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Executives

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

Timothy E. Guertin – President and Chief Executive Officer

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

Analysts

Amit Bhalla - Citi

Amit Hazan – Oppenheimer

Tycho Peterson - JP Morgan

Dalton Chandler – Needham & Company

Jeffrey D. Johnson - Robert W. Baird & Co.

Junaid Husain - Soleil Securities

Sean Lavin – Lazard

Nathan Sadeghi – Highside

Charley Jones – Barrington Research Associates

Varian Medical Systems, Inc. (VAR) F4Q09 Earnings Call October 29, 2009 5:00 PM ET

Operator

Welcome to the Fourth Quarter 2009 Varian Medical Systems Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator's Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Spencer Sias, Vice President of Investor Relations and Corporate Communications.

Spencer R. Sias

Good afternoon and welcome to Varian Medical Systems conference call for the fourth quarter of fiscal year 2009. With me are Tim Guertin, President and CEO, Elisha Finney CFO, and Tai Chen, our Corporate Controller. Tim and Elisha will summarize our results and will take your questions following the presentation.

To simplify our discussion, unless otherwise stated, all references to the quarter or year are fiscal quarters and fiscal years. Quarterly comparisons are for the fourth quarter of fiscal 2009 versus the fourth quarter of fiscal 2008. Annual comparisons are for fiscal 2009 versus 2008. All results are for continuing operations which exclude the sale of the research instrument portion of ACCEL.

Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, could, should, believe, opportunity, can, estimate, and similar expressions are intended to identify those statements which represent our current judgment on future performance or future matters. While we believe them to be reasonable based on information currently available to us, these statements are subject to risks 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, future events, or otherwise.

As a reminder, we’ll be holding our usual meeting and booth tour for investors at the Annual ASTRO Conference at the Hyatt Regency McCormick Place in Chicago this Tuesday. The meeting will be webcast and it will run from 7:30 to 8:45 AM and will be followed by a tour of our booth at the convention center. If you wish to attend the meeting in person, please RSVP with Anne Rambo at 650-424-5834. You can also RSVP on our investor relations web site. We look forward to seeing you there. And now here's Tim.

Timothy E. Guertin

Today we are reporting our results for the fourth quarter of fiscal 2009, with solid growth in revenue and earnings, but comparatively slow growth in our net orders. Compared to corresponding periods in fiscal year 2008, net orders rose by 4% to $755 million, with the help of our first proton system order and 3% for the fiscal year to $2.4 billion. Revenues rose a solid 8% for the quarter to $642 million and 7% for the fiscal year to $2.2 billion. Our year-end backlog grew 9% to a record $2 billion.

Both gross and operating margins improved for the quarter and the year. Our operating earnings rose 11% for the quarter and 13% for the year. Our earnings per diluted share from continuing operations rose a strong 15% for the quarter to $0.78 and an equally strong 15% for the fiscal year to $2.65. Cash flow from operations for the quarter was a robust $116 million, and we ended the year with a record $554 million in cash and cash equivalents.

All in all, we’re pleased with our performance which has put us in a good position to deal with the challenging economic environment, particularly in North America. I’ll focus now on this issue and other aspects of our operations and let Elisha provide you with the details on the P&L and balance sheet before I give you our guidance for fiscal year 2010.

Oncology systems fourth quarter net orders declined by 7% to $570 million because of a 20% decline in North America that was partially offset by a 12% growth in our international markets. Oncology’s net orders for the fiscal year rose 1% to $1.9 billion with a 7% decline in North America and an 11% increase in international markets. On a constant currency basis, Oncology international orders grew 16%, for both the quarter and the year.

As we first reported in our last call with you, the North American market is mired in an uncertainty created by a severe economic recession, expensive capital, pending healthcare reforms, and proposed dramatic cuts in reimbursements for freestanding clinics. Business across North America slowed considerably for just about every one. While we benefited from pre-recession capital budgets in the first half of the fiscal year, we’re now feeling the full effects of the smaller capital budgets that have been established by many healthcare providers.

For many customers, capital spending priorities appear to be focused on completing projects that were already underway rather than adding new capabilities. Consequently, we’re seeing more customers who are seeking to modernize using creative financing solutions outside their capital budgets. Our customer finance team which facilitates leasing for hospitals and clinics who are buying our products has never been busier.

We hope to see a stabilization of capital equipment budgets as the economy recovers and the healthcare reform debate and reimbursement issues are resolved. Hospitals tell us that advanced capabilities for radiosurgery and radiotherapy remain a high priority for new spending projects.

Turning to the freestanding clinics, the proposal for a drastic 30-40% cut in reimbursement rates virtually paralyzed this market segment during the fourth quarter. However, many customers have told us they plan to move ahead with purchases if CMS adopts more modest cuts. We’ve joined the industry in making the case in Washington DC for a more reasonable rate schedule, and we should know the outcome for 2010 in the matter in a few days.

Given all of these circumstances, the North American market is likely to remain very challenging at least for the first half of 2010. Turning to the international markets, we had excellent growth in Europe and Latin America and a decline in Asia which reported tremendous growth in the year ago quarter.

For the year, order growth in all international regions was positive. In Europe, we had major wins in Russia, Portugal, the UK, France, and Germany during the quarter, and in Asia we landed significant orders at major hospitals in China, Japan, Korea, and Thailand. We’re seeing increased interest in more advanced treatment capabilities, particularly RapidArc which has universal appear across all markets.

We set an all-time record for RapidArc orders units ordered in the fourth quarter, and we now have more than 270 RapidArc installations around the globe. This is well on its way to becoming a new standard of care for radiotherapy, and it is being used increasingly in radiosurgical cases where we believe it can be a real game changer.

Speaking of surgery, we also set an all-time quarterly record in orders for our Novalis TX radiosurgery products. It appears that the radiotherapy/radiosurgery markets are hybridizing at an accelerating rate. In Germany, we received our first order for the new low-energy unique accelerator for RapidArc and megavoltage imaging for fast, affordable image-guided IMRT. We believe this product, which was introduced at the European Society for Therapeutic Radiology and Oncology during the quarter, will be a real winner in the international market where government cancer treatment centers are looking for small, cost-competitive machines that offer both high throughput and advanced care. It should make us even more competitive in this market.

The growth of our installed base together with warranty expirations on systems installed last year at a high capture rate for contracts continued to drive double digit growth in our service business during the quarter. So how will we handle this challenging environment for oncology systems? Our growth opportunities for this business lie in the international markets, services, expanded applications for RapidArc, radiosurgical products, and a variety of new technologies. We plan to step up R&D investments in 2010 to capitalize on these opportunities. In the US, we have a large number of aging units that are not capable of delivering modern therapy. These customers will benefit from our RapidArc and radiosurgical technologies.

