Accuray Incorporated F3Q09 (Qtr End 03/28/09) Earnings Call Transcript

May. 5.09 | About: Accuray Incorporated (ARAY)

Accuray Incorporated (NASDAQ:ARAY)

F3Q09 (Qtr End 03/28/09) Earnings Call Transcript

May 5, 2009 5:00 pm ET

Executives

Tom Rathjen – VP, IR

Euan Thomson – President and CEO

Derek Bertocci – SVP and CFO

Analysts

Erik Schneider – UBS

Mark Arnold – Piper Jaffray

Amit Hazan – Oppenheimer

Sung Ji – JP Morgan

Josh Jennings – Jefferies & Company

Larry Haimovitch – HMTC

Junaid Husain – Soleil Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to Accuray third quarter fiscal year 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I would now like to turn the conference over to Mr. Rathjen, Vice President of Investor Relations. Please go ahead, sir.

Tom Rathjen

Thank you, Brady. Hello and thank you for joining us this afternoon for Accuray's conference call for the third quarter of fiscal year 2009. Joining us today are Dr. Euan Thomson, Accuray's President and Chief Executive Officer, and Derek Bertocci, Accuray’s Senior Vice President and Chief Financial Officer. As we did last quarter, we will again be referring to backlog data, which is found in a PDF file on the Investor Relations page of the Accuray website at accuray.com. Please log on to this site to view this information.

Before we begin, I need to remind you that except for the historical information, the information that follows contains certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include the matters described in the Risk Factors sections of our report on Form 10-K for the 2008 fiscal year as updated from time to time by our quarterly reports on Form 10-Q and other filings with the SEC.

And now I would like to turn the call over to our President and Chief Executive Officer, Dr. Euan Thomson. Euan?

Euan Thomson

Thank you, Tom. And thanks to everyone for joining us on our fiscal third quarter 2009 conference call. I’ll start the call with a recap of some of the business highlights of the quarter. Next I will comment on the current state of the market for the CyberKnife. Finally, I will provide clinical and reimbursement updates and then turn the call over to Derek who will give a detailed review of our financial results and outlook.

So to begin with, I would like to provide a review of the financial highlights from the third quarter. During the quarter, Accuray set a record for total revenue with $61.3 million, a 4% increase over the same period last year and a 6% sequential increase from the second quarter. Services revenue was $17.9 million in the third quarter or 29% of total revenue, representing an increase of 62% over the same period last year. We continue to see growth in this recurring revenue stream as very positive, since it represents a steady, predictable revenue flow from long-term contracts.

Our net income for the quarter was $1.2 million or $0.02 per diluted share. This includes a one-time charge of $1.6 million or $0.03 per diluted share associated with severance costs related to the workforce reduction we announced last quarter. We added 15 new CyberKnife system orders to backlog in the third quarter, which together with service renewal by existing customers resulted in a total addition to backlog of $81.6 million. Seven of the new system orders were from the United States and eight were from international markets, including six from our European sales region where we are seeing considerable growth. Derek will provide a more detailed analysis of backlog in a few minutes.

During the third quarter, a total of nine CyberKnife systems were installed, bringing the worldwide installed base to 164 systems. Six new systems were installed in the United States and three outside the US. Each of the six US installations was accompanied by commitment to our Premier Diamond service agreement, representing a continued strong uptake of our high-level service programs and providing us with a good indication of future growth within our recurring revenue streams.

In addition, three of the new US customers began spending upgrade points prior to the actual installation of the CyberKnife, further demonstrating the value our customers place on the Diamond service program. During the third quarter, there were also two additional shipments to distributors internationally that we expect will be installed over the next quarter or two.

Now I’d like to review the market climate for the CyberKnife. On a worldwide scale, despite ongoing global economic headwinds, our business has remained strong. Once again, we had no cancellations from non-contingent backlog in the third quarter, and there has been no impact on construction programs worldwide. In the last four quarters, we have had no cancellations from non-contingent backlog.

We found that many US hospital customers do still have available budgets. The spending of those funds involves demonstration of a strong return on investment on a low level of risk. As a result, we have modified our sales effort to reinforce not only the important clinical value of the CyberKnife, but also economic pro forma information demonstrating strong return on investment for customers. We believe that this focus was responsible for the strong sales results in Q3. The CyberKnife has a unique capability to build new clinical practice focused on non-invasive tumor ablation. As such, it brings new patient population into the hospital along with new revenue stream.

For those customers who purchased last year’s upgrade package, treatment times have decreased significantly as patient throughout has increased, further enhancing efficiency and economic value of the CyberKnife. As a result, we are finding the CyberKnife to be in a strong position to gain the attention of hospital administrators with limited budgets.

