Accuray Inc (ARAY) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q4 2013 Accuray Incorporated earnings conference call. My name is Jackie, and I will be your coordinator today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I will now turn the conference over to Ms. Lynn Pieper. You may proceed.

Thank you, Jackie. This is Lynn Pieper, Accuray's Investor Relations [Counsel] from Westwicke Partners. Thank you for joining us today on our conference call as we review Accuray's fourth quarter and fiscal year 2014. Joining us today is Josh Levine, 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 information which can be found on a summary slide deck on the investor relations page of the Accuray website at accuray.com/investors. Before we begin, I need to remind you that our call today includes forward-looking statements that involve risks and uncertainties. There are a number of factors that could cause actual results to differ materially from our expectations, including risks associated with the effects of the introduction of the new CyberKnife and TomoTherapy systems, commercial execution, future order growth, future revenue growth, future profitability, and guidance for fiscal 2014. These and other risks are more fully described in the press release we issued earlier this afternoon, as well as in our filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements. Now, I'd like to turn the call over to Accuray's President and Chief Executive Officer. Josh Levine.

Thank you Lynn, and thanks everyone for joining us today as we review our results for the fourth quarter and year end of fiscal 2013. I will begin with an overview of the fourth quarter, with Derek providing more a detailed financial review later in the call. I will then wrap up with some commentary on our strategy and outlook, and then we will open the call up for questions. I am pleased that we are continuing to make solid progress on our path to achieve sustainable growth in revenue, and improvements in profitability. In the fourth quarter we experienced continued strength in new orders. We treated our first patients with both the new CyberKnife M6 and TomoTherapy H Series systems. We maintained solid financial discipline and operating expense control. This is the second quarter in which we are showing growth and momentum in new order volume driven by the early benefits of our improved commercial focus.

While we have more work to do, I am encouraged by the early progress we have made. In the fourth quarter, we saw a noticeable improvement in new order volume. Gross new profit orders totaled $71.6 million, up from $53.8 million in the third fiscal quarter, and $39.8 million during the second fiscal quarter of 2013. Net product orders added to backlog totaled $58.1 million, up from $44.1 million in the third quarter, and $17.9 million in the second quarter. Importantly, we are seeing enhanced selling focus and an improving order pipeline across all four regions. We are seeing strong demand for our new models, which is positively impacting pricing trends. Net new orders were up 32% from the third quarter, reflecting our growing sales pipeline and interest in our new products that we introduced last October.

Our reported fourth quarter product revenues were $38.6 million, which were in improvement from the $25.1 million we reported in the third quarter. We expect to see modest improvement in product revenue during fiscal 2014, with some quarter-to-quarter variability. The trends in our service business revenue and gross margin in the fourth quarter continue to show strong momentum. At $46.3 million, our service revenue continued to grow, contributing over 0.5 of our total revenue for the quarter of $84.9 million. Our service gross margin was consistent at 29%. While we expect a positive trend in our service gross margin to continue, we do expect it to experience some quarter variability. Since our acquisition of TomoTherapy, we have consistently improved system reliability, and as a result our [prime] is now approaching 99% globally. This has resulted in increased interest in the TomoTherapy system and improved order prospects. We expect continued progress in commercial momentum over the next several quarters, driven by improved selling focus and sales funnel management, the economic and clinical validation of the first commercial installations of our new products, and market acceptance driven by the substantial improvement and the reliability of our TomoTherapy product line.

In turning to our new products, we have completed the first commercial installations of both of our new generation product platforms, and have treated patients with both the TomoTherapy H series and the CyberKnife M6 series. The TomoTherapy system is known as the gold standard in IMRT. The newly launched TomoTherapy HAD system is proving itself to be versatile, efficient, and enabling delivery of highly effective treatment plans to a wide range of patients and disease types. Our efforts to ensure that system reliability meets or beats industry standards have allowed us to deliver overall reliability approaching 99%. The TomaTherapy HAD is enabling customers to enhance the end-to-end workflow by combining daily imaging, optimize those calculations, delivery speed, precision, and streamline quality assurance. We are encouraged by customer feedback on the system's expanding clinical utility and increased throughput.