Internationally, we have many countries that are seeking to do high volume, state of the art radiotherapy. Together, our new products and technologies should help to drive expansion in replacements in our worldwide installed base, which now stands at more 5700 units.

Turning to x-ray products, net orders grew 3% to $97 million for the quarter and 1% to $339 million for the year. Net orders for our flat panel detectors for filmless x-ray imaging rose by nearly 30% during the quarter with the help of our emerging line of panels for digital radiography. Panel orders were up 9% for the year, and they represented better than 40% of the orders for x-ray products in the fourth quarter.

We have added several customers for our new digital radiography panel, which make it possible to convert film-based x-ray systems to digital radiography. These panels offer enhanced image quality versus computed radiography, higher patient throughput and lower cost per imaging procedure. For these reasons, we continue to believe there is a big market opportunity for this product line, not only for conversions of existing equipment but for new equipment as well. Several customers are now designing these panels into next generation products for radiographic imaging.

In the past, I’ve called attention to our unmatched capability to engineer and pair tubes with panels for optimized filmless imaging. We sold the first such packages during the fourth quarter and are continuing to work on new tube designs for high throughput filmless imaging.

Our tube orders declined during the quarter and for the year as a result of the recession which has cut deeply into imaging equipment sales. Fortunately, demand for replacement tubes in the aftermarket was up, as hospitals and imaging centers look for ways to keep existing equipment operating in the most cost-efficient manner. Our competitive advantages in the aftermarket are better pricing and the broadest product line in the industry, and we’ve also been helped by the weak dollar.

In our other business categories including our security and inspection products business, our particle therapy business, and our Ginzton Technology Center, we generated combined net orders of $89 million for the quarter, up $68 million from the year ago quarter, thanks to our previously announced proton therapy system order and strengthened SIP business. The proton order, which I’ll expand upon in a second, helped our other category to post net orders totaling $151 million for the full fiscal year 2009, up $56 million from the previous year’s total.

SIP achieved 26% order growth in the fourth quarter following disappointing second and third quarters when government slowed deployment of screening systems at ports and borders. Orders came in primarily for installations outside the US, and orders for nondestructive testing products also rose in the quarter.

Turning to proton therapy, we reached a major milestone this quarter when this business a $62 million contract following a public tender to equip Sweden’s Skandionkliniken with a proton therapy system. As is common in public tenders, this award is being challenged by a competitor in Swedish courts. We believe, however, that the award was proper, and we booked the order in the fourth quarter.

Despite the recession, the proton therapy’s base appears to be as busy as ever, both in the US and international markets. The Skandion award demonstrates that Varian is a very strong position when bidding for these products.

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 2010.

Elisha W. Finney

As usual, I will walk you through the income statement as well as cover a few balance sheet items. Fourth quarter revenues of $642 million increased 8%. Oncology Systems posted an increase of 9%, X-Ray Products posted a gain of 11%, and revenues from businesses under the other category decreased by 16%.

In constant currency, total company revenues increased 9% from the year ago quarter. For the full year, revenues increased 7% to $2.2 billion, with 8% growth in oncology systems, 9% growth in x-ray products, and a 9% decline in our other category. In constant currency, total company revenues increased 9%.

The fourth quarter gross margin for the company was roughly even with the year ago period at 44.4%. Oncology System gross margin increased nearly 1 point to 46%, due primarily to product mix and cost control. X-ray products gross margin fell by two points to 38.7%, due to product mix in our panel business, start-up costs for our new radiographic panels, and higher costs of tube quality.

Year to date, total company gross margin is up 1 point to 43.4%, with all of the improvement coming from oncology systems. Fourth quarter SG&A expenses were $96 million or 15% of revenues, even with the year-ago quarter, and for the year SG&A was also 15% of revenues, down slightly from the prior year.

Fourth quarter R&D expenses were $38 million or 6% of revenues, down nearly 1 point from the year-ago quarter, and for the year, R&D expenses $147 million, even with the prior year at 7% of revenue.

Moving down the income statement, fourth quarter operating earnings rose 11% to $151 million or 23.5% of revenues, up more than half a point from the year ago quarter. For the full fiscal year, operating earnings were up 13% to $474 million or 21% of revenues.

Depreciation and amortization totaled $12 million for the quarter and $44 million for the year. Net interest expense for the quarter was $200,000. The effective tax rate was 35% for the quarter and 30% for the year. For the first quarter of fiscal year 2010, the estimated tax rate should be about 33%, up from the year-ago quarter when we benefited from the reinstatement of the R&D tax credit, and for full fiscal year 2010, we estimate that the tax rate will be between 31% and 32%.

Fully diluted shares outstanding were approximately $125 million for the quarter and the year, and diluted earnings per share from continuing operations rose 15% to $0.78 bringing total EPS for the year to $2.65.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $554 million, debt of $37 million, and stockholders' equity of $1.3 billion. DSO or day sales outstanding for the quarter was 81 days, up 7 days from the year-ago quarter, but down two days from the prior third quarter due to strong collections.

Fourth quarter cash flows from operations was $116 million with most of it coming from net earnings. Primary uses of cash were $30 million for stock repurchases and 15 million for capital expenditures. During the quarter, we spent $30 million to repurchase 700,000 shares under our repurchase program.

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

Timothy E. Guertin

Weak orders in the second half of fiscal year 2009 together with ongoing uncertainty stemming from the recession, healthcare reform, and proposed cuts in reimbursements in North America give us a cautious outlook for fiscal year 2010. We believe that for the first quarter of fiscal year 2010, total company revenues could increase by 3-4% over the prior year. Including a higher tax rate and a one-time $0.02 per share charge for our recently completed reduction in force, net earnings per diluted share from continuing operations for the first quarter could be in the rate of $0.52 to $0.56.

For the full fiscal year 2010, we estimate that revenues and operating earnings could increase by 4-5% over the fiscal year 2009 total and that the net earnings per diluted share from continuing operations could be in the range of $2.65 to $2.75.

To summarize our thoughts on the quarter and the year, we’re facing challenges in the current economic environment, but we are comparatively well positioned to address them. We’ve grown our order book with the help of our emerging proton business and strong international presence. New product lines contributed to solid revenue growth which together with successful cost control initiatives led to improved margins, excellent earnings, strong cash flows, and record cash levels.

In 2010, we’ll step up our R&D efforts, and we have the technology, products, resources, and talent that we need to become stronger than ever.

We’re now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Amit Bhalla.

Amit Bhalla - Citi

I wanted to start with a couple of questions on the North American oncology business. Given that it was down 20% in orders, I was hoping Tim if you could give us a little bit more color on the moving parts. Clearly we’re assuming Clinac was down significantly, but give us some more color on software and brachytherapy in the business in North America.

