Accuray Inc (ARAY) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter 2012 Accuray Incorporated earnings conference call. My name is Regina and I will be your conference operator for today. At this time all participants on the phone lines are in a listen-only mode. Later we will be conducting a question and answer session.

(Operator Instructions)

Today's event is being recorded for replay purposes. I would now like to turn the conference over to Mr. Tom Rathjen, Vice President of Investor Relations. Please go ahead sir.

Thank you Regina. Hello and thank you for joining our conference call this afternoon as we review Accuray's fourth quarter and fiscal year 2012. 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. Please note that today we will be referring to financial data which can be found in a summary slide deck on the investor relations page of the Accuray website at www.Accuray.com/investors.

Before we begin I need to remind you that our presentation includes forward-looking statements that involve risks and uncertainties. There are a number of factors that could cause actual risks and uncertainties to differ materially from our expectations, including risks related to our ability to achieve projected revenue, gross margin, and profitability targets, achieve our TomoTherapy integration goals, launch new technologies, and improve performance in the US through a realignment of our sales organization. These and other risks are more fully described in the press release we issued earlier this afternoon, on our Form 10-K for fiscal 2012, which will be filed shortly, and other filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.

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 today for Accuray's fourth-quarter and fiscal-year 2012 conference call. To help illustrate the main points discussed this afternoon, we have posted slides to the investor relations page of the Accuray website. This afternoon I'll review the progress in our strategic plans and provide an update on our outlook for fiscal 2013 and beyond. I will then turn the call over to Derek Bertocci who will provide a detailed financial review.

As we did in previous quarters we will provide GAAP and non-GAAP numbers. When Derek talks later he will refer to both measures, but for the sake of clarity I will refer only to the non-GAAP numbers, as they give you a clearer picture of Accuray's ongoing core operations.

Today our results show that we've achieved good progress in our strategic plan, although we know there is still work to do. Fiscal 2012 was the year of transition at Accuray as we integrated our acquisition of TomoTherapy. It represented the first year of our multiyear strategy and execution story. The first phase of our strategy centered on integrating the two Companies, with a strong focus on solving the reliability issues surrounding the TomoTherapy system. I'm pleased to report that we have now engineered solutions to TomoTherapy system's reliability issues with upgraded technology that we are in the process of rolling out to the field.

The second phase of our strategy is to drive system orders and revenue growth through a major technology release that we will unveil at the ASTRO tradeshow next month. This aspect of the plan we were not able to announce until today for commercial reasons. But I'll talk more about it in a few minutes. The final phase will be to accelerate earnings growth. But I'll concentrate today on the first two phases since they represent the year we just concluded and the period we are now entering.

Let me first provide a review of the fourth quarter and full fiscal year 2012. During the fourth quarter total revenue was $101.1 million. 15 units were installed and 23 units shipped. Total revenue for the fiscal 2012 was essentially unchanged from prior year when factoring nonrecurring Platinum revenue and the difference in TomoTherapy product revenue accounting. This met our goal of maintaining revenue in the year in which we integrated two salesforces.

For the full year of fiscal 2012 we placed 99 system orders into backlog and we shipped 92. The number of new orders increased for both product lines internationally, offset by a decline in US orders for both products. There was a net worldwide increase in orders for TomoTherapy systems over the prior year, and a year-on-year decline in CyberKnife orders, but I'm glad to report that Q4 was a strong quarter in CyberKnife orders. We believe this is a sign that we're reversing the decline in the CyberKnife product revenue that we observed during the first year of integration.

In the fourth quarter we added $74.2 million in new orders to backlog. The rolling four-quarter book-to-bill ratio was 1.02. For the past three quarters the book-to-bill ratio was 1.12 and for Q4 it was 1.15. This indicates growing momentum in new orders performance, a leading indicator of future revenue growth.

I'll now briefly review the environment in the US. As we announced last quarter, we have realigned our US sales force to address our recent US weakness. Although the business environment in the US remains somewhat weak, it is in certain territories we continue to do well. As we described last quarter our intention is to replicate best practices in all US territories which will also help us to capitalize on our new technologies. Early signs are encouraging, with a significant increase in the quality and quantity of opportunities in our pipeline.

