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Varian Medical Systems Inc. (NYSE:VAR)

Q4 FY08 Earnings Call

October 23, 2008, 5:00 PM ET

Executives

Spencer R. Sias - VP, Corporate Communications and IR

Timothy E. Guertin - President and CEO

Elisha W. Finney - Corporate Sr. VP and CFO

Analysts

Amit Hazan - Oppenheimer

Amit Bhalla - Citigroup

Dalton Chandler - Needham & Company

Julie Hoggatt - Noble Financial Group

Junaid Husain - Soleil Securities

Tycho Peterson - JP Morgan Securities

Operator

Good day, ladies and gentlemen, and welcome to the First (sic) [Fourth] Quarter 2008 Varian Medical Systems Earnings Conference Call. My name is Clarissa and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. [Operator Instructions].

I would now like to turn the presentation over to your host for today's call, Mr. Spencer Sias, Vice President of Investor Relations. Please proceed.

Spencer R. Sias - Vice President, Corporate Communications and Investor Relations

Thank you. Good afternoon and welcome to Varian Medical Systems conference call for the fourth quarter of fiscal year 2008. With me are Tim Guertin, President and CEO; Elisha Finney, CFO; and Tai Chen, our Corporate Controller. Tim is going to start this afternoon by summarizing our financial results and operational highlights for the quarter and for the fiscal year. Elisha will detail the P&L and balance sheet and Tim will finish with the company's outlook for the first (sic) [fourth] quarter and full fiscal year 2009. We'll take your questions following the presentation.

To simplify our discussion, unless otherwise stated, all references to the quarter or year, our fiscal quarters and fiscal years and quarterly comparisons are for the fourth quarter of fiscal year 2008 versus the fourth quarter of fiscal year 2007. Annual comparisons are for the fiscal year 2008 versus fiscal year 2007.

Importantly, as described in our press release, we have approved plans to sell the research instruments portion of ACCEL and as such have classified it as a discontinued operation on the income statement and balance sheet. Elisha will provide more detail, but unless otherwise stated, all financial comparisons are from our continuing operations which exclude the impacts of research instruments in both fiscal year 2007 and 2008.

Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, expect, could, should, prospect, intent, believe, opportunity, can, our confidence, anticipate, estimate and similar expressions are intended to identify those statements which represent our current judgment on future performance or other future matters. While we believe them to be reasonable based on information currently available to us, these statements are subject to risk and uncertainties that could cause actual results to differ materially. Some of the important risks relating to our business are described in our fourth quarter earnings release and in our filings with the SEC. We assume no obligation to update or revise the forward-looking statements in this presentation and discussion because of new information in future events or otherwise.

And now here is Tim

Timothy E. Guertin - President and Chief Executive Officer

Good afternoon and welcome. Today we are reporting strong results for the fourth quarter of fiscal 2008 with growth and net orders, revenues, backlog and earnings.

We had an excellent quarter and fiscal year. Revenues grew 15% for the quarter and 18% for the year. Operating earnings increased 19% for the quarter and 24% for the year. Net earnings per diluted share rose 10% for the quarter and 24% for the year. Net orders increased 15% for both the quarter and the year. Our year ending backlog grew 14% to a record $1.9 billion. Our gross margin and operating margin improved for the quarter and for the year.

As you all know, Varian, like many medical device companies, has been the subject of considerable speculation that customers would not be able to find financing for purchases. We saw no sign of this among our customers during the fourth quarter, and I will elaborate on this a bit more in my discussion on operations.

Oncology Systems fourth quarter net orders grew by 17% to $611 million including 15% growth in North America and 19% growth in international markets. Oncology's fiscal year net orders were $1.9 billion, up 14% from 2007 with 13% growth in North America and 16% growth internationally.

Orders of RapidArc products for radiotherapy and radiosurgery continued to be robust. We now have taken more than 300 orders of RapidArc since introducing it last March. Not only is RapidArc a very fast and cost effective clinical tool, it is also the fastest product roll out in our history both in the U.S. and in international markets, which accounted for about a third of the orders taken so far.

We are seeing RapidArc used in a growing number of centers for a broadening range of indications. As you've seen from recent press releases, some centers are using RapidArc for radiosurgery in addition to radiotherapy.

Furthermore, the economic value that RapidArc brings is becoming increasingly important to our customers. By enabling significantly higher patient throughput, clinics can lower their cost for treatment and attract patients by offering greater access to advanced care. Customers also see that the speed of RapidArc gives them more time in the day to expand their clinical offerings into radiosurgery. Expansion into radiosurgery is a choice being made by more and more radiotherapy centers.