Timothy E. Guertin

Software and brachy were both up in terms of orders. The problem was in Clinac, and and you might expect the freestanding market was not a good market in the fourth quarter as people are waiting to see what the reimbursement numbers are, and I think more importantly to understand what’s behind whatever decision CMS makes. They want to not just see the numbers, but they want to understand how those numbers were derived. The hospital market was also down in North America. I think that’s continued for Clinacs, and that’s once again related to hospitals trying to control their capital budget. They are trying to look forward to what healthcare reform impacts will be, and I think capital equipment projects are one of the places where they are trying to show restraint until they know what the story is. So I think this is going to make 2010 a tougher year than I would otherwise expect it to be. We’ve shown that that backlog remains real, that people turn those orders into real sales which helped us in 2009, and I think that when those capital budgets return for hospitals, we’ll see a lot of strength, but we’ve to get through 2010 for that to happen. So although I’m at the beginning of 2010, I suppose I’m really looking forward to latter half of 2010 and 2011, and I’m really looking forward to seeing how healthcare reform and reimbursement decisions are made by the government.

Amit Bhalla - Citi

Is there a anyway for you to tease out or even give us a best guess of how much of the North America order book was impacted by the delays due to people waiting on the sidelines for reimbursement, even a guess?

Timothy E. Guertin

I think for the freestanding marketplace, that market was probably about one-half of what it would ordinarily be, and that’s a severe problem.

Amit Bhalla - Citi

In terms of the overseas markets, could you provide us with just a view on the sustainability of the demand there? It looks like order growth there was pretty positive, as well as just comment on the Unique platform. Is that going to put pressure on the operating margin?

Timothy E. Guertin

Let me start with the international markets, and then I’ll come back to Unique. For Asia, I think Asia is at the beginning of a long-term sustained rise. I’m not saying that in any given quarter it’s going to rise, but I’m saying over the long-term it’s going to happen. When we look at Japan, which was a strong quarter for us, the demographics in Japan, we see an aging population and we see Japan trying to respond to that by increasing the number of units that is has and it’s still way below the capacity that it will need. When we do a calculation that looks at what they’re going to need to handle patients with radiation therapy, there is a huge need for machines there. Same thing in China. There is a huge shortage of machines to serve that market, so I think that Asia-Pacific is going to continue to be strong.

For Europe, we had a good year in Europe. I think going forward in Europe, we want to see what the effect is of the recession on capital budgets for governments. It would be difficult to believe that Europe will grow and grow and grow in the midst of a recessionary environment, but we’re hoping that. For us, remember that Europe includes the Europe, the Middle East, and some parts of Asia and Africa. I think that Western Europe is a question mark for next year. I think Middle East will behave somewhat normally. I would also remind you that we had a very tough comp for Asia in the fourth quarter, so although it was down, it was way up in the fourth quarter of last year, and it was very difficult for them to achieve that.

For Latin America, I think it’s also promising based upon momentum in 2009 and the affordability that the currencies are giving us will help us there, and of course they’ll help us in Europe as well, so we’re hoping that the currencies stay favorable for us going into next year.

The Unique product line, we have a historically low use of our low energy lines, so what we’ve done is improve that machine so that it’s capable of doing RapidArc. I think it have a good margin on it and good price positioning, but of course we’re trying to sell it into markets where they are very price sensitive and where capital is difficult. Nonetheless, this is a machine that for a very reasonable price can treat patients very fast and with the most state of the art radiation therapy. So I think when customers look at it, when people have a high volume need for machines and they have restricted capital budgets and they only have a small room, this is the kind of machine that will fit perfectly into that category, and I think it’s a killer product.

Amit Bhalla - Citi

Elisha, it doesn’t look like you’re showing any leverage from the topline to the bottomline with that 4-5% revenue growth that you’re putting up for fiscal year 2010. Can you give us some color on the expenses there, and then secondly also on guidance, what contribution from Proton is in your guidance for next year?

Elisha W. Finney

In terms of the leverage, Amit, remember we took the EBIT margin up a full point this year to 21.4%, so being this early and the planning process for a year that has a lot of uncertainty for all the reasons that we talked about, I’m very pleased that we’re able to grow sales and to maintain the ROS percentage even with the year ago period. The way we’re going to get there is you’ll see some gross margin decline that’s going to come from the fact that more of the growth this year in orders has been in the international market. There is some pricing pressure as we talked about. The Proton revenue, and I’ll come back to that, will have a much lower margin, so you’ll see some decline in gross margin, and you’ll see an increase in R&D spending as a percentage of sales to be offset by significant leverage that we’ll see in SG&A expenses. So that’s at the EBIT line, and frankly that’s how we manage the business. So not necessarily between gross margin and operating expenses, but we manage it to the ROS level. Of course, the interest and the tax rate is hurting us next year when you take that down to the EPS level.

To come back to your question on Proton, we will not take any Protons for this particular Skandion deal until we actually start work on that project, and then we’re going to record the revenue as what’s called a zero profit model under the percentage completion method, and that’s because given that this is our first project, there’s of course some uncertainty with our ability to estimate the profitability, and therefore when we take revenue at certain milestones, our costs will equal our revenue and we will defer the profit until it becomes assured, and that will most likely be at the end of this project given that it’s our first one. So obviously there is a small amount of revenue from Protons that I’m assuming in fiscal year 2010, but it’s going to have zero margin attached to it.

Timothy E. Guertin

I’ll just add that our issue is not at the EBIT line. We’re fine at the EBIT line, but between tax and interest, we’re just not able to take as much of that to the EPS line right now as we would hope to. In a difficult year like this, I think it would be unreasonable to expect considering all the factors that Elisha has talked about that we can increase our return on sales. So we’re not trying to increase it, but we’re trying to reasonably hold it.

Operator

Your next question comes from the line of Amit Hazan – Oppenheimer.

Amit Hazan – Oppenheimer

On guidance again, maybe as a followup, on the topline, if we’re looking at the 4-5% growth you’re looking for fiscal year 2010, I’m trying to reconcile it with the order patterns in the last year or especially in the last 9 months now without Proton flat, maybe even a little bit down. It certainly sounds like you’re describing an environment where orders are going to stay pressured even into December and into March, so that reconciled with revenues, I’m having a little trouble with, and at the same time you guys are really good about guiding revenues, and so I’m wondering what’s implied in there. How much of that you’re confident and how much of an expectation for a rebound in orders you’re looking for in the coming quarters to get to that sales number?