Another factor in the US market that could work in our favor is the potential change in Medicare payment rates for calendar year 2013. The proposed deep cuts to freestanding IMRT payment rates would improve the business cases of both of our technologies when compared to competitive products.

First, because of its unique architecture; unlike other systems, the TomoTherapy system can mitigate the loss of IMRT revenue by billing for daily imaging. Second, CMS's proposal would bring IMRT freestanding rates much closer to CyberKnife levels, making CyberKnife the more attractive financial proposition especially for the treatment of prostate cancer. This is significant today as we have relatively low penetration in the freestanding segment of the market.

We significantly grew Accuray's services during fiscal 2012, with 18% growth in service revenue. For the full year service gross margins improved year on year from negative 1.9% to positive 15.1%, with the fourth-quarter comparison changing from negative 2.3% a year ago to 19.9% this quarter. The end of fiscal year 2012 marks the end of the first phase of our strategic plan, with Accuray on track with the integration milestones that we gave you.

I will now turn to the second phase, which will see the exciting results of our intensive investment in recent quarters into research and development. I'm happy to announce today that we are ready for a significant technology release at ASTRO in October, with the unveiling of two advanced platforms. We will reveal the details of these technologies at ASTRO. But we believe they have the potential to change the dynamic of the market. Our micro-site indicating the technology launch went live today as the market closed. And can be found at www.AccurayBoston2012.com

Although we are not making a formal new orders forecast, we do expect new orders to accelerate during fiscal 2013, with most of the associated revenue being recognized in fiscal 2014 and beyond. You will remember that when we launched CyberKnife BSI in 2009, there was a significant increase in new orders over the next 12 months. The impact of these technology releases will dictate the pattern of our financial profile through the current fiscal year. Already some customers have asked to see the technology released before accepting shipment. We are aware of course in discussion with these customers now, but we expect Q1, traditionally our weakest quarter of the year, to be further affected by this customer behavior.

Also impacting the comparison with prior year, is that in the first quarter of fiscal year 2012 we were able to ship some of the systems sitting in TomoTherapy's backlog that we had just acquired. Accuray over the years has developed techniques that minimize the time between booking and shipment. These techniques gave us a one-time benefit in Q1 of last fiscal year. Since that time we have consistently applied these techniques to TomoTherapy orders as they've been generated. We therefore expect total revenue for the first quarter of fiscal 2013 to be substantially lower than that of the first quarter in fiscal 2012. Going forward however, we believe that we will see a number of customers upgrade their orders to the newer technology after ASTRO, which would enhance revenues.

The timing of these revenues may be affected by a ramp-up in production. Despite the softer Q1, our revenue guidance for fiscal 2013 is $405 million to $425 million. After operating expenses, we expect that both R&D and marketing expenses will rise as we go through ASTRO, but will then decrease in Q3, reaching levels seen in the first half of fiscal 2012 in Q4. We expect service gross margins to continue to improve, and are holding to our forecast of 20% to 22% for the full fiscal year.

I want to paint this picture for you so that you understand why we foresee a year of two distinctly different chapters. First we expect weaker revenue and increased operating expenses in the beginning of the year, followed by stronger revenues and lower expenses in the second half. The turning point between these two chapters is the launch of innovative platforms at ASTRO, which history suggests should strengthen our growth in orders within the fiscal year and then revenue in the coming fiscal years.

We expect Q4 revenues to be higher than in fiscal 2012. with improved service great margins and operating expenses in line with those before the new technology rollout. As a result we can reaffirm our expectation of reaching profitability by the end of this fiscal year. I believe we can achieve sustainable profitability on an annual basis in the future.

In summary, fiscal 2012 was a year in which we completed the first phase of our strategic plan, successfully integrating TomoTherapy and essentially solving the TomoTherapy system reliability issues. We're embarking now in the second phase; the introduction of technology innovations which are anticipated to drive topline growth. We expect to return to profitability by the end of fiscal 2013. With that I'll now turn the call over to Derek.

