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Accuray Incorporated (NASDAQ:ARAY)

F4Q2010 Earnings Call Transcript

August 31, 2010 5:00 pm ET

Executives

Thomas Rathjen – VP, IR

Euan Thomson – President & CEO

Derek Bertocci – SVP & CFO

Analysts

Bob Labick – CJS Securities

Tycho Peterson – JP Morgan

Mark Arnold – Piper Jaffray

Josh Jennings – Jefferies & Company

Junaid Husain – Soleil Securities

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter and year-end fiscal year 2010 Accuray Incorporated earnings conference call. My name is Caitlin and I will be your operator moderator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today to Mr. Thomas Rathjen, Vice President of Investor Relations. Please proceed.

Thomas Rathjen

Thank you, Caitlin. Hello and thank you for joining us this afternoon for Accuray's conference call for the fourth quarter and fiscal year-end 2010. 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 have done in the past quarters, we will again be referring to revenue and backlog data, which are found in PDF files 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, but are not limited to, revenue guidance, installations, gross margins, operating expenses, profitability, and clinical acceptance. These and other risks are more fully described in the Risk Factors sections of our Annual Report on Form 10-K, as updated from time to time by our quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission.

And now I’d 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 for our fourth quarter and fiscal 2010 year-end conference call. Today I’m pleased to announce a strong fourth quarter, solid orders and backlog expansion. During the fourth quarter, we added 16 orders to backlog, increasing total backlog by nearly 7% from the third quarter. We received one cancelation of a 2009 order from Europe, our only cancelation from backlog for the 2010 fiscal year. 10 CyberKnife systems were installed and 12 were shipped during the quarter.

For the full year of fiscal 2010, Accuray has added a net of 56 CyberKnife systems into backlog and shipped 38 units worldwide. We believe that this positive book-to-bill ratio is a continued indicator of future growth.

I' will now provide a brief review of the business highlights of the fourth quarter and our fiscal year 2010, an overview of how we see our business growing. I'll then turn the call over to Derek for a detailed financial review and guidance update. During the quarter, Accuray’s total revenue was $61.8 million. Revenue from sources excluding previously deferred platinum revenue was $58.2 million, representing an increase of 21% from Q4 in fiscal 2009.

During the fourth quarter, despite the year-on-year decline in deferred platinum revenue, we recorded net income of $5 million or $0.08 per diluted share. This was driven largely by growth in our core revenue, continued improvement in gross margin, and operating expense control. For the full year fiscal 2010, total revenue was $221.6 million, in line with our annual guidance.

We recorded net income for the year of $2.8 million or $0.05 per diluted share. During the fourth quarter, 16 CyberKnife systems were added to backlog, contributing a total value of $74 million. In addition, service and ancillary orders with a value of $18 million were also signed.

Of the 16 orders added to backlog; seven were from the Americas region, with an additional five orders from the European region, two from Asia Pacific, and two from Japan. 10 of these were the latest CyberKnife VSI system. Derek will provide a more detailed analysis of backlog in a few minutes. During the fourth quarter, 10 CyberKnife systems were installed, of which seven were in the Americas region, two in the European region, and one in Asia Pacific. The worldwide installed base as of June 30, 2010 was 206 systems.

I’d now like to briefly discuss clinical development. It’s important to remember that in order for the CyberKnife to be successful, Accuray needs to build clinical acceptance of full body radio surgery. Our business plan requires that we work to expand the level of clinical knowledge about this new way to treat cancer. So we track clinical utilization of the CyberKnife as a way to judge the core growth that will drive system demand.

With that in mind, I’m pleased to report that during fiscal 2010 there was a 15% year-on-year increase in the number of patients receiving CyberKnife treatments worldwide. Long prostate and intracranial procedures led the field in growth. Approximately 25% of all CyberKnife patients ever treated were treated during fiscal 2010, demonstrating continued acceptance by the worldwide medical community.

As I said, expanding clinical demand is a key driver for sales results. And I can also report that on a worldwide scale, the demand for the CyberKnife remains strong. During the fourth quarter, our Americas sales team reported there is improving access to financing of renewed budget availability. Five of the 16 orders came from the European region, which also continued to see strong sales growth.

Japan continued its renewed sales momentum, adding two orders to backlog. This is the third consecutive quarter of orders coming from Japanese customers. Recent Shonin approval for the CyberKnife G4 system includes the Xsight Lung Tracking System, the Iris Collimator, RoboCouch, and a higher output linear accelerator designed to reduce treatment times. This enhanced technology is expected to expand CyberKnife extracranial treatments throughout Japan, especially among the significant lung cancer patient population.