Elisha W. Finney

If you look at the backlog number year over year, we’re up 9%, but of course that includes the Proton order. If you exclude the Proton order, the backlog is up about 5%, so again that gives us good visibility looking into fiscal year 2010. A lot of the problems we ran into this fiscal year were really in our short cycle businesses where we had x-ray really struggle for several quarters. So we’re starting to see a normal rebound in the x-ray product segment. The flat panel business has a new product that’s starting to turn around. Our service business is growing quite strongly, and I don’t see why that wouldn’t continue into next year. So just given customer requested delivery dates and looking at the detail of that backlog, this is our best guestimate as we sit here today.

Timothy E. Guertin

I’ll just add that I think all of the businesses have the potential to show revenue growth next year, but oncology is obviously going to have the toughest time, and that is 80 something percent of the company. So even though other businesses might grow a lot more than oncology next year, I think that’s why we’re showing some conservatism. But if we get good news in reimbursement and things like that and we get some orders that turn into business next year, that would be nice to see, but right now I think this is prudent way for us to go.

Amit Hazan - Oppenheimer

So do oncology orders need to grow for you to hit your guidance?

Timothy E. Guertin

We need something to happen positively in North America for us to do better than our guidance. We’ve assumed that reimbursement won’t be as bad as what’s originally predicted, but it’ll still be off, and so if things are worse or things get better, then we’ll come back to you and give you an assessment on that. Even if the numbers come out next week, which is of course when we’re hoping it will happen, it will take a while for our customers to digest them and make their decisions. So I think the first half for oncology is going to be based upon the kinds of numbers you saw us taking in orders last year. For the second half, we’ll have to see what things look like in the first half.

Elisha W. Finney

Let me just follow on by saying if you look at 2008 to 2009, we grew sales close to $150 million. If you look at 2009 to 2010, we’re only assuming a little more than $100 million, so that’s built into the guidance already.

Amit Hazan - Oppenheimer

I have a followup then on the freestanding clinic side. I think a lot of us were expecting some weakness, but that was probably more than most of us expected, and I’m wondering when you talk to these people, we’re also hearing that the codes won’t be down as much, but we’re hearing that they’ll be down, and I’m just wondering what kind of color you are getting from them in terms of what they’re looking for. If they waited to see the codes, what does that mean? When they see the codes and they’re down, are they going to still order, or how are they going about their thought process with regard to decline reimbursement levels in the coming years?

Timothy E. Guertin

The first thing I’ll say on their behalf is our customers don’t feel that any code for the treatment of cancer should be going down, that it’s crazy to think that costs for treating cancer patients should be lowered. I’ll say that on their behalf. Now, being realistic people, they’re expecting that the codes might go down. If you talk to one of them, you’ve talked to one of them and you certainly don’t know what everybody things, but I think they’re expecting to lose some percentage of their revenue. Some people are expecting to lose 4-5%; some are expecting to lose more than, but we’ll have to wait and see what actually occurs. So I think the reason why it’s down so much is because they just don’t know, and if you’re planning a new center, why can’t you wait for three months from July 1st, why wouldn’t you wait for 3 to 4 months to find what the numbers are going to actually be, so you can plan your P&L. It’s very difficult to go to people and say we should invest this kind of money when you can’t show them what your P&L projections are going forward. So those people who I think are in centers where they are convinced that no matter what the number is they can do are the kind of people who order during this period of time. Those people who are hoping to open up locations where the number of patients would be lower and where the consequences to their profitability will be a function of what the reimbursement is, they want to wait and see what the numbers are going to be, and more importantly not just what the numbers are going to be, but what’s CMS’s thought processes are behind those numbers, so that they can get a multi-year view. So I think we’re going to see strength in the hospital segment first. The hospitals are looking at favorable reimbursement going into next year. They’re still buying, although they were down in the fourth quarter. I think hospitals when they see what healthcare reform is going to cost them, it’s going to put them in a more solid position, so I expect we’ll see hospitals return first, and then freestanding clinics as they come to terms with whatever happened will start to get a better understanding. So probably by the end of the first quarter, when we’re giving results for the first quarter, we’ll have talked to a lot of people about the actual numbers and their plans are and we’ll have a much better insight into what their acquisition picture will be like for the year.

Amit Hazan - Oppenheimer

With regard to Elekta, we can never really tell in terms of their orders or what’s going on over there, but they do report orders that have been better than what you’ve been reporting in the US, and I’m just wondering if you can make a competitive comment as to what might be going on with respect to that and if you’re seeing certain amount of pricing incrementally worse than what they’ve been doing in the past or any color you can give on that.

Timothy E. Guertin

First of all, they report orders for the Americas, and they had a very large order for Latin America during the quarter, and I wouldn’t want you to think that that order was in North America. They had some good orders in North America, but the big order that they had was in Latin America, and they offered very special terms for that order that we were reluctant to do, so I think we’ll have to see how that business turns out for them. In terms of the year, I think both Varian and Elekta probably gained share overall in the market. I would expect in the fourth quarter because of certain orders that may Elekta may have benefited one or two points of share relative to us during the quarter, but overall for the year and for the quarter, I think Varian did fine.

Operator

Your next question comes from the line of Tycho Peterson - JP Morgan.

Tycho Peterson - JP Morgan

Starting off with a question on Proton, your comment about the Proton order in Sweden being contested, can you just help us handicap that? It sounds like it’s a fairly common event, but how do we think about timelines and does that potentially delay things if it gets dragged down to court a little bit?

Timothy E. Guertin

IBA who is a competitor there contests every order, so we were not shocked. We think that challenges like these are going to be common. We think there will never be a Proton that doesn’t have a degree of being contested, and Skandion is aggressively defending its bidding process, and we looked at what our competitors had said and we looked at what Skandion had said, and we became convinced that Skandion has sufficient logic to prevail in this matter. The appeals process for these things is normal as I said. It usually lasts from 3 to 6 months, and so far the schedule has not been impacted, because we’ve built a certain amount of this into our process. We think the delivery for this system will be in 2011, and they plan to do the first patient in 2013. So everybody has built this into their schedules when we put this project together.

Tycho Peterson - JP Morgan

In your comments, Tim, you highlighted the installed base of mature Linacs with regard to the RapidArc opportunity. Can you talk a little bit about how you’re thinking about the sales strategy in the coming year? It’s a little bit harder to nudge those customers that haven’t upgraded that have older systems. Do you have to add reps, or how do you just think about the upgrading of mature base of Linacs?