Thank you Euan. I share your confidence about Accuray's future and prospects for returning to profitability. Now I will address some financial topics. In our press release announcing our results for this quarter, we provided details of the adjustments between GAAP and non-GAAP results. We also provided pro forma results for the three and 12 month periods ended June 30, 2012 and 2011. Unless stated otherwise, all results I discuss represent non-GAAP results and prior-year results represent the combined total of the results reported separately by Accuray and TomoTherapy as standalone Companies, excluding expenses related to the acquisition.

We acquired TomoTherapy at the end of fiscal 2011 to broaden our product portfolio. With our two product lines, we now provide the leading technologies to address the needs of clinicians and patients, for both radiosurgery and radiation therapy treatments. The challenges in this acquisition were to engineer improvements to the TomoTherapy system to address reliability issues, and to combine two large organizations into one smoothly functioning team. We have made tremendous strides in meeting both challenges and are confident that we will continue seeing improvements in the coming year.

During the fourth quarter we continued to make good progress towards our goals of returning the Company to profitability and positioning it for revenue growth in the future. We delivered strong performance in a number of areas as described in the following points. Our book-to-bill ratio was 1.15 during the fourth quarter. This reflects continued improvement since the first quarter of fiscal 2012 and strong demand for our products in the market. Solid new orders are the key driver of future product revenue.

TomoTherapy product revenue increased over the prior year, up 9% for the quarter, and up 4% for the full year on a pro forma basis. These increases reflect the benefit of good orders in the opening backlogs plus the solid level of new orders for TomoTherapy systems booked during fiscal 2012.

Service revenue increased over the prior year, up 13% for the quarter, and up 18% for the full year on a pro forma basis. These increases were driven by the continued sale and installation of systems, most of which represent new Accuray systems for these customers.

The service gross profit margin continued to show strong improvement. The service gross profit margin improved to 19.9% in the fourth quarter from a loss of 2.3% in the prior-year quarter on a pro forma basis. The improvement was driven mainly by improvement in the reliability of TomoTherapy systems and the resulting reduction in service calls and repairs on these systems.

While the positive developments were numerous, we also encountered some challenges that are described in the following points. New orders for systems in the United States were below our expectations and the prior year. As previously noted, we experienced challenges combining the two Companies' direct sales teams in the United States after the acquisition of TomoTherapy. We restructured the US sales team in the fourth quarter of fiscal 2012 and look for improved performance in the future.

CyberKnife product revenue decreased from the prior year, down 36% for the quarter and down 27% for the full year. The decline in the United States market was due principally to the shortfall in new orders in this market. We also experienced a decline in CyberKnife product revenue in our EMEA region, caused by the timing of customer installation schedules rather than from a decline in new orders.

CyberKnife system orders and backlog was solid in Europe in fiscal 2012, and we expect CyberKnife product revenue to increase in fiscal 2013. New orders for CyberKnife systems were solid in the fourth quarter of fiscal 2012, and prospects look good going forward.

The product gross profit margin of 52.3% was down from 58.1% in the prior year of fourth quarter. This decrease stems from an active program to trade up older-generation systems to the most recently approved versions of the CyberKnife in Japan. We recorded revenue for three such sales in the fourth quarter.

Operating expenses rose in the second half of fiscal 2012, reaching their peak in the fourth quarter. The increases were driven mainly by higher R&D spending, plus a smaller increase in spending on marketing. These costs were incurred to develop significant new technologies and prepare to bring them to begin marketing them at the ASTRO industry meeting in late October 2012.

Now I will address our balance sheet and cash flow. We maintained prudent control over our balance sheet during the fourth quarter of fiscal 2012. Decreases in receivables and inventories were offset by a decline in current liabilities. The $9.7 million decline in cash during the fourth quarter was driven mainly by the net loss. When we transition to profitability we expect to generate positive cash flow from operations.

As we look to the future we are encouraged and believe that we are on track to return to profitability and long-term growth. Our belief is based on the following key points. New orders for products rebounded after the weak showing in the first quarter after the close of the acquisition of TomoTherapy.

In addition we believe the exciting new technologies that we plan to introduce at ASTRO should boost interest in our products even further. We saw this effect after we introduced the BSI model of the CyberKnife in the fall of 2009. We experienced slightly significantly higher new orders for systems during fiscal years 2010 and 2011. We have a solid backlog of orders to support product revenue in fiscal 2013.