On the CyberKnife side of our portfolio, we have received extremely favorable feedback about the performance at our first sites with the new CyberKnife M6 system in terms of patient throughput, reduced treatment times, and ease-of-use. We believe this validates the improved performance characteristics of the new M6 platform when compared to previous generations of the CyberKnife. The M6 is ideally positioned to support the trend toward hyperfractionation and is it the product of choice for developing a full-body radial surgery practice. The CyberKnife M6 system is enabling already established industry leading precision to become faster and more flexible. Our customers want to achieve improved outcomes and reduced toxicity, while delivering treatment comfortably for their patients. The CyberKnife M6 system enables patients to keep living their life with minimal disruption. It is the best radiation oncology solution available for maximizing the dose of radiation in the minimum number of treatments comfortably and with minimal side effects, even when the target is moving.

It's precise accuracy allows it to deliver escalating doses, while its synchrining software automatically corrects for target motion in any direction, without requiring patients to hold their breath, and without having to pause treatment delivery. The CyberKnife M6 system also adds disease-specific tracking and treatment delivery solutions for brain, spine, lung, and prostate to enhance workflow and accuracy in treatment of those tumor types. In October 2012, we introduced our new CyberKnife M6 series systems six that come in configurations that have the option of a fixed collimator, an iris collimator, and a multileaf collimator, or MLC. For the MLC option, as we have previously indicated, the vendor producing our MLC has experienced low manufacturing yields, and has been able to deliver only a small number of units. Our subsequent lifecycle testing revealed that the units did not have the durability that we, and most importantly our customers, expect in our products.

Therefore, we have decided that we will not commercial release the MLC units produced by our current supplier. We are working with additional vendors for key components of our MLC, and expect that this will enable us to produce an MLC that meets our standards in the future. We expect to be in a position to articulate our strategy and timeline for when units will be available for shipping when we report results from our Q1 fiscal 20004 quarter. Turning to the status of our commercial organization, we have filled all of the critical leadership roles across the sales and marketing organization. We are starting to see the benefits from more focused selling responsibilities by product platform, as well as a dedicated sales team responsible for our install base business. We have better overall market and opportunity visibility, more accountable sales funnel management, and most importantly, we are starting to see growth in our order pipeline.

When combined with what is clearly a growing level of customer interest in our new products, we expect to see continued improvement in order growth over time. During Derek's financial review, he will provide our ending order backlog which should provide increased visibility to assist in your financial modeling. In addition, I am pleased to report that Accuray received the NorthFace ScoreBoard Award from Omega Management Group in recognition of achieving excellence in customer service and support in calendar 2012. Since 2000, the Award has been presented annually to companies who, as rated solely by their own customers, exceeded expectations in customer satisfaction during the prior calendar year. This was our second year in a row to receive this award, which measures customer satisfaction and loyalty levels at least four times during the year in such categories as technical support, field service, customer service, and account management.

Finally, I would like to provide an update on our cost restructuring efforts, which are integral to driving our business model to a level of sustainable profitability. Early in the calendar year, we announced a goal to reduce our operating expenses by $40 million from the level originally reported for our fiscal year 2012. Our initial target was to reduce non-GAAP operating expenses to an average of $38 million per quarter during fiscal year 2014. Based on the ongoing analysis of our global commercial opportunities, and the early results we have achieved to date generated by improving the effectiveness of our commercial teams, we concluded that modest incremental investments in sales infrastructure and market development resources would generate a significant return on investment and help to unlock the opportunities inherent in our new products. These increases in sales resources will enable us to pursue opportunities with GPO and strategic account customers, with our existing install base of customers, and with new customers in growth markets such as Japan and China. As a result, we now expect operating expenses to average approximately $40 million per quarter during fiscal year 2014. I will now turn the call over to Derek to provide you with a more detailed review of our financials, as well as provide our outlook for fiscal '14, and then I will wrap up with closing remarks. Derek?