According to recent analyst reports on hospital spending, replacement of existing capital equipment can be at high risk for budget cuts in the current environment. The CyberKnife, on the other hand, is not replacement equipment. It therefore represents a new business opportunity to the hospital, serving new patient population.

To give you some specific examples, in Colorado Springs, Colorado, Penrose-St. Francis Healthcare Center recently postponed some building renovations, but purchased a CyberKnife for their cancer center. Fox Chase Cancer Center in Philadelphia, one of the country’s first hospitals dedicated entirely to the treatment of cancer and a leading research center, is installing a CyberKnife. Kaiser Permanente has now completed installation of a CyberKnife at their hospital in South San Francisco, California. We feel that these sites demonstrate the point that projects involving enhanced clinical practice, a new patient flow are still able to obtain funding.

In summary, new order flow in the US remains solid despite the challenging economic environment. Accuray’s international order flow is yet to see any significant impact of the economic downturn and remains strong, particularly in Europe where solid growth for CyberKnife continues. This is a market that typically bases its purchase decisions on clinical data and is less impacted by financial consideration.

Last month, Accuray sponsored the second European radiosurgery workshop. This attracted double the attendants of last year’s event, reflecting strong and growing interest in full body radiosurgery. There were more than 200 attendees from 28 countries throughout Europe and the Middle East. And presentations were given on the latest clinical experiences with CyberKnife.

Our business in Asia, while not progressing at the speed of our European market, remains encouraging. During the quarter, the first CyberKnife center in India began treating patients. And as we recently announced, Japanese patients are now receiving extracranial treatments on the CyberKnife system for an expanded regulatory approval. Japan contains our second largest installed base of customers and offers significant opportunities of further growth, as customers become more familiar with extracranial applications.

Moving on to our clinical programs, interest in CyberKnife radiosurgery treatments continued to expand among the medical community. The distinction between radiosurgery and radiation therapy is becoming widely recognized, with the CyberKnife Robotic Radiosurgery System remaining the only dedicated whole-body radiosurgery system on the market. We continue to see increasing interest among clinicians in the use of CyberKnife for both inoperable and operable lung cancer patients.

The University of Pittsburgh Medical Center is leading a multi-center Accuray-sponsored study to inoperable lung cancer patients and has accrued more than 110 patients as of the end of Q3. The first interim results demonstrating preservation of quality of life for CyberKnife patients were presented in January at the Society for Thoracic Surgeons Meeting. We expect continued analysis of results over the coming years, as these patients are followed.

In addition, approximately 40 centers worldwide have now applied to participate in the prospective, randomized study, led by the MD Anderson Cancer Center comparing use of the CyberKnife with traditional surgery for treatment of operable lung cancer. Although still in its early phase, we are seeing great interest among both radiation oncologists and thoracic surgeons.

As we recently announced, more than 3,000 patients have now been treated for prostate cancer using the CyberKnife. Over 40 centers in the US are currently involved in Accuray-sponsored prostate studies and an additional number of centers are involved in independent prostate study efforts. Our two sponsored prospective multi-center prostate studies have continued to generate tremendous interest from commissions and patient, accruing approximately 250 patients through the end of Q3. We are confident that these efforts will provide the means to collect the high quality data needed to evaluate the outcomes of CyberKnife radiosurgery treatment for prostate cancer.

Further support for prostate radiosurgery was provided by publication in March of a Stanford paper showing 100% PFA response at a medium follow-up of 33 months after CyberKnife treatment. Also on the clinical front and as evidence of the emerging potential of CyberKnife, a clinical paper was recently published on the use of CyberKnife to treat women with breast cancer whose tumors were too large for breast-conserving surgery.

The CyberKnife decreased the size of the tumor in all six patients, and in some instances, tumors were no longer palpable. In all cases, patients became eligible for breast-conserving surgery. Although in early stages in clinical development, the initial results are an encouraging first step in validating the concept of using the CyberKnife as a first line replacement for surgical treatment of breast cancer.

Finally, before I turn the call over to Derek, I want to give you a brief update on the reimbursement environment in the US for CyberKnife. As you all know, reimbursement deals with both coverage and payment issues. At this time of year with the new administration, there is understandable interest in future Medicare payment rates. These payment rates have traditionally been determined based on hospital cost data reported to CMS, and there has been no indication that the rates they were proposing for 2010 will deviate from this established calculation method.

What is also important is the degree to which the range of indications of the CyberKnife become accepted by the payer community. Each indication accepted broadens the base of patients for whom CyberKnife is an option, a key factor for those considering the CyberKnife purchase.