Our On-Board Imager or our OB device for image guidance also continued to roll out very strongly during the quarter. Unit orders were up nicely for the quarter and the year and OBs were included on about 85% of high energy machine orders during the fourth quarter. We have now installed more than 1000 of these units, which means about 20% of our installed base of high energy machines have this capability. Given the high OB take rate on new machine orders and the growing OB upgrade business, we are convinced that image guidance is now a standard practice for both radiotherapy and radiosurgery.

Clinical versatility, high patient throughput and return on investment differentiate Varian from the competition and these competitive advantages are more important now during tough financial times when governments, hospitals and clinics are scrutinizing their spending priorities more and more closely. This is one of the reasons that we believe we gain share in 2008.

Suffice it to say, the numbers show that we are well ahead of all competitors in the rollout and deployment of products for volumetric arc treatments and image guided radiotherapy and radiosurgery. The key to our success in these important growth areas is having commercially viable, clinically practical products that are complete and ready to go when they are rolled out to the market.

We also had solid growth during the quarter in other important parts of the oncology business. Orders for our treatment planning and information management software products grew by more than 20%. Our service business also grew by more than 20% and is now a better than $425 million business for us.

As promised, before turning away from oncology, I will touch on customer financing and hope that the numbers we have reported today give a little more support for what we have to say.

To repeat what we told you in May during our mid-year review in New York, financing continued to be available for customers who bought our radiotherapy products during the fourth quarter. We are in the unique position of having a dedicated team that helps find... helps customers find the financing that they need, and this gives us a very good window on the credit situation. Here is what we see.

First, we help roughly 10% our customers in North America get financing from third party lenders. The other 90% of our customers pay us cash and arrange their own financing. We saw reduced DSOs during the quarter, so that gives us some confidence that customer payments continue to be timely.

Second, for the customers we help, there are several banks inside and outside North America who compete to finance purchases. We work to get the best finance deal for the customers and we are not committed to working exclusively with one bank. So as an example, in a typical quarter, we help 10 to 15 customers get financing with anywhere from three to five different banks.

I believe the continued willingness among banks to provide credit, albeit at a higher rates, is because cancer must be treated in good and bad financial times and the return on investment for Varian equipment is very good.

While hospitals, like most organizations, are taking a closer look at spending, radiation oncology is one of the very few areas where they can increase revenue as a result of making capital investments. As hospitals search for services that increase profitability, they will focus the capital expenditures they do make on equipment that generates added revenue, particularly if like RapidArc, it enhances patient throughput and productivity. Consequently, we expect that spending on products like ours should do better than many other types of healthcare capital spending.

Turning to X-ray products, net orders grew 19% to $94 million for the quarter and 24% to $337 million for the fiscal year. Net orders for our flat panel detectors for film less X-ray imaging rose by 50% versus the year ago quarter and by more than 70% versus the last fiscal year. Meanwhile, orders for X-ray tubes were up by 8% for the quarter and 5% for the full fiscal year. Flat panel orders represented nearly 40% of the total orders for our X-Ray Products business during the year.

The development and expansion of our flat panel product line resulted in X-Ray Products having the fastest orders growth rate in our company for the year. We began commercial shipments of our new panel for digital radiography during the quarter and we have high hopes for this new product in fiscal 2009.

Other key milestones reached in the quarter included faster revenue growth in China, helped by regulatory approval of some new tube products as well as the acquisition of a local distributor earlier in the year. China revenues are up by more than 50% for the year. Orders and revenues in Europe were also up nicely for the quarter and the year.

I will now turn to our other category, which includes our security and inspection products and ACCEL proton therapy businesses as well as our Ginzton Technology Center. Fourth quarter net orders for these businesses fell by $10 million to $21 million and annual net orders fell $7 million to $95 million. Although net orders for security products were down for the quarter, but they were up 10% for the year. Meanwhile, revenues in the security business were up 20% for the quarter and about 70% for the fiscal year as we supplied products for installation in Europe, the Middle East and the U.S.

During the quarter, we began to see a larger mix of orders for our dual energy systems for automatic image analysis and automatic detection of nuclear materials in cargo containers. We have successfully developed a compact version of the dual energy accelerator which can easily be retrofitted into existing Varian equipment installations in addition to being supplied for new systems.