Thank you, Josh. In reviewing the financial results for the quarter, we focus on our non-GAAP results, because we believe they are the best indicators of ongoing progress and operations in cash flow, as well as trends that may influence future results. Our press release provide details of the adjustments between GAAP and non-GAAP results. We will specifically make mention if we refer to GAAP results. As we had previously forecast, our product business improved during the fourth quarter, with product revenue up 54% from the low level reported in the third quarter. This increase resulted mainly from shipments of the new models we introduced at ASTRO in late October 2012. We shipped and installed several of our new TomoTherapy H series system plus additional CyberKnife M6 series systems. The gross profit margin for the product business improved 41.7% in the fourth quarter from 34.7% in the third quarter. The improvement was due mainly to higher margins realized on the new models shipped in the fourth quarter. However, the margin was still below our historical norms.

Accuray's gross profit margin for products was 50% during the first half of fiscal 2013, and 53.6% during fiscal 2012. The factors depressing the gross profit margin in the fourth quarter were inventory writedowns, mainly related to the CyberKnife MLC, and continued low manufacturing levels that resulted in higher overhead per unit taken revenue. Our service business showed continued improvement. Revenue increased 2% from the third quarter, and 17% from the fourth quarter of the prior year. This growth in service revenue was driven mainly by the continued growth in the installed base of Accuray systems, up 9% from the fourth quarter of the prior year. The impact of transitioning to a direct service model for our TomoTherapy service business in Japan and the transition of the TomoTherapy customers to the new Emerald service contract. The gross profit margin for our service business is 28.7% in the fourth quarter. This was approximately unchanged from 29.5% in the third quarter, but improved substantially from 19.9% in the fourth quarter of the prior year. This improvement is driven mainly by continued improvement in the reliability of TomoTherapy systems, plus the increase in our overall installed base, which enables greater efficiency across our service business.

Reliability improvement is reflected in the approximately 99% uptime for our TomoTherapy systems achieved in 2012 and the NorthFace ScoreBoard award awarded to Accuray in recognition of service excellence during 2012, as rated by customers. Operating expenses were $39.4 million in the fourth quarter, after excluding restructuring charges of $0.2 million. This was approximately unchanged from the third quarter, which totaled $39.7 million, after excluding restructuring charges of $4.9 million. Compared to the fourth quarter of the prior year, operating expenses have been reduced 21%, or $10.5 million per quarter. This reflects the benefits of the significant restructuring program announced in January 2013.

As a result of the increase in revenue, improved gross profit margin, and reduced operating expenses, a net loss was reduced to $15.1 million in the fourth quarter from $27.6 million and $22 million in the third and second quarters, respectively. Cash usage was also significantly reduced, $7 million in the fourth quarter as compared to $24 million and $27 million of cash usage in the third and second quarters, respectively. Reduction in cash usage was due to a lower net loss, plus an approximately $4 million reduction in working capital. For our fiscal year 2014 that will end on June 30, 2014, we anticipate the following results. Revenue in the range of $325 million to $345 million, operating expense averaging approximately $40 million per quarter. Now, I would like to hand the call back to Josh.

Think you, Derek. I am encouraged at the actions we have taken have produced positive results over the last two quarters. Our order pipeline and new order momentum are both improving. We are also encouraged by feedback that the expanded feature set and functionality of our new products is driving improved clinical benefits for patients, and economic value for customers. Additionally, we have seen positive trends in overall financial results in Q4, including increasing revenues and gross profit, and substantially reduced net operating loss and cash use. As identified in my early analysis of the Company and its operations, establishing the goal of driving the business to sustainable growth and revenue and profitability was a key priority.