In this respect, I’m pleased to report the Palmetto, the Medicare carrier for California, Hawaii and Nevada, has reconsidered its decision not to cover radiosurgery for prostate cancer. Having reviewed clinical data and listened to the views of patients and physicians, Palmetto decided in January to provide coverage for prostate patients. Other welcome news this quarter was a decision by Anston [ph] nationally to add coverage of CyberKnife for lung cancer.

We are sustaining our efforts with payers, physicians, patients and other healthcare stakeholders to ensure a thorough understanding of the clinical and economic benefits of CyberKnife and to promote its appropriate availability as an option for patients to consider in consultation with their physicians.

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

Derek Bertocci

Thank you, Euan. This afternoon I will review our financial operating results for the third quarter. As Euan mentioned, total revenue for our third quarter was $61.3 million, a 4% increase over the third quarter last year and a 6% increase sequentially. Accuray generated net income of $1.2 million for the quarter or $0.02 per diluted share compared to a net income of $584,000 or $0.01 per diluted share during the same period last year. During the quarter, net income was impacted by a non-recurring pretax charge of $1.6 million or $0.03 per diluted share associated with severance costs for the January workforce reduction.

Taking a closer look at third quarter revenue; $41 million were associated with CyberKnife product sales. Services revenue was $17.9 million or 29% of total revenue for the quarter. Our services revenue is generally derived from long-term maintenance agreements of four or five-year terms and is ratably recognized over the service term providing stability and predictability to our revenue stream as our installed base grows.

Fiscal third quarter 2009 services revenue represents an increase of 62% year-over-year, reinforcing the growing importance of this recurring revenue stream. Shared ownership arrangements produced $1.3 million of revenue during the third quarter, an anticipated decline from $2.7 million during the same period last year, following the buyout and recognition of sales revenue on 12 shared ownership units in fiscal 2008. Exiting the third quarter, Accuray had a total of two shared ownership units. Other revenue for our third quarter was $1.1 million, which includes upgrades for units installed in Japan.

Prior to fiscal 2006, we sold CyberKnife systems in the US under our Platinum Program, which entitled customers to specified upgrades over the term of the Platinum service agreement. Before we can recognize revenue on these sales, we must complete the installation of the system in all required upgrades. After all of this work is completed, revenue and cost of sales are recognized evenly over the period of service coverage that remains.

During the third quarter of fiscal 2009, we completed work installing upgrades on three Platinum Systems. All upgrades have now been installed on 28 of the 30 systems sold under Platinum agreement. As a result of completing these upgrades, during the third quarter we recognized $11.3 million of Platinum product revenue. We also recognized Platinum service revenue during the third quarter; $2 million for service work provided during the third quarter and $5.8 million for service work provided prior to the third quarter. We estimate that most of the remaining deferred Platinum revenue will be recognized as revenue by the end of fiscal 2010, with the balance complete by the end of fiscal 2011.

Looking at installations, nine CyberKnife systems were installed during the quarter; six in the US and three internationally. Of the three international installations, one was in Europe and two were in Asia. This brought the worldwide CyberKnife installation base to 164 at the end of the third quarter. The geographical breakdown of our worldwide installed base at the end of the quarter was 107 in the Americas, 15 in Europe, 21 in Japan, and 21 in the rest of Asia.

When Accuray is responsible for installation of a CyberKnife system, we recognize revenue only after the installation is complete. In general, when our distributors are responsible for installation, Accuray recognizes revenue upon shipment to the end customer. It is therefore important to note that a period of time often lapses between shipment and installation of the CyberKnife unit in these arrangements.

During the third quarter, we recognized revenue on 13 units, including ten in the US and three internationally. Of the US revenue units, six were new system installations, one was replacement buyout, and three units were associated with the installation of final upgrades under Platinum agreements. We added 15 new system orders to backlog in the third quarter, which together with $7 million of renewal of service contracts represented a total addition to backlog of $81.6 million. Seven of the system orders were from the United States, eight system orders seven were from international customers, of which six were from our European sales region.

We removed orders for five systems or $27.2 million of contingent backlog due to a reduction in our assessment of the probability of clearing contingencies on these orders or customer cancellations. We have added 51 orders to non-contingent backlog, with no cancellations in the past four quarters.

At the end of the third quarter, Accuray’s total backlog was $591.1 million, down $6.7 million or 1% from $597.9 million at the end of the second quarter of fiscal 2009. Non-contingent backlog was $425 million, down $26.6 million or 6% from $451.7 million at the end of the second quarter. Non-contingent backlog represented 72% of total backlog at the end of the third quarter. We added five orders to non-contingent backlog, two that were newly signed this quarter and three from prior periods that cleared contingencies during this quarter.