Timothy E. Guertin

We have about 1000 machines in the US that are over 10 years old, and obviously that represents a real opportunity for improvement. I will tell you that people actually make the decision on whether to upgrade their oldest machine is by how old their youngest machine is. If their youngest machine is 4 to 5 years old and is not delivering what they think of as the current state of the art, then they’ll probably want to replace their oldest machine with a new machine, so that they can have the current state of the art on at least one of their machines. It’s the hardest thing for people to do when they have only one or two machines because then taking one machine out of service is very difficult of them. So one of the things that we’ve done is we have increased the speed by which we can remove old machines and put in new machines and commission them, and the commissioning process of course is up to the customers, but in terms of what we to do, we’ve been able to demonstrate that we can do this in a couple of weeks now, which I think is as fast as we’ve ever seen. We’ve done the same thing for our upgrades by the way. We’ve been able to get that used to take several weeks to take a weekend, so we’re really fast. I think that will affect the market. I think RapidArc is rapidly becoming accepted in the US market as the way you should treat a variety of cancers, and so I think that that will encourage people to do more. Also we’ve stated again and again and I think our customers agree that radiosurgery is going to very important, and a lot of them want to get into radiosurgery, and so what we’ve been trying to do is produce a set of offerings for radiosurgery in conjunction with our partner BrainLAB that are easy for people to do and reliable for people to do and safe for people for to do so that they can get into this business, and BrainLAB has put together some very good training programs for customers. So there is a lot of work to be done. I can see ways to improve this process, and if radiotherapy departments don’t have the capital budget to buy equipment, then pretty much anything that we say won’t make any difference, but if they do have the budget to buy radiation therapy equipment, then I think we can give them very good reason to buy ours and to buy very flexible machines. Remember the more patients you can treat per day, the faster the return is on that machine, and so having a machine that can do stereotactic radiosurgery, a machine that can do IMRT very fast, a machine that can do image guidance fast is the machine that will be most profitable for them.

We’re also able to use our balance sheet. We have a very strong balance sheet. Once of the reasons we emphasize to you the amount of cash that we have is that it puts us in a position when people need some help with terms, we can help more than we’ve been able to help in the past, and I think that will boost us in the marketplace, so I think it’s obviously not the market that I’d to see, but I think we’re prepared in ways that other companies are not for attacking this market, and I’ll also say that I think in terms of service and reliability, in terms of lower cost per treatment, and in terms of clinical innovation, we’re number one.

Tycho Peterson - JP Morgan

Just to pick up on your point on radiosurgery, can you talk about the competitive dynamic? Are you pulling some share from some of your competitors, and then also are you starting to really get buy-in from the hospitals for this kind of cross-selling approach that you’ve been talking about for a while—pulling the neurosurgeons and the radiation oncologists?

Timothy E. Guertin

We had record orders for our stereotactic machines during the quarter, so that tells me that despite negativism in maybe other segments of the market, in terms of the radiosurgery section, the Novalis TX was very strong during the quarter, and that tells me that that segment is very important to us, and more centers want to add that. We’re talking to people all the time for whom this is essential, and when they look forward to what they’re going to want clinically to be able to in a couple of years, they see this as very important to them, and right now we can deliver stereotactic treatments that are incredibly accurate with amazing speed and it’s just getting better and better all the time. So I’m fairly proud of what we’ve been able to accomplish there. I’m gratified that people are embracing this.

Tycho Peterson - JP Morgan

Elisha, you mentioned DSOs improved quarter over quarter, but obviously we’re still a little bit off from a year ago. Any comment there and where do you think those can go, and then also on R&D, you talked about a step-up in investments. I’m just wondering if this is a pacing issue of projects or whether we should think about a higher run rate going forward.

Elisha W. Finney

In terms of the DSO, 81 days where we ended is up 7 days versus the year ago period, but an improvement from the prior quarter. If you look at the last 4 quarters and take just a simple average, it’s about 82 days. You’re going to see fluctuations, but I think we should be able to maintain anywhere between 80 and 85 days. Collections are back to what would call normal. Customers are still trying obviously to hang onto their cash, but our team has done a great job on collecting, so I think the aging looks good, so I don’t have really any concerns from where we are in terms of DSO.

In terms of the R&D, yes, we’re making a conscious decision to go after projects and increase R&D as a percentage of sales because we think it’s going to yield additional revenue to us as early as 2011 and 2012. So we go through the projects, we rank them, and we made a decision that this is one area. We talked about the reduction in force, but this is an area that was really not impacted to a large degree at all, so we’re trying to really save on the discretionary spending and on the SG&A costs and on the gross margin level, but we’re not scrimping on R&D because obviously we think we’re going to emerge much stronger when we come out of this on the other side.

Operator

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

Dalton Chandler – Needham & Company

I have a followup on the radiosurgery market. Could you tell us what percentage of radiation therapy patients today are getting radiosurgery and where you think that percentage could go in the future?

Timothy E. Guertin

Obviously I think the percentage is going up. I don’t think I have it on my fingertips the number for what percentage it is right now. It’s probably pretty small because the majority of them neurosurgical cases—brain, cranial cases, spinal cases, and that’s not a very large percentage of total cases. There are some people who are pushing toward radiosurgery for prostate, but there is not enough published data to know whether or not that’s a wise decision or not, so we’ll have to see. I think that there is a desire by a lot of people to reduce the number of fractions that are needed for prostate, but pushing it down to 5 may not be a good idea, but we don’t know. Maybe the correct number of days is 15, so we want to see the clinical trials there. I think in the long run where we’re going to see stereotactic radiosurgery used in lung and liver, for both mets and primary disease, in non-small cell cancer, when we look at the results from inoperable patients for stereotactic radiosurgery versus operable patients, so these are people who are either too sick or had too many comorbidities to be treated with surgery. When you look at their survival and their toxicities from radiation therapy, they’re pretty good, so that would suggest that over time we may be able to see more and more patients who are considered by pulmonologists and radiation therapists to be candidates for radiosurgery, and if you look at the kind of treatment that people go through, the kind of consequences to patients who have a big section of their lung removed, they’re struggling with disease and they have a wedge resection or a quadrant resection of their lung, that’s a procedure that’s very painful and takes a long time to recover from and it’s a very serious disease to begin with. So what you’d like to see is as people have better quality of life if you can make sure that you haven’t diminished their survival. We have a lot of customers who are doing research in this area. We’re seeing the radiation therapy oncology group do research in this area, and we’re hopeful that as data comes out over the next few years that we’ll see more and more patients move to this, and I’ll remind you that outside the US, in Japan and in China, as we see an aging population—there’s over 100 million people in China who are over 65 years of age and that number is growing, and we’re seeing a graying of the population in the US as the babyboomers age, and in Japan as well, and a lot of patients would benefit from stereotactic treatments, once again in lung as the incidence of cancer is very high and the death rate is nasty and the toxicities are nasty. And radiosurgery has relatively low toxicity, so we think this is an area that we need to emphasize going forward, and that’s where I think we will see a lot of growth. Are we going to see by next week Tuesday? Maybe, but more than likely it’s going to happen over the next few years.