While we have made reasonable progress towards that goal, we clearly recognize that there is more work ahead. We look forward to updating you on our progress when we release our results for Q1. Finally, as many of you are aware, the American Society of Radiation Oncology, or ASTRO, annual meeting is taking place in Atlanta from September 22 through September 25. Accuray will be hosting an investor breakfast on Monday morning, September 23, where we will be providing an update on our commercial strategy, and we will have customer presentations providing feedback on their experiences with the CyberKnife M6 and Tomo HAD systems. We hope you can join us in person, or if not, can at least participate via webcast. Thank you for participating in today's call. We are now ready to take your questions.

Ladies and gentlemen, we're ready to open the lines up for your questions.

(Operator Instructions)

Steve Beuchaw, Morgan Stanley.

First, and I will apologize for focusing on the negative initially, but as we reflect on the comments that you made around the MLC. I wonder if you can give us a sense for how it is you derive comfort that what you have is a production issue as opposed to a design issue? Said another way, are you comfortable that getting the right manufacturer is what it takes and all the takes to make the MLC production ready?

Yes, Steve, we have been very, I think, very transparent from reasonably early on that we had a, what we believed was a manufacturing yield, or manufacturability issue with the device. Just to be clear, that product that would be the current supplier, or the initial supplier was providing us, it met all of our ongoing technical specifications. It passed muster on that level. Where we really started to have challenges with competence with it was really around the durability testing that resulted from focusing on lifecycle testing. We did a really exhaustive amount of work in that area. At moments we thought we were seeing improvement, but quite frankly, over an extended period of time the product just did not have the durability it needed to, quite frankly, satisfy our requirements and the customer requirements for durability and reliability, and our decision was really based more on wanting to not disrupt workflow and patient treatment schedules for our customers.

The product would run, it just would not run long enough, quite frankly. The other bit of color I would provide here would be that we, because we recognized early on that there was a yield issue, we at that point started to think about exploring other alternatives for vendor and manufacturing options here. None of what we are looking at is design change or fundamental design-related. It is really more producing, quite frankly, through whatever source we need to, a more robust product, a more durable, reliable product. Just to be clear on that, we are not looking at design change in transition here.

Thanks, very helpful. Derek, on the outlook for fiscal '14, the comments that you and that Josh made around the plans for operating expend are very clear. Could you spend a bit of time kind of walking through how you think about gross margins and how they might trend over the balance of the year?

As far as gross margin goes, we expect moderate improvement during the year. The factors that are affecting gross margin, the biggest are the ongoing improvement in the service business, which we would expect to continue to see some improvement, although as we've made tremendous improvement to date, there comes a point where that growth and improvement in service margins begins to slow. The second area is in the product side, and the product margins were affected this quarter by some writeoffs in inventory, particularly related to the MLC program, plus a problem that we have faced, which is the low production level related to the -- coming from -- stemming from the low bookings level that is driving the lower shipment levels right now. We would expect that that low production level, which results in under-absorption of manufacturing overhead, will be a pattern that we slowly grow out of. It will not be an overnight transition from that. During fiscal '14, therefore, we would expect both of those trends to improve moderately across the year, and that is why we're expecting improvement in margin. If you look at the outlook for us, we've indicated where we were historically, where we were this quarter. I think that we are going to improve, but not immediately get back to our historical levels in fiscal '14.

As you think about over the next two to three years, what kind of asymptote should we be looking for? Is it back to the mid-40%s with the new product mix? Is that somewhere we could get to over time?

I think in terms of the product side of the business, I would think that getting back to our sort of historical norm of 50% is a good longer term goal. Don't have a timeframe that I want to give on that, and as far as the service business goes, while it would be a few years out, we would expect that our target for the service business would be the 40% gross profit margin. That is a long term target there.

Anthony Petrone, Jefferies Group.

Just to go back to the MLC issue here that you mentioned Josh. Can you maybe give us an idea of timing on when you may actually switch vendors, and what that means for meaningful orders coming from M6? Should we expect now that the M6 is a really fiscal '15 event due to the change here?