As we announced last quarter, beginning with the first quarter of fiscal 2010, we intend to report only non-contingent backlog, which historically has been a reliable indicator of our future system shipments and service activity. We have experienced no cancellations of non-contingent orders in the past four quarters. We will report contingent backlog only through the end of fiscal 2009. Contingent backlog represents orders with one or more uncertainties. Contingent backlog totaled $166 million at the end of the third quarter, up approximately $20 million from the end of the prior quarter.

During the third quarter, 13 new orders were added to contingent backlog, three orders cleared contingencies and moved to non-contingent backlog, and five orders were removed from contingent backlog. Of the five contracts removed from contingent backlog, two were the result of the failure to obtain certificates of need, two others represent customer groups got disbanded. Key members of these prior groups are now working with new partners and are pursuing new sales negotiations. We removed the last order from backlog due to a lack of progress by the customer in advancing their project.

Our total backlog, including non-contingent and contingent orders, represent $301 million with contracts for CyberKnife systems, $256 million associated with long-term service agreements, and $34 million for shared ownership program contracts. Three charts reflecting our backlog have been placed on the Investor Relations page of the Accuray website, including one that shows backlog as it will be viewed with non-contingent contracts only.

Our gross margins for the third fiscal quarter was 49.5%, up from 44.7% in the third quarter of fiscal 2008, but down from 51% in the second quarter of this year. The higher margin compared to the prior year is due principally to the fact that in the third quarter of fiscal 2008 we sold seven systems that had been in our shared ownership program at an average selling price and gross margin that were lower than for new systems.

Services margins in the current quarter also benefited from higher service margins on two Platinum systems, for which all contract revenue was fully recognized in this quarter. The overall gross margin decline in the second quarter of fiscal 2009, principally due to $1 million of additions to reserves, excess and obsolete inventory recorded as a result of the upcoming transition to Version 8.5 of CyberKnife in many markets, expect the transition from Version 7 systems in selected markets and improved inventory processes. We anticipate that our gross margin will be back to about 50% in the fourth quarter.

Total operating expenses for the third quarter were $29.5 million or approximately 48% of revenue. Research and development expenses totaled $9.3 million or approximately 15% of total revenue, reflecting Accuray’s ongoing commitment to the continued advancement of the CyberKnife’s capabilities as well as clinical studies that provide strong evidence of its effectiveness.

Operating expenses in Q3 increased $700,000 from Q2 of fiscal 2009, due mainly to costs associated with the CyberKnife users meeting in the third quarter plus higher costs of employee payroll taxes and health insurance, offset by a reduction in legal and accounting expenses. We anticipate that our operating expenses will be lower in the fourth quarter, as we begin to realize savings from the workforce reduction announced at the end of January.

During the third quarter of fiscal 2009, Accuray recorded non-cash stock-based compensation expense of $3.1 million. Non-cash stock-based compensation expense represents a fair value of stock options and restricted stock mortised over their vesting periods. The fair value of stock options is determined on the date of grant using the Black-Scholes Option Pricing Model. The fair value of restricted stock equals the market price of the stock on the date of grant. The investing period for most stock option and restricted stock grants is four years. Therefore, stock-based compensation expense in any quarter mainly relates to grants made in prior periods.

Reviewing Accuray’s balance sheet, total cash and investments increased $2.5 million during the third quarter to $157.2 million at the end of March 2009. The increase in cash was due to a combination of factors, including net profit for the quarter, favorable collections on accounts receivable, and non-cash expenses, offset by higher inventory and the recognition of previously deferred revenue and cost of sales related to Platinum revenue.

At the end of the quarter, Accuray’s total assets were $272.2 million and the company continues to have no debt. The strength of our balance sheet provides us with the ability to pursue our business goals without the need to raise capital, an important distinction in a time of economic challenge.

Based upon a review of the remainder of fiscal 2009, we are revising the range of our top line guidance to $225 million to $240 million. This change does not reflect the softening of the market, but the variability inherent in customer scheduling of installations.

Now I would like to return the call back to Euan.

Euan Thomson

Thank you, Derek. The third quarter was highlighted by record revenue, a significant increase in the current service revenue, a steady conversion of backlog, and an encouraging number of new orders. Despite the ongoing economic slowdown, we believe the clinical demand for the CyberKnife is robust and expanding. We’ll now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Erik Schneider of UBS.

Erik Schneider – UBS

Hi, good evening.

Euan Thomson

Hi, Erik.