Service revenue should continue to grow as we expand our installed base. Our current forecast indicates that approximately 90% of shipments in fiscal 2013 will go to new customers or new bunkers at existing customer sites. In addition, we continue to see TomoTherapy customers convert to our new Emerald and Diamond service contracts, which provide higher levels of service at a higher more industry-normal price.

Further we have taken over responsibility for servicing TomoTherapy systems in Japan from our distributor, which will support growth in service revenue in fiscal 2013.

Our gross profit margin should improve in fiscal 2013 due to continued improvement in the service gross profit margin, which we forecast to be in the range of 20% to 22% for the full fiscal year 2013, up from 15.1% for fiscal 2012. We expect the product gross profit margin to remain approximately unchanged.

The final step in our march back to profitability will be the return to more normal operating expense levels by the fourth quarter of fiscal 2013. Through the second quarter of fiscal 2013, we will continue to spend at higher than normal levels on R&D and marketing to bring these exciting new technologies to market. Thereafter we expect more normal spending in these areas and further efficiency initiatives to enable us to return total operating expense to approximately the level we incurred in the first half of fiscal 2012.

In summary, we believe the major elements to enable Accuray to return profitability are achievable by the fourth quarter of fiscal 2013. We believe that we will achieve sustained revenue growth and annual profitability in future years by continued progress in these areas. Now I would like to turn the call back to Euan.

Thank you Derek. As we discussed, fiscal 2012 was a year in which we completed the first phase of our strategic plan, successfully integrating TomoTherapy and essentially solving the TomoTherapy system reliability issues. We're embarking now on the second phase. The introduction of technology innovations anticipated to drive greater topline growth and we expect to return to profitability by the end of fiscal 2013. With the upcoming major technology launch, we are excited and optimistic about Accuray's future. We will now take your questions.

(Operator Instructions)

Raj Denhoy, Jefferies.

I wonder if I could just press you a little bit on the revenue in the quarter, the softness in the quarter. If I'm hearing you correctly from your comments it was primarily CyberKnife, and if I'm hearing you properly it was primarily related to perhaps disruptions in the sales force.

First I want to make sure that's correct or if there's anything else that maybe we should be looking at in terms of why the CyberKnife billings were a little soft here.

Raj, are you asking us a question about the forecast for the first quarter of fiscal '13 or the fourth quarter of fiscal '12?

The just completed quarter, the fourth quarter that you just reported.

The product revenue in the quarter was within the range that we had guided to. It was approximately down a little bit from the prior quarter. It was not at any significant variance from where we had anticipated we would be.

Okay, well maybe just perhaps broadly then, the CyberKnife revenue was down a year over year -- the revenue that you reported in CyberKnife relative to last year. The Tomo business yet did still show some growth, and I'm just trying to get at why that CyberKnife revenue particularly here in the US is seeing that slowdown year over year.

We've indicated that the new orders that we had anticipated for fiscal '12 in the US did not come in because of challenges we faced in integrating the two sales teams in the US. And we do have a certain portion of our revenue each year that is -- that comes from orders that come in the year that convert to revenue within the year. So due to the slowdown in orders in the US, which covered both product lines, it was not just CyberKnife, we did see a slowdown in revenue on the CyberKnife side in the quarter.

So Raj, there was also another factor which Derek might want to expand on as well which was really in EMEA, which remains strong for CyberKnife new orders. There was just some shift in the timing of shipments. So there was a decline in European revenue for CyberKnife, but it wasn't anything systemic to the business. It was really just a shift in the timing, and those orders are still there and will contribute to CyberKnife revenue in FY '13 and going forward, which is why we're fairly confident in CyberKnife revenues -- upcoming CyberKnife revenues.

I guess that's the point I'm trying to explore that it does seem like the issues that are in that business are, at least by your view, somewhat transitory and it's the sales force issue here domestically and then some of the shippings that are occurring in EMEA. And I guess I'm curious what gives you the confidence.