Let me be clear on this. You've got two different pieces, Anthony, in your question. Let me start with the later portion of this, which is -- which starts to suggest that we really don't have a product to sell without an MLC, and I want to be as clear about this as I can possibly be. I couldn't disagree with you more about that. We have got a really, really great, from a functionality and feature set, product in the M6 in the FI configuration. We now have five, I think actually six reference sites in place and installed, which are products that were ordered with MLC, or that had MLC in the backlog, and people have taken delivery and installation of those devices with a fixed and iris collimator, and the ones that have the longest timeline of experience in terms of patient treatment are thrilled with the functionality and the improved performance of the equipment versus the previous generation device. I am disappointed in the delay of the MLC.

But I do not think that we have a really, really significant degree of exposure in terms of our backlog or our commercial viability, quite frankly, of the product because even in its base form with fixed and iris collimator it is a great product, and you are going to hear, if you talk to people at ASTRO, you're going to hear talk about their direct experiences with this. So you don't have to take my word for it. The reality is that the --really up until today's release, we haven't been able to engage customers with orders in the backlog with regards to their views and their needs regarding timing, regarding functionality, and potential impact to their order in the backlog. The delay in MLC affects each one of these customers in a slightly different way, depending on their case mix, the timing of their installation, there are a number of variables there obviously. We, again as of today's release, we intend to be very strategic and proactive with our salesforce in terms of interactions with customers, and working with them to find the right solutions for each one of them individually. Our goal is clearly to retain as much of the backlog as possible, and I think again, it is a very reasonably attainable goal when you think about the fact that all of our early M6 installations are FI versions of the product that are waiting MLCs, and we think that it is a pretty good indicator, quite frankly, regarding likelihood of retaining those MLC-capable devices that are currently in the backlog.

That's helpful. Maybe one follow-up there on the MLC and what sounds potentially like a redesign specifically of the MLC. Does this at all potentially change the performance capabilities of the final product that were sort of captured in various simulation studies using a CyberKnife with an MLC?

Anthony, I'm d going to go back to, I think the response I gave to Steve Beuchaw just a little bit ago, there is no product redesign contemplated in this transition. We have had, unfortunately, and I am disappointed by it, and I am frustrated by it, but we have had, quite frankly, a vendor and a manufacturing ramp or yield problem with an initial vendor that we believe we are going to have solutions for that we can talk more granularly or specifically about with regards to what they mean timing-wise for us in terms of availability of that device. But it is really more vendor transition and supply chain-related than it is product design or redesign-related. I just want to be really strong in clarifying that.

Absolutely fair enough. Last one for me and I'll hop back in queue, is Josh, I need just high level comments about the potential consolidation of SRS and SPRT code, should they go into effect next year based on the CMS proposals issued in June. Thanks.

I think in previous comments, previous market interactions, we basically characterized the proposed rules that came down from CMS as, I would say, generally neutral to reasonably modestly positive for us. We think that the SRS/SPRT codes, certainly as it relates to outpatient department-type settings, the payments themselves, single fractions are up from a payment rate standpoint, reasonably substantially in single fractions scenarios, down modestly in three- to five-fraction scenarios. We don't think we have a large or significant degree of exposure there. On the freestanding center side, as I think you probably are aware, we do not have a very large presence in freestanding centers in terms of that channel at all.

So I think our downside is, again, pretty minimal in terms of exposure there relative to what CMS has proposed. I think we feel strongly that as it relates to CyberKnife specifically, we actually have seen reasonably positive impacts in changes over time. Prostate, as a specific discussion, prostate is now covered by all the Medicare contractors for CyberKnife. We have had coverage decisions and reimbursement in places like Blue Cross/Blue Shield of North Carolina that changed policy as of July 1 to basically endorse CyberKnife for early prostate treatment. So I think that the trends there momentum-wise are actually moving in our direction. If you believe that hyperfractionation is really where the market is ultimately headed, and there is an argument to be made that it is, we think we are well-positioned, quite frankly, in this business.

