a shipment and installation is not perfect, and so this is an example of a quarter when our forecast was a little bit less than what customers ultimately were able to handle in terms of shipments and installation.

So I think it is just a good example of the fact that on any one quarter our results are not as easy to predict. So that really represents a move forward from the standpoint of product revenue. In terms of the service revenue, as I indicated, the biggest reason for the increase from last year, and it is really simply an increase from what was the actual result in the first quarter of last year, was the continued growth in the install base which we had forecast.

So while there was a relatively smaller amount of some above forecast amounts for things like revenue from cash basis customers, training revenue, and service parts to distributors, the bigger piece was from the just simply the growth in the install base which we had forecast. It is more of a case of a revenues that we either forecast or came forward from the latter parts of the year rather than simply that we created a new upward level.

Okay. Thanks, Derek. Question on the order number, the $39 million of system orders. Can you give us a comparable figure for the year ago period?

One of the challenges is that the backlog criteria were different for the TomoTherapy product line one year ago. So it is difficult for us to give a like for like comparison. This quarter as we indicated in the earlier comments, there were some orders that we received from distributors that did not carry deposit, and as such we are not able to put those into backlog. A year ago quarter of course would have included those orders into backlog. But I think what I can say about new orders was it was pretty much in line with our expectations and Q1 is inherently a little bit light, but our going forward we still stand by our positive book-to-bill ratio for the year that we mentioned in the last earnings call.

Any granularity on the units behind that figure? I am sorry, the number of systems.

As you would expect, it was a mixture of orders both product lines, so we have two companies that have relatively similar levels of product revenues and ultimate in the long run, at least in the next year, we're expecting to see a relatively similar level of orders and revenues across the two product lines.

It will be variability from quarter to quarter but that's one of the advantages of having two products that with more units and two product lines the inherent difficulty in projecting a company's revenue that has one product with small numbers gets a little bit easier with two products and slightly higher numbers.

Thanks, Derek. Just one clarification, Euan. Your comments around the US hospital purchasing environment were cautious. This is a bit more cautious than what we hear, maybe substantially more cautious than what we hear, from Varian and Elekta. Can you help us understand why we're getting a different tone from you?

No. I would actually dispute that. I don't think we're seeing anything different from what I've heard at least from our competitive systems. I think that we're probably pretty much if we said it differently, than I would correct that now. I think that we're certainly seeing a lot of interest in the products. I think people are generally cautious about how they spend their money, not that they don't necessarily have access to capital, they have increasing access to capital, certainly beyond one and-a-half years ago, but I think people are just naturally cautious in making investments. Definitely overall similar messages to those I have been hearing from other people.

Okay. Great. Thanks, everyone.

(Operator Instructions). Our next question comes from the line of Tycho Peterson. Please proceed.

Good afternoon. First question, on service. You talked about the optimization initiatives, the RF optimization initiatives, and that will depress margins for the next couple of quarters. Can you talk to what that entails from a customer perspective? How long does the system have to be down and I guess you will work through the entire install base over the course of this year. Is that the right way to think about it?

Yes. It is a relatively simple upgrade from a customer perspective, probably down for about one to two days. But we think pretty impacting.

And Euan in your comments you mentioned cross-selling a few times. Can you talk now that the merger has been closed for some time? Are you placing CyberKnife systems with Tomo customers or vice versa? Where are you actually seeing the cross-selling and to what degree?

We'll try and give more color on this as we get actual orders in. There is a relatively long time span between customer interest and actually receiving a signed PO with a deposit. I saw myself as I indicated in my comments. I spent a lot of time with customers since we closed the acquisition in all regions. And in many of those discussions, discussions around cross-selling activities were initiated or accelerated. So very good first hand feedback on the value of presenting a company with compatible products as we indicated. Similar interests between the two products, that of personalizing the treatment, increased accuracy, addressing radiation oncology markets from the high end with sophisticated products involving a combination of imaging and sophisticated level of dose delivery. And all of those factors really do gel with the marketplace.

Okay. And as we think about on display at Astro, obviously a lot more of this is on software with the personalized lung and spine packages. Can you talk about how we should think about those rolling out and is there an idea you can lift the margins as you place more of an emphasis on software going forward?

Yes, so I think you can generally think about the same pattern for the CyberKnife upgrades as you have seen in the past. These products released through our Diamond programs as well as some cash orders for those customers that don't have upgrades, but the initial and most rapid roll out would certainly be through our Diamond program. I think for the TomoTherapy products one change to the historic business model would be that these upgrades offer us an opportunity to demonstrate the value of being on high level service programs like Diamond. So, they're somewhat valuable in their own rights. But they're also valuable in terms of demonstrating to a new range of customers that the service offerings that we have historically released upgrades through actually have value to their product line as well. I think success for those upgrades on the TomoTherapy side will come through as sales of upgrades but also as up take of our high level service programs.

Okay. And then your comments on reimbursement were helpful. As we think about the dynamic with private payers and in the free standing market as well, obviously a little bit more exposure for Tomo there. Can you talk about what you're seeing in the field from Tomo sites that may have more exposure to the private payers?

I'll deal with the free standing since it's first. I think the free standing markets of both products in the past has not been as strong as the hospital market let's say in the US. I think that our gaining access to that market for the TomoTherapy product line really relies on acceptance of direct mode of treatment and so on.

I think that release of HD, and adoption of HD, and we some gave color on that through the quarter, is a very positive thing for validating the presence of TomoTherapy systems in a free standing environment. That's probably the biggest swing there.

I think the changes in reimbursement were somewhat anticipated and as I characterized them, they're more around at least in our opinion, leveling the playing field for free standing centers compared to hospitals.

I think in the private payer world we're not seeing massive changes or significant changes in the way things have been in the past and the CyberKnife is probably the biggest hurdle still dealing with those last few residual payers who sometimes challenge the payment for certain clinical applications such as prostate cancer. And really no other change in the dynamic for either product line I would say.

Okay. And then last one. Last quarter you broke out cancellations, and I assume that's captured in the net number. Are you able to say whether you had any cancellations this quarter?

I think characteristically low. I don't have the exact numbers, but it was not radical change from past history. No change in the market dynamic which I guess is really behind your question. I mean, no sort of competitive influence, no competitors stepping in and messing up our existing orders or customer relationships. It has really been I think very, very stable and those very small number of orders that have canceled over the past couple of quarters have really just been generally things to do with changing business models amongst the partners as we have characterized them in the past, no sort of competitive dynamic change.

Okay. Thank you.

We have no further questions in queue at this time. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.