Overall, our book-to-bill ratio was approximately 1.5 for fiscal year 2010, with a net of 56 systems added to backlog and 38 systems shipped. We saw no observed impact on Accuray’s business from recent competitive product launches. It’s still the case that when a customer has decided to buy a dedicated radiosurgery tool, they invariably select the CyberKnife.

The CyberKnife competitive differentiation combined with the clinical expansion of radiosurgery is a positive indication of future growth. We believe that if the field develops, access to a dedicated radiosurgery tool will be an essential component of every radiation oncology center.

During the fourth quarter, we announced a strategic alliance with Siemens. As a brief review, the agreement has three primary elements. First, give Siemens the right to sell CyberKnife systems globally as part of multi-system deals. In addition, on a country-by-country basis, Siemens could be given CyberKnife distributorship in selected regions where Accuray is either under or unrepresented.

The second element is an R&D agreement, whereby Accuray will create components to enhance the capability of Siemens’ linear accelerator products, making them more competitive in the radiation therapy market. Once developed, Accuray will sell the components to Siemens in a supply agreement.

The third element in the agreement is an R&D collaboration between the two companies to explore next generation product possibilities. Our primary sales emphasis will remain on a direct sales force on our distributor network. We are excited about the Siemens deal to expand the footprints of CyberKnife, creating incremental sales opportunities that would otherwise be unavailable to us. We are not anticipating any impact on revenue from activities with Siemens during fiscal year 2011.

Turning now to our strategic goals of fiscal year 2011, we believe we have opportunities to further enhance the lead role of CyberKnife through a continued investment in R&D. We also believe that we have opportunities to increase market awareness of radiosurgery with the CyberKnife.

To accomplish these strategic goals, we plan to make staged investments over the next year. As a result, we anticipate disciplined and controlled increases in operating expenses during the year. Our intended goal is to enhance Accuray’s future growth as we expand our market. Derek will discuss the financial implications of this on fiscal year 2011.

Finally, before turning the call over to Derek, I want to mention some important corporate news that was announced during the quarter and the year. To help and meet the needs of an evolving and maturing public company, Accuray recently added two new members to its Board of Directors. Jack Goldstein, who most recently served as President and Chief Operating Officer of Chiron Corporation, brings over 20 years of experience in the medical device and pharmaceutical industries.

Peter Fine, President and Chief Executive Officer of Banner Health, one of the nation’s largest non-profit healthcare organizations, brings considerable healthcare experience, including hands-on knowledge of hospital administration and family clinics. Both new directors will be significant additions.

Also in fiscal 2010, Lou Lavigne assumed the role of Board Chair. Lou is a former Genentech executive and experienced corporate director. As a result of these recent changes, our Board has now been transformed into one populated and led by experienced healthcare executives, a transformation that will provide Accuray management with valuable guidance and strategic counsel as the company continues to grow and expand into its next stage of development. Lou will be discussing the Board of Corporate Development in the Chairman’s letter to shareholders that will form part of our Annual Report.

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

Derek Bertocci

Thank you, Euan. I'd like to start with a review of our financial operating results for the fourth quarter and fiscal year 2010 and then provide details for prospective. As Euan mentioned, during the fourth quarter of fiscal 2010, total revenue was $61.8 million compared to $58.8 million for the fourth quarter of the prior year.

Excluding revenue previously deferred for systems sold with Platinum service agreements, revenue was $58.2 million, up nearly 21% from the comparable $48.1 in the fourth quarter of the prior year. Gross profit margin for the fourth quarter was 50.3%, a sequential increase from the prior quarter and an improvement of 4.2 percentage points over the gross profit margin from the fourth quarter of last year.

We continued to control operating expenses, holding them to $25.1 million for the quarter, which is approximately 6% below the prior year’s level. The overall result was net income of $5 million or earnings of $0.08 per diluted share for the fourth quarter compared to net income of $1.2 million or $0.02 per share for the fourth quarter of the prior year.

For the full fiscal year, total revenue was $221.6 million, a decrease of 5% from last year. Net income for fiscal 2010 was $2.8 million or $0.05 per diluted share. This compares favorably to fiscal 2009 net income of $609,000 or $0.01 per diluted share.

Net orders added to backlog totaled $85.9 million in the fourth quarter and $313.5 million for the full year of fiscal 2010, representing book-to-bill ratios of 1.4 in the quarter and fiscal year from a dollar standpoint. We had a book-to-bill ratio of approximately 1.5 when comparing CyberKnife system unit orders to shipments. The decreases in backlog generated by these orders validate ongoing customer demand for the CyberKnife and will help support our continued growth in the further.

During the fourth quarter, 14 orders for CyberKnife systems were added to backlog. We received one cancelation during the quarter, the only CyberKnife system order canceled during fiscal 2010, resulting from the dissolution of the Eastern European entity place this CyberKnife order in fiscal 2009. Including this order cancelation, net orders to backlog totaled 15 systems in the fourth quarter.