That's a correct assumption. Our view of the international market is that CyberKnife actually maintained its momentum, there was no indication of a downturn. Again, it is including EMEA. In international markets we actually grew the TomoTherapy business through new orders quite markedly. There was a downturn in the United States, but we feel we've addressed that through the realignment of sales force, and we are actually fairly positive about the new activity that we are seeing amongst customer sites now for both the products lines in the United States.

So I think it's certainly there in fact. The revenue for CyberKnife systems was down. I think it's a large contributor was EMEA, but as we said, that was really -- we believe that to be transitory and will correct itself during this year, and the US sales force we are seeing signs of activity now.

Okay, great. I'll let some others jump in. Thanks.

(Operator Instructions)

Steve Beuchaw, Morgan Stanley.

Just one on systems revenue. It sounds like with the guidance for next year coming in where it did and to your point with the visibility that we have on service revenues that the guidance at least contemplates that systems revenues that could be flat to down. Am I right there in my interpretation? And if so, I'm a little confused as to why that would be given the book-to-bill ratio.

So the system revenue given that service revenue should increase. You are right, the system revenue depending on exactly where we end up with all factors could be flat to down slightly. We had the first quarter after the -- there are a couple factors that are affecting that. The first quarter after the acquisition of TomoTherapy we had slow bookings and our book-to-bill ratio was approximately 0.7. And so when you think of orders being light in that quarter generally speaking a year or so later on average you see the rebound effect of that.

The second thing is that as we are introducing new products and new technology this year, there is a -- we are being somewhat cautious about predicting exactly the rollout of those products and the introduction of those two customers and getting them into production. So those two factors are things that we're taking into account in providing the guidance.

Just to expand on this fractionally I think -- you shouldn't underestimate the impact of these technology releases. Customers are aware of something significant going on even before our public announcement on this call. And that gives us a challenge in Q1 as we discussed, which we then have to recover on for the rest of the year and I think you should see this level of guidance as confidence that we will definitively recover from that as we go through the year.

And the other factor is, as Derek mentioned, was that we did --- we mentioned in our prepared remarks, because we did receive somewhat of a boost to revenues last year when we were able to ship some of the inherited or the purchased revenue rather from TomoTherapy. There were systems that we were able to accelerate after revenue, and that built up Q1 a little bit, which hurts us a little bit looking back as a comparison. But I think it was the right thing to do, and it's indicative of the intensity that we give to taking systems from backlog and shipping them out customers.

So following up on that and really following up on Raj's question too, have you seen any -- as a function of the macro environment in the competitive environment any acceleration or change in the rate of which orders might be coming out of backlog or perhaps there are installation delays as one of your competitors pointed to earlier this week?

No. We haven't seen any installation delays. I'm not sure which comments you are referring to, but we haven't seen anything like that. We've got -- we feel very comfortable and very positive on a worldwide scale with the rate at which we've been generating TomoTherapy systems. And we found that the time between booking systems and shipping them is somewhat less than CyberKnife systems because they tend to be going into more existing rooms and it's less of an upgrade for the room from a radiation shielding standpoint.

Overall no change really in the dynamic of shipping CyberKnife systems. I would say when I look at it on a broad scale across the whole of our first year of integration, I would say I think we integrated with the two Companies well, we integrated the international salesforces with actually much success. We face challenges which we've been open about in the US, but I feel pretty comfortable we have now addressed those, and we're seeing signs of new activities. So that really is pretty much the full story for the first year. And that coupled with the technology rollout at ASTRO this year is really -- paints I think a pretty positive picture for how far we've come.

Okay, thanks guys.

Tycho Peterson, JPMorgan.

First just following up on some of the questions earlier on the US dynamics. Can you talk on the competitive landscape? Have you have any swap outs of your vaults? And can you also just comment on whether you've had any traction from that Siemens agreement?

No major impact of either of those really. We haven't really seen a change in the competitive dynamic. I think in the United States in particular we were feeling before the US salesforce alignment that we possibly weren't being aggressive enough in targeting our competitive sockets. And it's actually a stated objective of ours that we will now be more aggressive and I think these new technology rollouts will definitively give us some traction there as well.

From Siemens I think it's a story that hasn't really changed much over the quarters. We generated about I think it's about five new system orders from Siemens' competitors since they announced -- or Siemens' customers rather since they announced -- Siemens announced their exit from the market.