Erik Schneider – UBS

Just on the last comment you noted that on lowering the revenue expectations that it reflects just inherent variability rather than softened expectations, but we know that the last quarter you made the specific point that you thought that installs could stay above average through the remainder of the year at that point, which is where you got confidence in your revenue expectation at that point. So, why did you have that confidence then, but you don’t have it now?

Euan Thomson

When we look at a period, Erik, that’s several quarters long, we have customer orders that may move from one quarter to another but still be within a year. When we get down a single quarter left, it is entirely possible for us to have customers –it could only be a couple of customers that move their installations from one quarter to another. And that can move our revenue by $3 million to $4 million per installation. So in this case, what we have tried to do is give a reasonable estimate of the range of possibilities that we have, and we don’t have the luxury of several quarters to essentially get orders in even though they may move from one quarter to another.

Erik Schneider – UBS

And on the MD Anderson lung study, I think I heard you say that you have – or Anderson has had expressions of interest from more than 40 institutions. Can you give us a sense of how many centers or through IRB are actively enrolling, how many patients have been enrolled, and if you still think it’s on target for two-year enrollment at the 1,000 to 1,100 patient number?

Euan Thomson

I think about 50% of them are actually through their IRB approval process. The enrollment, I think, will probably in line with what we initially projected. Of course, all of these studies take a while to actually kick off and get started. We have had the initiative – additional feature of this study is that we’ve seen the first few patients that were presented with the option of the study, ones that had the CyberKnife option explained to them that we’ve certainly seen a number of patients opt out of choosing – selecting to go into the study and that should go straight to CyberKnife. And I think that that’s an increasing awareness for CyberKnife, which is a very good thing, among surgeons and patients. It certainly presents a minor obstacle to getting started.

Erik Schneider – UBS

And just on a clarifying point, could you just let me know where in the income statement the severance cost was imbedded?

Derek Bertocci

The severance costs are actually in all parts of the income statement, because they were elements, they were employees throughout the organization that were included. So it would be implicitly in cost of sales to overhead sales and marketing, R&D and general and admin lines.

Erik Schneider – UBS

Okay, thank you.

Operator

Your next question comes from Mark Arnold of Piper Jaffray.

Mark Arnold – Piper Jaffray

Good afternoon. I guess just to start, the – you talked a little bit about this even last quarter, but just the hospital decision-making process in general, any changes you have observed here in the last three months?

Euan Thomson

No, I don’t think much of a change from last quarter actually. I think we’ve – like I said in the scripted portion, we’ve very much tried to focus on return on investment, which I think is a reason for the positive order inflow in this quarter. As we mentioned, 15 systems going into backlog. And I think it’s really a question of people have the money, I think, were sensing in line with what we’ve heard and read. But certain projects involving construction and replacing equipment are the ones which get delayed. And with maybe a smaller capital budget, people are really focused on things which are going to give them a good return on investment. That’s part of their selection process. They are very concerned with minimizing risk. And that means we have to go probably into a greater level of detail with pro forma and the revenue plan for CyberKnife than we’ve maybe done in the past just to get the confidence level up. But it is a unique technology, and I think once we’ve gone through that exercise, we’ve usually been successful in convincing this is a good way to spend their money.

Operator

Your next question comes from Amit Hazan from Oppenheimer.

Amit Hazan – Oppenheimer

Hi, good afternoon guys.

Euan Thomson

Hi, Amit.

Derek Bertocci

Hi, Amit.

Amit Hazan – Oppenheimer

Question for you and just to make sure – you guys went through a lot of numbers, which is great. But you said I think 15 units into backlog and 13 of those went into contingent backlog?

Derek Bertocci

Yes, two of the 15 orders that were received, two went directly into non-contingent, 13 went into contingent backlog. And then there was some movement from contingent into non-contingent backlog.

Amit Hazan – Oppenheimer

So I’m just wondering if we kind of spring – if we fast forward to Q1 of 2010, you’re going to be reporting – this quarter you would have reported two unit orders and as a ratio, I mean, that I think even for you guys is actually a much higher ratio of contingent to non-contingent. So I’m wondering – is there any indication in that number that you had a more difficult time signing folks all the way through to non-contingent maybe because of the economy or is it just a fluke? Or how do you look at that?

Derek Bertocci

So, couple of things for you to keep in mind. While we did only get two orders from the outside, that came directly into non-contingent. Three orders cleared contingencies and moved from contingent into non-contingent. So if we were only reporting the non-contingent backlog, it would have been five new orders this quarter.