In proton therapy, we have not yet booked a system order, and this is a business that will depend on access to capital and credit. We remain on track with development of control software for our proton therapy system and we continue to work with customers on supply and service contracts for new proton therapy centers.

Now I'll turn it over to Elisha for a review of the numbers and then come back to you with our outlook for the first quarter and the full fiscal year of 2009. Elisha?

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

Thanks Tim and hello everyone. As usual, I will walk you through the income statement as well as cover a few balance sheet items.

Let me start by taking a moment to talk about our plan to sell the research instruments portion of ACCEL.

In the second quarter of fiscal year 2007, we purchased ACCEL in order to enter the proton therapy business. Within ACCEL, the research instruments business is focused on physics research. And while this is enormously useful for science, it does not fit with Varian's mission of focusing energy on life saving products.

We have decided to sell this business and therefore have classified it as a discontinued operation on the income statement and balance sheet. As such, revenues, expenses and impairment charges for this business are now excluded from continuing operations in the fourth quarter of 2007 and 2008 and in both full fiscal years. The total charge per diluted share for discounted operations was $0.06 for the fourth quarter and $0.12 for the fiscal year.

Please refer to our website for a reclassification by quarter of the research instruments business as a discontinued operation for fiscal years 2007 and 2008. So from here on now my quarter-over-quarter and fiscal year comparisons are for continuing operations. As usual, my comparisons do include the impact of option expensing and the acquisition of the proton therapy part of ACCEL in the second quarter of fiscal year '07 and the acquisition of BIR in the year ago third quarter.

Fourth quarter revenues of $593 million increased 15%. Oncology Systems posted an increase of 13%. X-Ray Products posted a gain of 25% and revenues from businesses under the other category increased by 20%.

In local currency, total company revenues increased 12% from the year ago quarter. For the full fiscal year, revenues increased 18% to $2.1 billion with 16% growth in Oncology Systems, 19% growth in X-Ray Products and 62% in our other category. In local currency, total company revenues increased 14%.

The fourth quarter gross margin for the company, increased by 2 points to 44.3%. Oncology Systems' gross margin increased 2.5 points to 45.3%, due primarily to volume, to product mix and geographic mix. X-Ray Products gross rose 2 points to 40.9% due to the higher proportion of flat panel revenue. For the year, total company gross margin is up 64 basis points to 42.4% with roughly a 1 point gain in Oncology Systems and a 1 point decline in X-Ray Products.

Fourth quarter SG&A expenses were $88 million or 15% of revenues, up almost 1 point as a percentage of revenues with the year ago quarter. But for the year, SG&A as a percentage of revenues is 16%, down slightly from the prior fiscal year.

R&D expenses were $39 million or 7% of revenues, up slightly from the year ago quarter as a percentage of revenue. And R&D expenses for the year were $136 million, up 16% in absolute dollars but even with the prior year at 7% of revenue.

Moving down the income statement, fourth quarter operating earnings rose 19% to $136 million or 23% of revenue, up 1 point from the year ago quarter as a percent of revenues. For the quarter, our Oncology Systems and X-Ray Products businesses together contributed $153 million in operating earnings while our other category and corporate consumed a net $17 million. For the full fiscal year, operating earnings were up 24% to $419 million or 20% of revenues.

Depreciation and amortization totaled $10 million for the fourth quarter and $36 million for the year. Net interest income was $2 million for the quarter.

The effective tax rate was 37% for the quarter and 31% for the year. And while on the subject of taxes, we are obviously pleased that the R&D tax credit was reinstated for 2008 and extended through 2010. We expect that our first quarter and fiscal year 2009, tax rate will be positively impacted by about 30 basis points as we get to catch up our 2008 tax credit. I expect the tax rate for fiscal year 2009 to be about 31% to 32% with a slightly lower rate in the first quarter.

Compared to the year ago quarter, diluted shares dropped by 600,000 shares to 127 million, due primarily to the ongoing share repurchase program. Diluted EPS from continuing operations rose 10% to $0.68.

Now turning to the balance sheet. We ended the quarter with cash and cash equivalents of $397 million, debt of $40 million and stockholders equity of $1 billion. DSO or day sales outstanding for the quarter was 74, down 14 days from the year ago quarter and down 4 days from the prior quarter due to very strong collections. Fourth quarter cash flow from operations was $82 million with all of it coming from net earnings. Primary uses of cash were $85 million for the stock repurchase program and $22 million for capital expenditures. During the quarter, we spent $85 million to repurchase 1.5 million shares under a 12 million share repurchase program that extends through the end of this calendar year.