Jason Wittes, Brean Capital.

Josh, question about the backlog and how we should be thinking about it. I know that you guys have a pretty strong policy to take stuff out that is over 30 months old, I believe it is 30 months old. I am looking at your backlog, and it seems like the TomoTherapy backlog's definitely in flux. So it seems like that is probably a pretty reliable backlog, but in terms of the CyberKnife, it seems, partly due to the delay in the MLC, et cetera, that seems like it has been pretty consistent, and I am guessing that there is still quite a few orders that have not been filled. In general, is this -- should we consider this a reliable backlog, especially -- and how would you think about it between TomoTherapy and CyberKnife?

If you look, Jason, or from a trend standpoint, basically between 2012 and 2013 growth in the ending backlog, CyberKnife actually was relatively flat, and TomoTherapy represented the biggest piece of the increase in the backlog. Directionally, in terms of product mix, that is really what we saw. If you looked at revenue, revenue conversion in terms of moving revenue out of the backlog onto the P&L, you probably have a longer timeline for transition in terms of that revenue conversion activity with CyberKnife because more of those installations are either requiring reasonably significant bunker modification or new bunker construction. And if you are a facility that really is just starting up a full-body radial surgery practice and using the CyberKnife as the vehicle, if you will, to be able to build that practice around, by definition it is really more of a missionary-type of business development exercise. It requires bunker build-out or modification, all of which is going to take a longer amount of time to kind of consummate. The Tomo side of the house product-wise is really more of a replacement product-type of a sale, and therefore it is a more abbreviated, it tends to be comparatively more abbreviated in its timeline from backlog to P&L.

Okay, but I assume that you're in touch with these customers and feeling that these orders are somewhere within that sort of usually, what, 12 to 16 month time horizon for getting filled? Is that fair to assume?

Yes.

Okay, great. In terms of the extra $8 million of spend this year, I assume from what your comments made earlier, that is for basically setting up an account manager, et cetera for dealing with the national accounts. Could you give a little more detail in terms of how you envision that working?

I think we talked about it in broader terms than just the national account, or strategic account piece. That clearly is one area we believe that improved visibility, market visibility and deal visibility will result from having more of a regular presence, quite frankly, inside of GPO strategic account, national account types of customers. That is an important thought process for us in terms of levering our growth agenda. If you look at where else we are talking about making incremental investments, it is investing in a bigger group of people in terms of supporting the installed base of customers globally. That is one focal point for it, as well as building more, selling infrastructure and the market development resources in growth markets like China and Japan. As we started to look at some of the things we've started to do in the first several quarters, start to assess the progress that has been made and the traction that we have gotten, we believe that some incremental investment in '14 is the right thing to do, as long as we are talking about things that will power up the top line of this business going forward. We're not investing in G&A, we're not investing in things that don't get a return, we are investing in things, quite frankly, that are -- the precursor investments and resources related to building a bigger business long term.

Last question. When I went around with you, you seemed pretty satisfied with the way the salesforce was shaping up. Just one indicator I wanted to ask about would be turnover. How does that look right now in terms of the US and international markets for the salesforce?

We do not have a turnover problem. We basically have all of the commercial leadership roles that we have talked about over the last couple of quarters, all of those commercial leadership roles are filled. We have got full complement instructor in place, net of, or independent of the incremental investments I just talked about, related to national contracting install base, et cetera. We have got a very stable, probably more stable now than it has been in the last two years, a group in the US and in Western Europe. I feel good, and I know Kelly Londy, our Chief Commercial Officer, feels good about the team and where it sits right now.

Tycho Peterson, JPMorgan.

This is actually Patrick Donnelly in for Tycho. Thanks for taking the question. I guess first, just on 2014 product revenue. How do you guys see the seasonality next year playing out with the new products rolling out at the beginning of the year?