Euan Thomson

But I think – to your initial point, Amit, I think there is no doubt that just reporting the non-contingent backlog gives less of a feeling for the entire pipeline. We do see movements, which are not necessarily related to quarterly end of orders from contingent into non-contingent. So that order flow can somewhat fluctuate whereas new orders tend to come in at the end of the quarter. And there can be a time lag between getting the order in and actually then getting it into non-contingent backlog. So probably there is more of a feel from the pipe as it relates to viewing contingent backlog as well. But I think (inaudible) against that is the fact that things move out as contingent backlog and we end up removing them from the backlog altogether. So I think we feel more confident at this point in people regarding our non-contingent backlog because it’s so robust.

Amit Hazan – Oppenheimer

So if I might ask a related question in terms of the actual installations, we are kind of looking at this guidance for this year. And it looks like you’re going to install somewhere in the low-30s in terms of units, which is roughly about what you have installed for the last few years. And so if we look at that part, we don’t see much growth. And I’m wondering is it all related this year to the economy and that folks are staying in backlog and telling you if you want to delay it a little bit and we want to install the unit but we want more time to install it, or is it just where the business is going and there is just not much growth in terms of installations?

Euan Thomson

I think the – we are not giving specific guidance of number of units that will be installed. But we expect that to be certainly more units installed during this year than they were in previous years. And so therefore what we’re expecting there to be growth. In terms of people’s perception of installing CyberKnife, I think that we were not seeing pushback. We see natural obstacles always in the way to people to overcome sort of permitting issues, construction issues, those things that are always there and they would have been. And we work hard at helping our customers to overcome those. But we are not seeing a change in the environment. In fact, specifically we’ve called out in this earnings call, I think in previous ones that is the case, that we are not seeing a change in the environment. So I think that you will see growth in terms of installation numbers.

Operator

Your next question comes from Tycho Peterson of JP Morgan.

Sung Ji – JP Morgan

Hi, this is Sung Ji filling in for Tycho Peterson. Thank you for taking the questions. Just a question about – in terms of your system placement and things like that. Are you seeing any market share gain, given that your peers that are selling to the same end market are seeing a lot of constraints in terms of in the capital equipment spending? Are you seeing any market share gains from maybe some of the alternative technologies, if you will, such as minimal invasive surgery, or is that pretty – is it still too early to tell?

Euan Thomson

I think – the overall capital available, there’s no doubt, has decreased. I think our advantage in this environment is that, as I indicated earlier, we are a very well differentiated technology, whereas we’ve heard reports of – and obviously we can’t comment on those or validate them, but we’ve heard reports of the radiation therapy players being in a heavily competitive environment. We haven’t really seen any change in the competitive landscape for us. So the situation for us is still one where a challenge is to validate the fact that this will be new revenue, to validate the fact that it’s secure use of that capital. And as long as we can do that, then people will tend to go for a CyberKnife purchase. We don’t tend to get into the situation where we are going to head-to-head with other competitors and certainly getting into price wars and so on. We are finding that the selling prices have held up pretty well despite the environment. It’s more about just making sure people are comfortable with embarking on a radiosurgery program.

Sung Ji – JP Morgan

Okay, that’s helpful. And in terms of some of your recently launched products such as the ones launched at Astro [ph] last fall, could you comment on how they are tracking in this environment?

Euan Thomson

Yes. I think that – the new products in particular, the benefits of the increased need of treatment have been very effective at building the quality of the pro forma at the hospital level. So when people are looking now at a high level of throughput, it harms CyberKnife capabilities. It definitely strengthens the clinical case, makes the clinical case more robust and that in turn feeds through to the financial performance of the system. And that’s one of the aspects of us giving a very good return on investment. So those upgrades, I think, have specifically helped us in this market.

Sung Ji – JP Morgan

Great, thank you.

Operator

Your next question comes from Peter Bye of Jefferies & Company.

Josh Jennings – Jefferies & Company

Hi, good afternoon. This is actually Josh Jennings in for Peter.

Euan Thomson

Hi, Josh.

Josh Jennings – Jefferies & Company

Just to circle back in terms of just some more clarity in terms of the orders, in terms of moving $27.2 million from the contingent backlog, can you just tell us where any of those five orders that removed actually came from any new orders that were actually placed in fiscal ’09?

Derek Bertocci

I don’t – I think only one of them may have been an order that came in, but I don’t think the others were.

Josh Jennings – Jefferies & Company

Okay. And just in terms of the $81.6 million in new orders, you have 15 new system orders. Are any of those systems, do you count systems that are on and out of the backlog and then will come back in, because one of the issues with some of these systems being removed is the potential for them to put you to capture them again? Are those included in new orders? And were any in this quarter old orders that had fallen out of the backlog?