Now I will turn it back over to Tim for the outlook.

Timothy E. Guertin - President and Chief Executive Officer

Thanks Elisha. Well despite the onset of turbulent financial times, fiscal 2008 was an excellent year for our company with important product introductions that contributed to strong financial results and a record backlog that sets the stage for continued growth. We believe that for the first quarter of fiscal year 2009, total company revenue should increase by 10% to 12% over the prior year, net earnings per diluted share from continuing operations for the first quarter of fiscal 2009 should be in the range of $0.51 to $0.53 compared to $0.46 of net earnings per diluted share from continuing operations in the first quarter of fiscal 2008.

While the present economic climate creates additional uncertainties for the coming fiscal year, we currently believe that company revenues for the full fiscal year could increase by 10% to 13% over the fiscal 2008 total. Net earnings per diluted share from continuing operations for fiscal year 2009 could be in the range of $2.58 to $2.63 compared to $2.31 in net earnings per diluted share from continuing operations for fiscal 2008.

So thank you and we are now ready for your questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Amit Hazan from Oppenheimer. Please proceed.

Amit Hazan - Oppenheimer

Hey, good afternoon guys. Can you hear me okay?

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

Yes.

Timothy E. Guertin - President and Chief Executive Officer

We can hear you fine.

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

Hey Amit.

Amit Hazan - Oppenheimer

Hey, thanks for the color on customer financing issue. I noticed there was a lot of questions on that. I wanted to kind of ask the question from another angle since the majority of your systems are purchased without financing. What are you seeing at the hospital level in terms of orders or installations on those other systems? Are you seeing some delays at all that may be offset by your market share gains on either side or any granularity you can give us on that point?

Timothy E. Guertin - President and Chief Executive Officer

We're just not. We are seeing pretty much business as usual. Certainly customers talk about the situation. But the effect on us has been very small. Financing is available, customers are getting it. They can get it from us or they can get from other sources. I think we have the right strategy to weather this. I must say that there is almost a disconnect between what we're seeing when we talk to our customers and their behavior. And what we're hearing when we read about ourselves in the press, it's an amazing disconnect. I think people have assumed that... I think they are just making a couple of mistakes. For one thing, they assume credit is not available, and credit is available for our customers. Second of all, they are assuming a slight interest rate rise, a 1% or 1.5% interest rate rise is devastating to our market. It's just not true. It's just not a noticeable effect for our customers.

So we are not seeing a slowdown. We also want people to take account that we're a diversified company. We exist in more businesses than just radiation oncology. And those other businesses are showing some striking growth. And so for a lot of reasons, we think we are doing better than people seem to expect us to be able to do. I think we are also in a good position to weather this situation better than our competition are. Cancer, as I said, must be treated. People do want the best treatment and I think right now we are way by far and away offering the best treatment. And clinics also want lower cost per treatment. That's the sort of thing they want to do in order to protect themselves. And we are offering that. So we are offering them versatility, high throughput, high quality, low cost per patient. And I think our size and our balance sheet also reassure customers that we are the right vendor for them to be purchasing from. So for all of these things, for all of these reasons, I think we are doing good.

Amit Hazan - Oppenheimer

Great, that's very helpful. And should we see oncology orders grow in the low double-digit for your fiscal year '09 as well?

Timothy E. Guertin - President and Chief Executive Officer

Well right now things look good for oncology and the funnel looks good. We are just going to watch it as the year goes along. As you know, I'm always reluctant to forecast orders. But we don't see anything that would cause us to change. I will say that when I gave my guidance, we put some caution in the lower end of our guidance that we built into that already. If all of this wasn't going on in the world, I probably wouldn't have been as cautious in our guidance. But I have to say even though the effect... we are not seeing the effect that people are talking about, we want to be careful on what we tell you.

Amit Hazan - Oppenheimer

Okay. I appreciate that. And just moving on then, gross margin, clearly one of the highlights in the quarter, especially on the Oncology Systems side. Elisha, can you help us out a little bit? You said I think mix and geography. I'm just wondering to what extent that was RapidArc that helped that and probably maybe more importantly, kind of how we should think about that in terms of expectations for the next fiscal year?

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

Right. Well RapidArc was insignificant in terms of the Q4 and fiscal year '08, because as you know, we take the revenue on acceptance as a software product. So it was less than 3% of the oncology sales in the quarter. So really RapidArc was important in the orders number, will become more important in the revenue line as we are now moving into fiscal year '09.