It's a steady trickle. It's not a growth change in the market dynamic. And I think as I indicated before relationships with Siemens themselves and relationships between companies, I don't believe personally really result in significant sales. It's the relationships with customers that are most important there. And we continue to work hard on building those.

Can you comment on how things have progressed post the proposed reimbursement? I think it's been 68 days or so since you ended the quarter. Can you just talk about how things have progressed in the back half of the summer, and are you willing to comment?

Absolutely. I think for us it is more a story of opportunity as I indicated in my previous comments. For one of the main reasons of that is we haven't actually -- with either product, we haven't got a high penetration rate in the freestanding market, and we haven't been -- either company when they were individual companies were not selling their systems aggressively or actively to those portions of the market. And that reflects the specialist profile of those systems.

I think going forward we are seeing that there is opportunity there for us, should these -- and they are proposed changes don't forget -- should these proposed changes actually be implemented.

Our TomoTherapy system clearly is an IMRT product, but has the added advantage that you take images as routine with every patient every single day. That's the driver from a clinical standpoint. When we look at the business case associated with that, then it actually is relatively strong compared to systems that just read IMRT without that image guidance, which will be potentially impacted by these cuts.

From the CyberKnife standpoint, particularly as we embark on aggressive prostate cancer campaign to raise awareness of how far we've come with demonstrating the CyberKnife can be used to treat certain prostate cancer cases, we feel that these reimbursement changes get IMRT treatments closer from a revenue standpoint to what customers can expect in the freestanding center of CyberKnife. So there's not such a marked difference. And with the clinical benefits and the clinical trends that we see, we think that we have opportunities there for attracting freestanding center attention too. So nothing major to report yet. But I think we are not discouraged by the dynamic right now.

And then I know you don't want to say much about the new systems, but can you just kind of give us some higher level commentary? Are these using higher-level energy sources, is it leveraging something out of CPAC? Just kind of curious. Should we think about an upgrade cycle to the installed base with the new systems?

So I can answer partially the second part, but I do want to make everybody aware that this is a major technology launch that will be taking place at ASTRO. What we're announcing today is the launch, not the technology. I've got limited ability to discuss them today. We want to obviously manage that through our marketing department and have the most impact on our new orders.

I can say we believe these to be very important technologies. We consider them to be significant not just from Accuray's standpoint, but in the context of the overall market dynamic right now. They will be I think exciting to everybody to observe and of great interest to our customers. Beyond that I would rather reserve my comments.

Okay. Thank you.

Charles Croson, Sidoti & Company.

The first one just piggybacking on that CMS reimbursement changes. There's been a lot of talk out there that the current proposed changes don't really seem to -- there's a lot of sources that seem to think that they are not going to stick. Based on your conversations with CMS, what do you get a sense out of that?

I can't say we're in a real good position to make that judgment call. I think when you see dramatic changes like this, of course they're challenged, they're challenged by customers and they're challenged by professional groups. So after that it's a matter of negotiation between all concerned parties. It's a little hard to forecast where they might go.

I think our job as a Company is to address where we may be should those changes get implemented, and for that reason we've been looking hard at the competitive landscape as it will be post those changes. It fits pretty well with our strategy overall, which is to point out the relative value of our technologies for the CyberKnife as I indicated, treatment of prostate cancer which is a large part of the freestanding centers business, and for the TomoTherapy system, really drawing people's attention to the fact that there are real opportunities here for having an enhanced business case through use of daily imaging.

And the good news is it's not just an enhanced business case without clinical value. It's something that really does benefit patients. So we feel -- our strategy is to address those markets. Those I'm being fully open about, are techniques we will use to address those markets. And I think the message today is really that they are robust strategies even should those changes get implemented.

I see. Okay. That's helpful. Just one last one and you might have gone over this and I apologize if I missed it, but in terms of the purchase orders that went in through the quarter, can you give us a sense on what was replacement and what was actual new customers?

Well we haven't broken that out by Q4 in particular, but Derek did make some comments which I think you should definitely log, which are when we look forward to our shipment forecast for the coming year, many of which are systems which were -- we took purchase orders for in Q4 and certainly through the last fiscal year, we are seeing that -- approximately 90% or so of the systems that we plan to ship will be systems that are new to us.