Derek Bertocci

No, these are all new orders. As we indicate, though, of the five orders that fell out this quarter, two of them are customers or elements of customers that have worked with new partners to form new groups that are in fact continuing to express interest in orders in the future. So –

Euan Thomson

So to give you some idea to where the market is, it’s out [ph] behind the question. The vast majority of orders that replaced in backlog this quarter came from new customer agreements.

Josh Jennings – Jefferies & Company

Great. And then just lastly, the program to try and help your customers manage their construction projects, has that taken hold at all? Has that been received well? And had that helped you sort of manage timelines better?

Euan Thomson

Yes, I think it has. I mean, it’s still not (inaudible) challenges. But I think we have now a much, much better feel for when our customers are likely to install, we are able to help them overcome certain hurdles. And I also think, to be honest, as being responsible for the robustness of the non-contingent backlog because I think the quality of the data that we have about all of our customers is now much better than it was, say, a year to 18 months ago. So we are learning a lot more about our customers and we are definitely finding ways of helping them and helping them to move their projects forward.

Josh Jennings – Jefferies & Company

Great. Great, thanks a lot.

Operator

Your next question comes from Larry Haimovitch of HMTC.

Larry Haimovitch – HMTC

Good afternoon, Euan.

Euan Thomson

Hi, Larry.

Larry Haimovitch – HMTC

I was at the urology conference, I guess it was about a week or ten days ago, and I attended the talk that was given on the work you are doing on prostate cancer. And it looks promising. I just wanted to get an update from you in terms of what impact, if any, you think this is maybe having at this point in driving customer acceptance of systems? Is it helping them with new placements or is it more adjunct towards another use for an existing system as a facility [ph], what they are thinking about the CyberKnife already?

Euan Thomson

Larry, that’s a really good question. I think it’s different in different environments. I’d say as a general rule, we are probably not selling systems right now as a result of prostate cancer. To drive us to sell right now, primarily central nervous system and lung, that definitely are exceptions to that. And internationally you could probably add liver to that picture, pancreas as well, again particularly internationally. And I would say prostate is kind of – it's still one where a lot of people who don’t have a CyberKnife in wait-and-see mode, and that’s where the new clinical – all the new clinical data we gather is very, very important.

Larry Haimovitch – HMTC

The significant clinical data will be several years away, because I think you’ve got some studies – two studies going where both of them are going to gather five-year data. And I think we’re fairly early in that process?

Euan Thomson

Yes, those studies are fairly early in terms of the follow-up. But there are other studies coming from other centers, which are much, much further down the line. So yes, I would say in 18 months to two years there will be – the clinical picture for prostate cancer will be significantly different. In the meantime, I think that the first signs of market acceptance are definitely there. I mean, we are definitely seeing centers [ph] who wouldn’t have started treating prostate cancer sometime ago into existing sites to starting to treat based on the cases they have seen. But of course, there’s a network of communication that goes beyond the (inaudible) you lectured it to, which I know a lot of people are influenced by that very much in contact with the centers with most experiences and they track those – the treatments and the outcomes pretty closely.

Larry Haimovitch – HMTC

Thank you.

Euan Thomson

You’re welcome.

Operator

Your next question comes from Junaid Husain of Soleil Securities.

Junaid Husain – Soleil Securities

Good afternoon, gentlemen.

Euan Thomson

Hi, Junaid.

Junaid Husain – Soleil Securities

Derek, I think I missed this in your prepared remarks. Could you tell me the total dollar value of the Platinum contracts that entered the P&L in the quarter?

Derek Bertocci

Yes. There were 11 – in the product side, it was $11.3 million of sales that were from products from Platinum sales. And then on the service side, $5.8 million of the service revenue related to Platinum revenue that had been accrued in the past and deferred. And additional $2 million of revenue was for service provided in the current quarter for those Platinum systems.

Junaid Husain – Soleil Securities

Got you. Do you have any goal contracts left?

Derek Bertocci

I think we have a couple or two or three of those left, if not very many.

Junaid Husain – Soleil Securities

Got you. And then last question for you is, maybe for Euan is, as we get to implementation of Starck [ph] 3 by November, are you getting a sense that the overall size of maybe the entrepreneurial hospital physician groups might be shrinking and maybe the overall size of the CyberKnife market might be shrinking?