Dalton Chandler – Needham & Company

So it sounds like if I understand you correctly, you think that growth is going to come more from a replacement for a conventional surgery rather than a replacement for an IGRT procedure for example.

Tim Guertin

It will be an image-guided procedure, but it will be image-guided stereotactic radiosurgery procedure where patients probably would have had drugs or an intolerable treatment for them, and now they will have a tolerable treatment, so I think it’s good for cancer patients.

Dalton Chandler – Needham & Company

A quick one on reimbursement, when you think about the percentage of cuts, what’s the breakpoint where if it comes in below that, you say that’s not so bad versus if it comes in above that and you say, ‘uh oh’?

Tim Guertin

If my customers are listening to this call, they will all groan because they will all have different answers for this. I would say if the percentage cut is a few percentage points, it’s fine. If the percentage cut stays where it was, which is somewhere between 20 and 30%, that would be terrible. What it does is it moves the breakeven point for new centers in terms of number of patients you have to move. If it’s just a few percent in terms of cut, then they can probably swallow that, and it will make almost no difference to their buying patterns. If it’s 20%, then we’re going to see maybe the freestanding market even be worse than we saw in the fourth quarter, so we’re hoping for a number that’s closer to a few percentage closer, but I can’t tell you exactly where we break in between because the fact is the math is done center by center using the referral patterns for any given center. When we see the number, the first thing we’re going to do is go to our major customers who operate in this segment and ask them to run the mathematics for their centers and tell us what this will do, but in the absence of data I have today, I’m just very loathe to tell you how that math will work out for them.

Operator

The next question comes from the line of Jeff Johnson with Robert W. Baird.

Jeff Johnson – Robert W. Baird

Elisha, I just want to make sure I’m understanding all the moving parts in guidance for next year. It sounds to me and correct me if I’m wrong, there’s a $0.02 restructuring charge that’s included in your $2.65 to $2.75. From a tax rate standpoint, if it’s up 100 to 200 basis points year over year, that’s maybe $0.03 to $0.06, and I don’t know how to quantify your R&D comments, but if I take them up 50 basis points from my model, that may be a nickel or so. Would those be all the year over year headwinds to EPS that are included in your guidance? Is that how to think about it?

Elisha Finney

But remember we do get the leverage on the SG&A number, so net-net I’ll just bring you back to an even ROS percentage, so I wouldn’t focus too much on R&D going up and other things going up or down, so about 21% to 21.5% on the ROS. We’re on detrimented on interest because today as you know we’re earning effectively zero, and the tax rate is going up from 30% this year to somewhere between 31% to 32%. We had a lot of favorable discreet items in fiscal year ’09 that this early and fiscal year ’10, I’m just not willing to assume that those are going to repeat until we get further into the year.

Tim Guertin

If you take two cents out of the EBIT line which is basically close to flat for ROS, then you can see that most of our problem is below that.

Jeff Johnson – Robert W. Baird

Tim, I think you made a comment on what to use as kind of a proxy for at least the first half of ’10 order trends. Is that the ’08 first half of ’10 or what did you mention there?

Tim Guertin

What I was talking about there was just for the second half of ’10, a lot will depend for oncology on what orders look like in the first half of ’10. For the first half of ’10, their sales, especially in the first quarter is mostly in backlog, but for the second half of 2010, they are going to get some orders that came in late 2009, but some orders that come in first half of 2010, so it is very important that we pay attention to market dynamics especially in North America and Europe, especially in North America, for the first of half 2010 in order to understand better how the second half is going to perform. Although we made broad assumptions, it’s the reason why we have given you wide range, a wider range than we would ordinarily choose to give you because we simply don’t know enough right now to project that any better.

Jeff Johnson – Robert W. Baird

Can you just remind me when do you actually anniversary, is it fiscal second quarter or third, actually seeing Linac orders in North America down on a year over year basis? I know that’s been at least the last couple of quarters. Has it been the last two or three quarters?

Elisha Finney

I believe it was Q3 ’09 Jeff. I got Q3 ‘09 in front of me, and for oncology orders that quarter, it was flat year over year.

Jeff Johnson – Robert W. Baird

Linac orders themselves, not just the oncology orders?

Elisha Finney

Well, we haven’t really broken out Linac, but total oncology, that was the quarter that we flat lined and had a very strong Q1. Orders were up 13% in the first quarter, and I don’t have the second quarter in front of me, but I believe they were up as well.

Jeff Johnson – Robert W. Baird

I thought I just remembered some qualitative comments on the Q3 and maybe even the Q2 call, but big box sales were actually down in North America in those quarters with RapidArc and some other things offsetting.

Tim Guertin

That’s correct, although I can’t give you quantitative figures to do that, but I think you should assume that we anniversary in the third quarter.

Jeff Johnson – Robert W. Baird

I read your comments on the free standing center and the impact that had on the orders this quarter. If those were down 50% as you suggested or somewhere in that neighborhood, would that be about a 3-5% impact or drag to total oncology orders in the quarter?

Tim Guertin

We are going to have to do mathematics. I think it’s more than that.

Jeff Johnson – Robert W. Baird

More than 5 then?

Tim Guertin

I think what we said was North America was down 20%, and we are telling you that software is up and we are telling you that brachy is up, and service is up, so you can sort of guess from that if freestanding is down by 50% and fourth quarter a year ago was very strong for freestanding, so it’s a much bigger impact than 5%.

Operator

The next question comes from the line of Junaid Husain with Soleil Securities.

Junaid Husain – Soleil Securities

Tim, I have been hearing from some of my contacts on the Hill that radiation oncology might be carved out from the cuts to the physician fee schedule, so two questions for you. First, can you tell me whether you’re hearing the same chatter, and then secondly, what do you think this would mean for your freestanding radiation oncology customers? Would you expect them to be back at the purchasing table?

Tim Guertin

We would obviously be delighted, and it would be a correct decision if we were carved out, but it would be hard for me to predict that was going to happen. I have to tell you the signals and noise from Washington is not so good. We hear lots of things, and then the next day, we hear things that aren’t that way, so I don’t know. We certainly have been in there pitching. Radiation oncologists have certainly been in there pitching, and there’s a lot of people congress who don’t want to see cancer therapy hurt, and it’s pretty logical that they would take that position. Their biggest concern is that Medicare patients, more elderly patients, will be extremely angry with the government if the cost of healthcare reform is that the services that they receive as Medicare patients are harmed, and they would be justified in being very angry should that occur, and cancer is rough. I will also point out that if you look at all the Medicare spending which is a number in the order of $440 billion that cancer therapy is about $40 billion of that, and that radiation therapy is about $4 billion of that in terms of Medicare, so we’re like 1% of Medicare, so carving us out would be a very reasonable and affordable thing for the government to do, and so I wouldn’t be surprised that it happened, but on the other hand, there are a lot of folks in government who want to have very logical reasons for anything that they do carve out. What was the second part of your question? I think I just answered the first part.