Amit, the hardest thing for me to sit here and anticipate at this point is what's going on the FX markets. We have just seen some huge volatility. If all states equal, yes, RapidArc should have an upward bias on the gross margin. But again, if the dollar continues to strengthen, then that could have a negative impact on our margin to offset some of that. So we were able to get a full point improvement for the year. I think going into FY09 you should assume margins roughly equal to maybe slightly up from fiscal year '08.

Amit Hazan - Oppenheimer

Okay, thanks guys. I'll jump back in queue.

Operator

Your next question comes from the line of Amit Bhalla from Citigroup. Please proceed.

Amit Bhalla - Citigroup

Hi, good afternoon. A question to start with on guidance for Elisha. I just wanted to make sure I understood your current guidance versus your previous guidance which was around $2.52 for fiscal '09. Your previous guidance did not assume R&D tax credits but it was absorbing about $0.08 of the excel dilution. Is that correct?

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

That is correct. In terms of the top line on it we reduced FY08 by about $35 million in research instruments sales in '08 so you have to take it out of the top line and the bottom line. In terms of the, about it was $0.07 if you look at the discontinued operation. Excluding the impairment charges related to the research instruments business operations lost about $0.07 in fiscal year '08. Yes, it is true that goes away, but what we're doing is we're really starting to ramp up our proton business. We are hiring service people. We are getting more into the regulatory function and to marketing and to sales, manufacturing. So the expectation is that the RI loss will be offset as we continue to ramp up the proton business and get ready for sales in FY10.

Amit Bhalla - Citigroup

So if I am looking at your current range, if I wish to make a comparable at $2.52, I would have to strip out the $0.03 from tax and the $0.08 from ACCEL to at least make it comparable.

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

Well I think we've kind of... if you were to strip out... if we had the RI business in FY08, EPS would have been $2.24 I think the number is. It would have been $2.24 and then you would just compare that to the current guidance that we have given.

Amit Bhalla - Citigroup

Okay, and let me follow up with a question on just the core business. RapidArc orders clearly were very strong. Maybe Tim, can you comment on how the rest of the business is doing in terms of price in units. Are you seeing growth excluding RapidArc and then just one last question after that.

Timothy E. Guertin - President and Chief Executive Officer

Yes, we are seeing pricing and units are looking okay to us. In Novalis, we introduced the stereotactic machine, the Novalis TX, and that's been doing well for us. So I think we doing okay on units and we are doing okay on pricing. There is no doubt that RapidArc like any new product has helped us a lot. Also, the brachytherapy business grew 20% for the year and our software business... I mean for the quarter... and software businesses grew by 20% and our service business grew by 20%. So the business has got a lot of legs; it's not just a one trick pony, it's scoring on a lot of fronts.

Amit Bhalla - Citigroup

I completely understand the diversification piece. Just want to be clear that your core oncology business we are looking at, at Linnex [ph], did you say that grew?

Timothy E. Guertin - President and Chief Executive Officer

Yes, yes it did.

Amit Bhalla - Citigroup

Okay.

Timothy E. Guertin - President and Chief Executive Officer

I am not... I can't... I don't have the number for you, but it did grow.

Amit Bhalla - Citigroup

Okay, just a last one. Elisha, you can give us the constant currency order rates for the businesses out there?

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

Sure. Let's see, total Varian instead of having 15% orders growth in the quarter was 12% on constant currency and oncology alone instead of 17% in the quarter would be 14% on constant currency. For the year, it really made a 4 point difference for both Oncology instead of 14%, would have been 10% total company, 11% versus the 15% reported in dollars.

Amit Bhalla - Citigroup

Thanks.

Operator

Your next question comes from the line of Dalton Chandler from Needham & Company. Please proceed.

Dalton Chandler - Needham & Company

Good afternoon.

Timothy E. Guertin - President and Chief Executive Officer

Good afternoon.

Dalton Chandler - Needham & Company

I just want to make sure I understand the, I think you are talking about either the $0.12 for the year from discontinued operations, $0.05 was the impairment charge. So with that also, the part of the $0.06 for the quarter.

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

Yes, it was $0.01 of operating loss in the fourth quarter and $0.05 impairment charge.

Dalton Chandler - Needham & Company

Okay. And what was the revenue associated with that for the fourth quarter?

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

For the year, it was $35 million and for 2007 was $22 million and for the quarter, let me get that, $11 million... I'm sorry $13 million in Q4.