Euan Thomson

No, I wouldn’t say that. I think we have focused around sales effort very much more on the operational side of the things for the last 18 months or so. And it wasn’t so much driven by Starck. It was really driven by the threat to the under-arrangements, as we’ve talked about in several previous calls. I think that now what’s happening is that, as reimbursement confidence grows and we’ve seen certain changes are taking place over the last year or so, that CMS has confirmed that reimbursement should be available to freestanding centers. The rates themselves have to be negotiated locally. But as some of those negotiations take place with the first kind of pioneering freestanding centers, people start to gain confidence in a reimbursement model for entrepreneurial systems outside of hospital systems that’s kind of independent, if any, under-arrangement of hospitals.

I think that’s where particularly the radiation oncologists who we want to start off their own freestanding CyberKnife centers start to come back into the market. But our sales successes over the last year or so have definitely been down to more focused on the operational centers, as we call them rather than the freestanding centers. I think that’s one of the reasons why our sales performance now is robust, because of course those people would be the people who are particularly vulnerable in terms of availability of capital, was the more operational sites and hospital sites are really generating more there [ph] in capital and they have sort of a greater access to capital than the freestanding centers do.

Junaid Husain – Soleil Securities

Excellent. Thanks so much, guys.

Euan Thomson

You’re welcome.

Operator

Your next question is a follow-up from Mark Arnold of Piper Jaffray.

Mark Arnold – Piper Jaffray

Thank you, guys. Does the reason CMS decision to expand coverage and simplify reimbursement for PET CT Scans have any potential benefit for Accuray in terms of more patients, I guess particularly with metastatic disease being identified when their tumors are still treatable?

Euan Thomson

I think that in the long-term, yes, but probably short-term, no. But I think there is definitely an ongoing interest in multiple metastases and more aggressive treatment of multiple metastases. And there are certain sites throughout the world that are really pioneering the idea of kind of aggressive focal treatment for metastatic disease with a long-term vision that if you continue treating these metastases, then eventually you can provide better survival for cancer patients. And that’s still a relatively new concept. But I think PET plays an important part of that. And if people are detecting that metastatic disease earlier and they are getting more of a better idea of about where it is, then definitely that philosophy comes into play for the CyberKnife.

Mark Arnold – Piper Jaffray

Would lung and liver be the places where you would see the sites where you would – the tumor sites where you would see that benefit?

Euan Thomson

Yes, those would definitely amongst the sites.

Mark Arnold – Piper Jaffray

Okay, thank you.

Euan Thomson

There is also incidentally – there is a growing in trust in sort of more different imaging agents for PET, which show up functionality of the tumor cells too. And I think the CyberKnife potentially has a role to play, as more detailed information becomes available about the nature of the tumor.

Operator

Your next question comes from Erik Schneider of UBS.

Erik Schneider – UBS

Hi. You gave the detail on legacy revenue split in the components on the service side. Do you have that same information from the quarter a year ago?

Derek Bertocci

Just one second. So, of course on a quarter a year ago, in the service area, the total service revenue related to Platinum systems was $4.6 million. Of that, $2.7 million related to the ongoing service for Platinum systems during that quarter and $1.9 million related to the acceleration, if you will, of the recognition of previously deferred revenue.

Erik Schneider – UBS

Great. And then with respect to fourth fiscal quarter in a business like this, we typically expect and we certainly saw last year a big jump in orders, but we’ve heard from other people (inaudible) most recently that they are not expecting to see that sort of typical ordering pattern just given hospital’s reluctance to commit. So what are your expectations coming into the last quarter of the year?

Euan Thomson

As you know, we are not going to give specific guidance for (inaudible) orders. But I think in terms of the environment, as I indicated, we’re really – we feel that we have been and we remain fairly robust. So we have no reason to think that our standard – at this point that our standard pattern for order generation would change. We did have a very positive Q3. In fact, it was probably one of the best Q3s in new order generation in the company’s history. So I think the strength of the CyberKnife system still holds out. I think it still provides a very good demonstrable return on investment. And the clinical acceptance of the CyberKnife is definitely also making the business case of CyberKnife very strong. So there is nothing really in that mix, which would indicate that we would be facing a different environment. But as I said, I do want to reinforce that we are not giving a forecasted number for new order generation.

Erik Schneider – UBS

Thank you.

Operator

There are no further questions at this time. I would now like to turn the conference over to Dr. Euan Thomson for any closing remarks.

Euan Thomson

Thank you. The third quarter was highlighted by record revenue, a significant increase in recurring service revenue, a steady conversion of backlog, and encouraging number of new orders. Despite the ongoing economic slowdown, we believe the clinical demand for the CyberKnife is robust and expanding. I’d like to take a moment and thank all of Accuray’s hardworking employees for their dedicated contributions, as we change the way in which cancer is being treated for patients around the world. Thank you for joining us today, and we look forward to speaking with you on our next call.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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