And for that reason we are pretty bullish about the continued growth in our service revenue. And couple that with the recent transition to direct servicing in Japan, which we issued a press release on, and the continued uptick in the number of TomoTherapy customers that are adopting our industry-standard level, Emerald and Diamond contracts, I think you can expect to see some positive growth in our service business.

Okay. That's helpful. I'll hop back in the queue then.

Junaid Husain, Dougherty & Company.

Derek, assuming that you guys hit the low end of your sales guidance for fiscal '13, would you still expect to hit profitability by the end of the year? And can you walk us through all the puts and takes in that?

Yes, we do expect even if we hit the low end. I think the thing that we should probably reiterate is that the first quarter we are expecting to be substantially below last year, so it is a year in which it is not a question of sales not occurring. It's just that sales are being delayed by the product introductions and the effect on our shipment patterns. The new products we expect to really begin shipping in the third and fourth quarters, so we are seeing that the Company moves to its future level of activity in the second half of the year.

That combined with the fact that we will be passed the peak of R&D spending, having in this past year worked on two major product releases, we will be getting back to a more normal level of R&D. And then the third step is that marketing expenditures, which will peak in the second quarter as we do release these two products, will come back to more normal levels in the third and fourth quarter.

So really it's a combination of a dip in revenue in the first quarter followed by new products coming online from a shipment standpoint in the third and fourth quarters -- the continued evolution and improvement in service margins. And then the operating expenses coming down to a more normal historical level, basically the levels we achieved in the first half of fiscal '12 we are expecting in the second half of fiscal '13. When you put all that together, we do believe that we can be profitable in the fourth quarter of fiscal '13.

And one point to add here. I don't think -- we're definitely not feeling that profitability is dependent on a successful product launch at ASTRO. We anticipate an extremely successful product launch, but we are not saying that the bottom end of the guidance range profitability is dependent on that product launch. We had a very positive, we feel, Q2, Q3, Q4 in terms of new orders bookings and we have a solid backlog as we indicated. We are feeling positive about the range that we gave. And even should it be the low end, then as Derek indicated, we still expect to be profitable in Q4.

Just to amplify one other point that Euan made. The new products that we expect to introduce at the end of October, typically when you think in terms of customers ordering those new products given the time from order to shipment and revenue of one to two years, those new products will affect our revenue in fiscal '14 and beyond. So that's where we will see the effect of the growth in revenue from those new products.

Thanks guys. That's actually very helpful. Euan, last question for you. You seem fairly confident about these new products that you're going to introduce in ASTRO. It sounds like some of your customers have already seen it. Can you tell me if you're confidence is based on the early stage customer feedback -- just help us understand why you think these two new products could potentially be game changers if you will?

Sure. I'll answer that cautiously Junaid, because what I don't want to do is to send our competitors scuffling around finding out which customers we have spoken to, which probably will happen anyway. I can say that I have personally been asked and discussed these new technologies with some customers, limited customers under strict nondisclosure conditions. And the response has been universally extremely positive.

And some of our comments today about them being -- changing the industry dynamic for example, are actually comments which I have heard not even back from customers but the customers have stated to me once we have spoken about those technologies.

So we have had great customer discussions so far. We're feeling extremely positive about it. It's always hard to forecast the exact timing of an impact on a business with significant technology releases, but I think as we indicated in the script there have been cases in the past where we've rolled out technology very successfully and they've had pretty substantial impact on our new order flow. So I think customer feedback so far and past experiences do lead us to be fairly positive about the future for these.

All right. Good enough. Thanks so much guys.

Steve Beuchaw.

My question was ultimately preempted though so thank you.

Ladies and gentlemen, this does conclude the question and answer portion of today's event. I'd like to turn the call back over to Management for any closing remarks they may have.

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 continued dedication to success, and to our continued focus on improving the lives of cancer patients worldwide. We look forward to speaking with you on our next call.

Ladies and gentlemen, thank you so much for your participation today. This does conclude our presentation and you may now disconnect. Have a great day.