Dalton Chandler - Needham & Company

Okay, great. And then just on the... you had commented on the decline in DSOs, and it had been pretty steady for a while around 90 days give or take. And it's come down pretty dramatically in the last two quarters. Is there something in particular you are doing to drive that?

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

There is just a lot of focus on it. We had again I believe record collections in the quarter. We have added some collection staff in Europe, which is making a big difference. We have not really added any additional collectors in the U.S. But we are very focused on it. I would say that 74 is low. If you look back on the last four quarters, we have averaged 83 days. So I think if we can... it was a significant improvement, but I don't want promise 74 days every single quarter going forward.

Timothy E. Guertin - President and Chief Executive Officer

And it's a big denominator too. I mean we have a lot of sales in the fourth quarter, so that always helps us bring down DSO in the fourth quarter.

Dalton Chandler - Needham & Company

Okay. And then I guess I have to ask the obligatory financing question. Obviously, for the quarter, you did very well with the orders you took, but really the worst of it was probably the last two weeks of the quarter in terms of what was going on with the financial markets. Was there any impact there or was it just business as usual right through the whole month?

Timothy E. Guertin - President and Chief Executive Officer

It was business as usual. Furthermore, since then, I've asked our... I called our service manager the other day and asked several of them and they check with their field organization to see if they were seeing any delays in terms of site readiness, and they are not. We're only a couple of weeks into October, but still we might have seen something, but we're just not.

Dalton Chandler - Needham & Company

Okay, great. Thanks a lot.

Timothy E. Guertin - President and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Julie Hoggatt from Noble Financial, please proceed.

Julie Hoggatt - Noble Financial Group

Hi guys, thanks for taking my question. Just so we are clear, has there been any expansion in the sales cycle or any type of slowdown due to the current economic environment?

Timothy E. Guertin - President and Chief Executive Officer

Expansion of this... you mean lengthening in the sale cycle?

Julie Hoggatt - Noble Financial Group

Yes.

Timothy E. Guertin - President and Chief Executive Officer

Well it doesn't appear to be happening. I mean all I can do is ask the sales people, but they are not seeing it. I mean obviously, customers do read the newspaper. So they're talking to us about things. And I can see that there is a plausible scenario for everybody to listen, to look at. But the truth is as I said, they can get credit, the payback on these machines is good. We're not seeing the effect that other people are reporting. It's always possible that it could happen. We do want to be careful, but in the last month, we have not seen it.

Julie Hoggatt - Noble Financial Group

Okay. And can you tell me what the stock-based expanses were in the quarter?

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

I believe it was $0.06 Julie. It's on the P&L attached to the press release there.

Julie Hoggatt - Noble Financial Group

Okay, thank you.

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

Take a quick look, $0.06, yes.

Julie Hoggatt - Noble Financial Group

Okay, thank you.

Timothy E. Guertin - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Junaid Husain from Soleil Securities. Please proceed.

Junaid Husain - Soleil Securities

Good afternoon, guys.

Timothy E. Guertin - President and Chief Executive Officer

Good afternoon.

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

Hey.

Junaid Husain - Soleil Securities

Tim, just a couple of questions on RapidArc. Could you tell us how many RapidArc installations have been done year-to-date?

Timothy E. Guertin - President and Chief Executive Officer

We have 30 that are clinical, about 30 that are clinical.

Junaid Husain - Soleil Securities

Okay.

Timothy E. Guertin - President and Chief Executive Officer

So we're still spinning up there.

Junaid Husain - Soleil Securities

And could you give us a sense for how many installations you might be performing on a weekly basis and where you expect this rate... how you expect this rate to go?

Timothy E. Guertin - President and Chief Executive Officer

Well, I don't know that number, but I will tell you it will go... 30 in 6 months is remarkably low compared to what we will do next year. I mean we can... if you look at the OB installed numbers, you can see that they're much higher than that, and OB is a lot more difficult for us to install than RapidArc. So RapidArc is a treatment planning and a machine modification. So I suspect that rate will speed up a lot, but I don't have the number with me that shows what the rate will be.

Junaid Husain - Soleil Securities

Okay, fair enough. And then how many field reps are performing the installations and would you expect this number of reps to expand?