Junaid Husain – Soleil Securities

In terms of what does it mean if they do the carve-out, do the freestanding radiation oncology customers come back to the decision table?

Tim Guertin

Yes. That would certainly help them, but remember physician fee schedule is just one part of the problem. That’s the professional side. On the technical side, they have to have favorable numbers in order to make the math work. These freestanding centers, some of them are in big cities like for us out here in the West Coast, the Palo Alto Clinic is in a big city, but for a lot of them, these centers are being built in locations that aren’t in major population centers, and so they don’t have numbers they need to see, so they need to see both physician reimbursement be good, and they need to see the technical reimbursement be good.

Junaid Husain – Soleil Securities

Relative to your x-ray business, it feels like this business is bouncing back from a tough last couple of quarters. You got a major customer in Toshiba to turn OEM for. How should we think about this customer going forward? Should we expect it to be lumpy or do you expect it to be a little less wobbly as we head into 2010?

Tim Guertin

Remember this business splits into two parts, the flat panel and the x-ray part. In the x-ray tube part, we’re selling to people who are selling into the diagnostic radiology marketplace, and the CT and MR marketplace in the US has been very unpleasant for the last few years, and those businesses had their reimbursement cut because people say that people are getting scans that they don’t need, and the way they prevent people from getting scans that they don’t need is to harm the people who own those machines. That obviously is absurd on its base. If the referring physicians that are making the decisions as to whether people should have scans, so that’s probably not a valid thing, but I think people are a little worried about self-referral in these markets, and so one of the decisions we’re looking forward to going forward is that this issue of self-referral is dealt with more correctly than it currently has, and I think in the latest house bill, there may be some attention paid to this, so rather than just whacking reimbursement in the head for diagnostic radiology, it’s done more intelligently.

The strength that we’re seeing in the x-ray business is largely in flat panels. That’s a market that’s really taking off, and it’s more than compensating for fluctuations that we see in x-ray tubes. We’re seeing growth in x-ray tubes in the aftermarket, that is, people who are buying tubes for services. We’re seeing growth there, but in terms of diagnostic radiology, it’s difficult; it’s difficult for Toshiba. However, Toshiba is doing really well outside the US, and their CT scanners are very good, and I think they have seen share increases, and they’re a great company to work with. We work well with their senior management. They are people who understand us. and we understand them and what they want from us, and we have very open lines of communications, and so they’re great customers. I wish we had more customers like Toshiba, and so we’re thrilled with them, but we have lots of new customers especially in the area of flat panel, so I think the flat panel business as I have been saying for several years is a business where there is just a lot of growth, so what I would hope for is that if diagnostic radiology sees some stabilization in their reimbursement rates and they start to see some growth again, then that will benefit us on the x-ray tube side, and it will help us on the flat panel side even more.

Junaid Husain – Soleil Securities

Elisha, you got a lot of cash overseas. What are you thinking to hear about the cash? Do you repatriate it or do you keep it OUS?

Elisha Finney

Well, as we speak, if I take total cash in the US and subtract out the checks that haven’t cleared the bank yet, we’re actually sitting on a little more than $60 million, so it’s nice that we’re in fact starting to rebuild cash in the US. As you heard, we did buy 700,000 shares in the last quarter, and my expectation is that if we have cash in the US, we are going to spend it and put it to good use and move forward with our share repurchase program, so that’s what we plan to do in the oncoming quarter. We’re in a good position. It’s an enviable position that we have very strong cash flow, we have a very conservative balance sheet, lots of cash. We’ve reorganized where our Proton cash needs can be funded out of Europe as opposed to the US, so there’s lots of things going on that give me optimism that we can continue to build some cash in the US and put that money to work.

Operator

The next question comes from the line of Sean Lavin with Lazard.

Sean Lavin – Lazard

If you look at the freestanding reimbursement and these 65% utilization proposals that are being discussed would go through instead of the 90%, how would the payback period for these centers change?

Tim Guertin

Yes, the 65% is probably going to go through only for diagnostic radiology. It probably will not apply to radiation therapy. ASTRO provided data to the CMS that showed that the utilization rate for freestanding centers was in the 50% range, and that data was good enough, but I suspect they will use it. If I were a betting person, I would bet that CMS will use the 50% utilization rate when calculating the numbers for radiation oncology, so any reductions will come from other factors and not factors related to utilization.

Sean Lavin – Lazard

So if they went with the 50% instead of the 90% they previously proposed, how would it change the payback for these centers?

Timothy E. Guertin

I think of the 20% that we were looking at, about 6% was related to utilization, so that factor would go away entirely. Of course, you still have 16% to go, and that was also based upon data that was troubled, and ASTRO has provided information on that, so we’ll have to see what decision comes out on the other 16%. Did you get a chance to read the articles, the submissions by ASTRO and others? If you did, you can see that there was a significant number of factors that CMS needs to take into account differently than the way they did when they came out with their first estimates.

Sean Lavin – Lazard

On the 2010 tax rate, why do you expect it to be higher than the last 3 or 4 years?

Elisha W. Finney

I’ve asked that same question internally about a dozen times, and it really comes down to the fact that we adopted 1048 a couple of ago. We’ve had a lot of volatility in the tax rate as a result of that. Last year, we had a catchup of the R&D tax credit in the first quarter that was a retroactive catch-up, so that had a pretty big impact—I think about half a point or so. We also had some very favorable audits that were resolved in the year. It’s something that I can’t necessarily count on year in and year out until we start to clear some open audits, but it’s early in the year and I just simply don’t want to go in and underestimate at this stage. I think from where we sit today that 31-32% should be right in there.

Operator

Your next question comes from the line of Nathan Sadeghi – Highside.

Nathan Sadeghi – Highside

I just wanted to better understand the share dynamics. I think earlier in the call you commented that Elekta might be taking 1-2% market share. If you could drill down on that a little bit more as to what kind of orders are those.

Timothy E. Guertin

That’s relative share. In other words, we think that Varian gained share in the market, but Elekta may have gained two more points in share than we did, so the change is relative share, and that happened in the fourth quarter, and it was mostly related to some large orders in Latin America.

Nathan Sadeghi – Highside

So that did not relate to the North America market?