I will start this one, Patrick. Maybe Derek can amplify on it. In my view, again we're still in the early phases of our commercial ramp, commercial launch, if you want to describe it that way. We have got the initial commercial reference sites for both CyberKnife and Tomo H series in place, but quite frankly those customers, depending on when they were installed, those customers have a varying degree of experience, treatment experience, on patients from account to account. Ultimately it would be our goal that we would have probably at least two reference sites per region, and we are still building to that level. If you look at overall. It is still early. The feedback about both products and the improved functionality is very positive on both ends, but it would be, again it would be -- we missed, I am going to say at least two quarters, quite frankly of lead time, or ramp time, in again the delays of the products to commercial release, dating back to last October. We have got the right level of activity in terms of the reference site establishment, but we need more experience and more real time with patient treatment for those accounts before they can really start to be, at least the ones that have been installed more recently, before they can really start to provide the kind of leverage for us in terms of selling expansion of sales momentum.

Okay, great. Talking about the first few installations, I know you said at ASTRO there's going to be a deeper dive into customer feedback, but maybe can you discuss how initial customer feedback is, compared to your expectations?

Again, from our view, all of the feedback we have gotten is positive. Again, there are people that were existing CyberKnife users, they had earlier generations of CyberKnife, so they understood the product in its earlier form and its earlier functionality. A couple of them in very large volume patient situations that have experienced the M6 with -- they've commissioned that device in the one account that I am think of was fixed and iris collimators, so no MLC obviously, and have seen, just with the fixed and iris collimator capability, the dramatic differences in treatment times and throughput, in user interface in terms of software. Very, very strong feedback about the product and how it performs. Robust experience in terms of off-time, very little of what you would normally see in terms of debugging a brand-new platform. Our service organization and our installation teams are to be commended for that. We feel good about the momentum, at least in terms of initial customer feedback and where we sit right now. Again, we need to get a little further downstream in terms of build-out of a broader number of locations inside of each region, but momentum in terms of the activity level and interest level about these products is definitely on the rise.

Toby [Warren], CDM Research Group.

A couple of -- just want kind of go around the globe quickly, kind of talk about the pace of order activity, any pockets of weakness you are seeing geographically, any comment on the pace of activity here in the States? I know some others out there have said that the US continues to be a bit of a challenge with the Affordable Care Act being implemented, and reimbursement budgets being tight. and CapEx budgets being tight. So maybe you can give --shed some light on kind of pace of activity from a geographic standpoint?

Yes, Toby, I would say that we feel very good, and what we have seen is really a pretty even balance across the globe in terms of the new order activity and the sales funnel build that we have got taken place. In other words, we have been working hard at bringing, obviously, new teams around the world up to speed, but also putting in place some of the more improved go-to-market capabilities that we talked about early on, and I think that we are seeing the benefits and the impact of those go-to-market capabilities, and again, the interest in the new products in a reasonably balanced way geographically. I mean, the order growth and the activity, the pipeline activity, is strong in all regions. I am not seeing -- we are not seeing anything that is geographically limited to one region or another. It is growth across the system for us geographically.

In terms of hospital, some of the macro trends you have talked about, I have read the same reports that you have and listened to the same earnings calls that you have, and quite frankly, I do not think we are seeing the constraints, at least today, in hospital CapEx pressures. Those pressures may be there, but we have got, I'm going to guess that we have products that, quite frankly, people want to learn more about and know about, and I am not seeing -- we are not seeing the impact of a really big economic overhang in this discussion. I am not naive. There's obviously, depending on the region in the world, there are perhaps watch-outs, but across the board in general, we feel pretty good about the general climate that we are selling into.

No, that's good. That helps a lot, appreciate that, especially that color. Then just quickly, a couple of housekeeping items. In terms of the inventory writedown that was taken this quarter, could you guys quantify that, maybe?

It was at least approximately $3 million, and the biggest chunk of it related to, as we said earlier, the MLC product that we got ahead of ourselves on.