Timothy E. Guertin - President and Chief Executive Officer

Yes, I'd like to you compliment you or thank you for your compliment on the amount of knowledge that I have about the number of field reps we have. But I don't know that number either. We've obviously added field reps. as I recall, we added more than 300... the number we added last year... 250, okay. I think we added a large number of field reps last year. Now they are not all there to do RapidArc; they are there to support this large service business and the OB and all of these other things. But this is... we have... I've been assured by our service management that we have the staff necessary to accomplish the mission no matter. And we are not going to be behind at all. If customers are ready to take RapidArc, we'll be ready to install it.

Junaid Husain - Soleil Securities

Okay, fair enough. And Tim maybe I'll go more macro then. Help us if you could understand your presence at the ASTRO meeting this year and how this might have helped your net order number in the quarter. Do you get the sense that you filled a good number of orders in the last couple of weeks of the quarter, seeing as ASTRO was at the end of September, and all the key decisions makers were in Boston for the meeting, which made it easier for your sales guys?

Timothy E. Guertin - President and Chief Executive Officer

Actually, it makes it more difficult and the... because we had to have sales people there and decision makers were there and it actually makes it harder, I mean, when I heard a year ago that we were going to have to do the ASTRO in the last week of our fiscal year, that was not a happy moment for me.

Now as it turned out, because we had a year to prepare for it, our sales people came to the meeting and a lot of them left a little earlier than we might as, or came a little later than we might have otherwise done. And they were able meet with the decision makers who wanted them, they wanted to meet with. So we are able to pull it off. But I wouldn't say that ASTRO was an advantage, no. In terms of this year, it is an advantage to have a ASTRO out of the way. Usually it occupies a week for us in the middle of October, and kind of takes a few days out of our fiscal quarter. So I think, it is an advantage for us to have done it. And I got to say, a lot of our customer came, they heard about RapidArc a year ago. We made a big splash. We had the big signs up on the walls of the building and everything. They came this year to find out how it was going, and to get some sense of how real it was, and just get an update on it. And furthermore, we had a lot of planning systems there, so they could sit down, and try to create plans for themselves. And so, I think it helped actually, give us additional momentum by having the ASTRO late down right at the beginning of the fiscal year for us.

Junaid Husain - Soleil Securities

Good enough. Thanks so much guys. That's all I got.

Timothy E. Guertin - President and Chief Executive Officer

Thank you.

Operator

Your last and final question comes from the line of Tycho Peterson from J.P. Morgan. Please proceed.

Tycho Peterson - JP Morgan Securities

Hey, thanks for taking for taking the call.

Timothy E. Guertin - President and Chief Executive Officer

Hi Tycho.

Tycho Peterson - JP Morgan Securities

I guess continuing with ASTRO theme, I was just wondering if you can comment maybe on the level of competitive noise that you're seeing out there with VMAT and ARTISTE just what the dynamic is competitively in the marketplace lately.

Timothy E. Guertin - President and Chief Executive Officer

Yes. Well, we think that our competitors are behaving a little... we're seeing additional desperation I guess, and that's what it looks like to us anyway. The way the desperation manifest is lower pricing and people trying to convince people who bought Varian that they made a mistake and stuff like that. These things don't usually work by the way. So we're seeing some low balls [ph] on the part of some of our competitors there and we're seeing them take some risks in terms of the terms they're willing to take, terms that Varian wouldn't take. They are offering to take those terms. And so they're accepting some risky in deals. And if you are a leveraged company, or if your profits are not very good, that's a very poor strategy I would say in these times.

So we are seeing behavior by our competitors that, if I were them, I don't think I'd be volunteering to do. But overall, I think customers who looked at what our competitors offer and look at what we are offering are very pleased with what they're seeing. We had... we showed some advanced technologies at ASTRO and we had I think one particular technology, had 400 or 500 people come and see and just tell us that they were thrilled at the direction we're going in.

So I think we have captured the imagination of our oncology customers in a way that a year ago or two years ago maybe we hadn't. And I think that the message that high speed matters, that versatility and throughput and cost per patient is important and that you don't have to pay a fee, you don't have to increase your cost in order to improve the quality of your care. You can get improved care and lower cost at the same time. I think that message has penetrated more than and it ever has before. And so when people talk to us about it, they're really thrilled. And I think the RapidArc name, I think the branding of RapidArc has worked. I think it's caught on.

And I'll say since you're the last questionnaire, our marketing program seems to be working, getting lots of positive compliments. And so although our SG&A was a little higher than it might have otherwise been in the fourth quarter because we spent on it, we felt that it worked really well. We had great PR in The Wall Street Journal, 35 television stories, 10 local stories, 500 Dear Cancer letters; it's just been working well for us.