Timothy E. Guertin

No. They give their number for the Americas, and we separate out North and South America. So when we look at their numbers, obviously they didn’t call me up and give me this information, but based upon what we consider to be lost orders, we think that was an effect that largely happened in Latin America. By the way, we grew in Latin America. It was just a strong year in Latin America, and Elekta benefited more than we did. So we’ve lost share relative to Elekta in Latin America. I don’t have any way of knowing yet for sure exactly how that played out in North America, but we think in worldwide terms, we were fine.

Nathan Sadeghi – Highside

So the order in Brazil accounts for that 1-2% of relative share, and in North America you think you guys both gained a little bit share, but that was relative; there was no share swing in between you?

Timothy E. Guertin

I don’t know it to significant digits because Elekta doesn’t divide it up, but that’s what we think.

Nathan Sadeghi – Highside

Do you have a sense for on absolute basis how much share you think you gained?

Timothy E. Guertin

I would say 1 to 2 points on a worldwide basis, mostly from weakness of other companies, and I think we have reason to believe our share is about as high as it gets.

Nathan Sadeghi – Highside

Do we still have a lot of what I think as residual other players, non-Elekta, non-variant players? What do those share numbers look like now?

Tim Guertin

We think those numbers went down for some of those companies. You can look at their numbers and see that that’s what happened. A lot of them are public, so you can see their numbers, and it is difficult once again because some of them report service businesses when they report their orders, and some of them report years. When a take a service contract that lasts 5 years, they book the whole thing as an order, and other companies do not do that at all, so one of the things that we have to do is use a variety of data sources to try and calculate this. I would love to tell you that we know share to eight significant digits, but we don’t. All we can use is a variety of methods and information from NEMA and other sources and try to put together the story, and the story gets more accurate the more time has passed from the end of the quarter.

Operator

The next question comes from the line of Charley Jones with Barrington Research Associates.

Charley Jones – Barrington Research Associates

My first question is a multipart question on lung. At the analysts’ day, you mentioned that you expected some lung data to be presented from a center, I think, out of Netherlands. Can you give us a brief synopsis of the data, and then the second part of the question is do you feel that data is good enough to support a couple of thousand additional machines in the US like you had mentioned or do you kind of believe that this can be offset by the extra capacity that RapidArc provides?

Tim Guertin

Did I actually say a couple of thousand extra machines? I don’t remember saying that. Maybe somebody else said that. Anyway, the data from Amsterdam showed that patients who were, I don’t have their information in front of me, but it showed that patients who were treated with radiosurgery did very well, did as well as the surgical candidate patients, and we’ve talked to surgeons about this, and of course they would like the data divided up different ways and analyzed differently, and I’m sure that BU will do that, and but we were favorably impressed, and we’ve also talked to people who have data that isn’t published. I can’t tell you who those people are because they need to publish it, but when we look at unpublished data in the US, there is reason for optimism as well. It’s 200,000 patients that are diagnosed per year in the US, and there would probably be more lung cancer patients in China in a few years in a given year than the entire patient load in the US, so between China and the US and Japan, I think there is a huge opportunity, and that could result, yes, in thousands of machines but not in the US. They will be distributed throughout the world.

Charley Jones – Barrington Research Associates

Last quarter, you gave us a number of about $50 million, I think, in revenue. Can you give us an update on how China came in in the quarter so strong like that?

Tim Guertin

China was very strong for the quarter. We had a good year in China.

Charley Jones – Barrington Research Associates

Last quarter you told us that freestanding clinics were about 30% of your US oncology revenue, and I guess that implies somewhere around 10-13% of your total revenue. Is that math correct? I think one of the earlier questions was trying to get at whether or not this was about 5% of a drag on orders or revenue.

Tim Guertin

When I gave the 20%, I said we declined 20% in the US. About 30% of our business in the US is freestanding, and that business was down by 50%, and then if you take into account that hospitals were also down, you should be able to work it out. North America was very important to us in this quarter and so that was where we had a big impact on that. Asia we had a very strong comp a year ago, so although we did fine in Asia on a yearly basis, it affected us. We weren’t able to use the international to surmount to this effect, and that why we gave you the constant currency number because actually currencies worked against us a little bit during the quarter too because I think the average Euro was $1.54 or something like that in the previous year it was $1.44. So that affected us too. So the US turned out to be very important and mathematically with 30% of the North American market off 50% and the rest of the market off less than 50% but still off, it hurt the US order basis enough to where even though software was up and brachy was up and other things were up, we were not able to counteract it.

Charley Jones – Barrington Research Associates

I think your comments about down 50% were referring to orders. Was revenue affected already in the current quarter revenue as well? I know you have a little of the past year book to bill there.

Tim Guertin

I think obviously if orders had been stronger in the third quarter, we could have had a little bit of extra business in the fourth quarter in North America, but no. I think that’s a minor effect. I think that customers took the units that they were expecting to take, and that’s why revenue was reasonably okay for the oncology.

Elisha Finney

Revenue exceeded the prior guidance in the quarter pretty significantly. It’s really that software acceptances came in faster due to really fast installations in the quarter and service revenues, so all of that combined we actually came in higher than what we were expecting on the revenue line.

Charley Jones – Barrington Research Associates

Did you come in a little higher on the US orders that you expected as a result of some of the proposed reimbursement or did that not have an effect yet?

Tim Guertin

I don’t think that would have an effect because those numbers were known in July and those orders were already committed prior to that. Hospitals just stuck to their guns, and whatever they were committed to, that’s what they did.

Charley Jones – Barrington Research Associates

I know you’ve assumed that reimbursement cuts would be lower than what they’ve initially proposed which obviously makes sense, but could you give us an idea regarding your assumptions for the freestanding clinics next year? Are you assuming those are going to be down 50% or have you assumed a smaller decline there?

Timothy E. Guertin

What we’ve assumed is that 2010 will behave slightly better than 2009 did in terms of the behavior of freestanding, but we haven’t assumed bullishness in the freestanding segment in 2010, but I can’t give you a number like, say if the reimbursement was X percent and we’ve assumed this or that, we’ve just made broader assumptions than that based upon conversations with a few of our customers about what they’ll do. We’re hoping it will be stronger than it was in 2009, but not really strong.

Operator

That does conclude today’s question and answer session. I’d now like to turn the call back over to Mr. Spencer Sias for closing comments.

Spencer R. Sias

Thank you for participating. For those who may have come in late, this call has been taped, and it will be available for replay beginning at 4 PM today on our IR web site at www.varian.com/investor. It will be archived there for one year. You can also access a replay via telephone by dialing 1-888-286-8010 from inside the US or 1-617-801-6888 from outside the US and entering confirmation code number 40919568. The telephone replay will be available through 5 PM tomorrow.

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Source: Varian Medical Systems, Inc. F4Q09 (Qtr End 09/30/09) Earnings Call Transcript
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