Right. Then in terms of how you guys have been, I guess, righting the ship, so to speak, in terms of the products and getting the Company back on track with the new product launch, I know we have kind of seen the product revenue and the service revenue mix shift pretty significantly here over the past year. How should we think about that from a modeling standpoint going forward? Any color there would be helpful.

From a FY '14 standpoint, the revenue that is forecasted in '14 obviously represents, for the most part, things that have been in the backlog for some period of time, right? Just the nature of order, from order to installation cycle, we are dealing with things that have their genesis from an order, going into the backlog from, in some cases a year before, or maybe even more. The focus, the significant -- the most significant focus we have, Toby, is on growing the install base in this business. Growth in the install base, growth of that footprint drives not just product revenue, but it drives recurring revenue stream impact from new service revenue. We are focused, quite frankly, on competitive sockets. This fourth quarter we took away more sockets that we gave up. That is obviously, that's a win/loss ratio that we want to keep driving.

This is still, I would characterize this as still reasonably early phase in our turnaround. We have made some progress, and we are pleased at what we have seen, but we still have work to do. We are not naive, and we are respectful of the fact that we compete against companies that they're going to lay down for us. I think we're going to show up and compete in ways that Accuray has not competed in the past. I think we are starting to see that. Our focus clearly is on, in the context of the product revenue side of the house, the service revenue side of the house, all roads lead back to, in my mind, growing the installed base. That is what makes the difference longer term, and it is going to take some period of time to get the ongoing revenue generation capabilities of this business model back to where it had been. We are talking about reasonably modest growth in service and product revenue in fiscal '14.

Sean Lavin, Lazard Capital Markets.

It's actually Karen Koski for Sean. Two quick questions. Have you made any changes to your salesforce compensation structure over the past few quarters?

The answer is yes. Basically, coming into this current fiscal cycle yes, and actually there were adjustments made to back about the time that I landed here in October, Karen. We talked about, at the time we talked about improved and renewed focus by product platform. We talked about separating the selling responsibilities for the two product lines. We also talked about the importance of separating selling responsibilities for installed base versus new product, new equipment sales. There were different compensation drivers that were put into place, and adjustments made to existing comp plans at that time that I think, quite frankly, have been significant in terms of impact on getting people focused on the right things, quite frankly. If you have confusion on the part of your salesforce when they swing their legs out of bed in the morning about what it is they should be focused on, my experience on that is that you cannot end up at a good outcome. I think that we've -- that the folks that have run our commercial organization have made a lot of really good decisions about selling focus and lining up the compensation in ways that the drivers, the incentives, lining those up in ways that, quite frankly, are influencing behaviors in a very, very positive way.

Okay. So it Is fair to say we are starting to see some traction there?

Yes.

Regarding the incremental spend in Japan and China, should we think of this as a kind of a shift in strategy, or nothing has really changed, this has always been in the plans and you're just choosing to highlight it now?

The answer simply put is no. It is not a change in strategy. We have just finished the strategic business planning process, and we have got -- we have recognized, really from the beginning, and we really just validated those assumptions in this planning process, but job one, or close to job one, was making sure that we fixed our situation and our ability to grow in the US marketplace. We do not have a strategic growth agenda, quite frankly, unless we can fix our position in the US market. That was clearly an anchor need and an anchor strategy, and it remains that. There has been no shift in that discussion at all. The truth is, for a company given where we are at right now, and given the limited resources we have, we need to place our bets in those markets where we can get the very best impact, and when you look at the opportunities available to us in China and Japan, we think those are essentially outsized opportunities for us in terms of the investments required, and on the other end, the kind of impacts they will generate.

Ladies and gentlemen, with no further questions, I would like to turn this presentation over to Mr. Josh Levine for closing remarks.

Thanks for joining us on this afternoon's call. We're aggressively focused on those activities that we believe will unlock the value in our new products and allow us to become a profitable growth-oriented business. We look forward to speaking with you on our first quarter fiscal '14 update. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.