Tycho Peterson - JP Morgan Securities

Maybe just to pick up on that, can you remind us where you are in the direct to consumer plan? I mean you've rolled it out in a couple of markets. How do we think about it for the coming year?

Timothy E. Guertin - President and Chief Executive Officer

We spent quite a bit of money on it in the fourth quarter and we'll probably continue to spend money on it throughout next year. It worked. We'll just switch to other geographic areas and continue to do that. And we learn as we go, but clearly, people are hearing the message and responding positively to it.

Tycho Peterson - JP Morgan Securities

Thanks, that's helpful. On the... ASTRO has kind of come out with a position paper on stereotactic for prostate. And I would assume from your positioning that that's a relative competitive advantage. Can you just comment though on how you view the position there and what you've heard back from some of your customers?

Timothy E. Guertin - President and Chief Executive Officer

Well in fact I talked to a customer a little bit ago about this. The position that the ASTRO took was that they five fractions for... to the prostate, a kind of radio surgical technique to the prostate was not the standard of clinical care. It was investigational in nature. And the nice thing about investigational stuff is it may work out. It may not work out, but it may work out. So there are a lot of scientists who are investigating whether or not this method will work as well. The prostate is one of those sites where you really have to wait a decade to get the kind of information you want to have because you can have these very long-term effects.

So we think that that decision by the ASTRO was wise and we think it was investigational and we think that people who were doing it not investigationally will read what the ASTRO had to say and probably modify their practices accordingly. And the same is going to be true, there is going to be studies on lung where people are going to try to do half fractionation of the lung, and those studies should be done very carefully.

But the last point I want to make is if it turns out this stuff works, our machines can do it better and faster than our competitors can. So one way, I don't care which way it turns out, we win. But I'm always concern when people push clinical procedures to the public before those procedures have been properly vetted by clinical scientists. And so this is a very unusual thing for ASTRO to do, but I was proud of them for doing it.

Tycho Peterson - JP Morgan Securities

Okay. Great. And then just one last one on the international markets. You guys obviously had very good international order growth this quarter. But maybe as we think a little bit about the dollar being strong here and some of the issues you've run into in the past with regards to tenders and things, can you just talk a little bit about how you view the international market playing out over the next year?

Timothy E. Guertin - President and Chief Executive Officer

Well, I wish I knew where currencies were going, because, so we could have a different conversation. I don't know what's happening. I guess the euro is what, at $1.28 today?

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

1.28.

Timothy E. Guertin - President and Chief Executive Officer

So clearly as the euro weakens and the dollar strengthens, that will change the competitive dynamics a little bit for us in Europe. However, I must tell you that we competed in Europe when the euro was $0.80 and we will compete just fine if the euro is at $1.20 or $1.10, we'll do just fine in Europe. And the nice what we are going to do is, we're going to compete on innovations, and we're going to compete on throughput and we're going to argue that our machines are the best for innovation and the best for throughput and that our treatment plans are the best. And as always, we are not the low price leader. We are the people who I think are the most innovative and we want customers to recognize that innovation and we want to be properly compensated for it. And I think we will be. And that's the strategy that we'll be pursuing. I mean, yes, it would be nice if the currencies would sit is still for a while so that we could all go into steady state and plan for it. But apparently, that is not to be.

Tycho Peterson - JP Morgan Securities

Okay, thank you very much and congratulations on the quarter.

Timothy E. Guertin - President and Chief Executive Officer

Thank you very much.

Elisha W. Finney - Corporate Senior Vice President and Chief Financial Officer

Thanks Tycho.

Operator

At this time, there are no further questions in queue. I'd like to turn the call back over to Mr. Spencer Sias for closing remarks. Please proceed.

Spencer R. Sias - Vice President, Corporate Communications and Investor Relations

Thank you for participating. For listeners who may have come in late, this call have been taped and it will be available for replay beginning at 4:00 PM Pacific Time today on our Investor Relations website at www.varian.com/investor. But if will be archived for a year. You can also access a replay via telephone by dialing 1-888-286-8010 from inside the U.S. or 1-617-801-6888 from outside the U.S. and entering confirmation code number 20390351. The telephone replay will be available through 5:00 PM Pacific Time, October 25, 2008. Thank you.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day. .

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Source: Varian Medical Systems Inc.F4Q08 (Qtr. End 09/30/08) Earnings Conference Call Transcript
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