Of the 15 orders to backlog for CyberKnife systems in the fourth quarter, seven were from customers within the Americas region, five from the European region, two from the Asia Pacific region, and two from Japan. Three of the CyberKnife orders booked to backlog this quarter were shipped and converted to revenue within the quarter.

As the end of the fourth quarter, backlog was $374 million, 7% increase from the last quarter’s ending backlog of $350 million. Ending backlog was comprised of $132 million of contracts for CyberKnife systems, $16 million for CyberKnife shared ownership programs, and $226 million associated with long-term service agreements.

For the system financial modeling efforts, we anticipate that order backlog for CyberKnife systems will generally convert to revenue over a 12-month period. Though this period can range from as little as one quarter to well beyond four quarters due to customers’ schedules. CyberKnife’s shared ownership programs entail a five-year usage period. Therefore backlog for these orders are expected to convert to revenue over a five-year period, unless the systems are bought out early.

Service orders cover from one to five years of service. Therefore service backlog is expected to convert to revenue over a period of up to five years. Charges reflecting our backlog have been placed on the Investor Relations page of the Accuray website. CyberKnife product revenue of $41.5 million was up 5% from $39.5 million in the fourth quarter of the prior year.

Service and other revenue of $19.6 million was up 5% from $18.6 million in the fourth quarter of the prior year, and shared ownership revenue remains relatively consistent at $470,000 in the fourth quarter of fiscal 2010 versus $455,000 in the fourth quarter of the prior year.

Excluding recognition of Platinum revenue that had been previously deferred, product and shared ownership revenue increased 22.6% and service and other revenue increased 17.7% in the fourth quarter of fiscal 2010 from the comparable revenues generated in the fourth quarter of the prior year. Increase in service revenue was due to the increase in systems installed and covered by service agreements compared to the fourth quarter of the prior year.

We installed 10 CyberKnife systems in the fourth quarter; seven in the Americas, two in the European region, and one in the Asia Pacific region. This brings the worldwide CyberKnife installed base to 206 units at the end of the fourth quarter, with 132 systems in the Americas region, 29 in the European region, 24 in the Asia Pacific region, and 21 in Japan.

Prior to fiscal 2006, we sold CyberKnife systems in the US with Platinum service agreements, which entitled customers to specified upgrades over the term of their Platinum service agreements. All revenue and cost of sales were deferred when such systems were sold. After all required upgrades were installed, we began to recognize revenue and cost of sales evenly over the period of service coverage that remained under the original Platinum service agreement. Final upgrades under Platinum agreements were usually requested by customers and installed several years after the installation of the system.

As a result, revenue and cost of sales for systems and services have usually been recognized over the last one to two years of a normal five-year Platinum service term. All upgrades had been installed by the end of the first quarter of fiscal 2010 on each of the 30 systems sold with Platinum service agreements.

We have fully recognized revenue on 25 of these arrangements and are recognizing revenue over the remaining service term on the final five systems. In fiscal 2009, we recognized $60 million of revenue for systems sold with Platinum service agreements. And in fiscal 2010, we recognized approximately $29 million of Platinum revenue. With only a small portion of this deferred revenue remaining, we expect to recognize approximately $5 million of revenue for systems still covered by Platinum service agreements in fiscal 2011, which will fully complete all Platinum revenue recognition.

During the fourth quarter of fiscal 2010, we recognized approximately $5 million of revenue for systems still covered by Platinum service agreements, of which $1.7 million was systems revenue. Platinum service revenue recognized during the fourth quarter totaled $3.3 million and was comprised of $1.4 million for service work provided during the fourth quarter and $1.9 million for service work deferred from prior quarters.

Our gross profit margin was 50.3% in the fourth quarter, up 1.4 percentage points sequentially from the third quarter and up 4.2 percentage points when compared to the fourth quarter of the prior year. The improvement in gross margin was due mainly to higher gross margin on service revenue.

Service gross profit margin increased nearly 6.8 percentage points from the prior quarter and approximately 5.9 percentage points over the fourth quarter of the prior year. The improvement in service margins was due mainly to the increase in service revenue, as our installed base continues to grow. This is our third consecutive quarter of an improving overall gross profit margin.

During the fourth quarter, operating expenses totaled approximately $25.1 million, up $2.4 million from the third quarter, but down $1.7 million from $26.8 million in the fourth quarter of the prior year. The overall reductions in operating expenses reflect our ongoing efforts to prudently manage the costs. While managing operating will remain a key corporate objective, we plan to make investments to provide for continued growth in revenue for the future. As a result, investors should anticipate an increase in operating cost in fiscal 2011.

As we have explained previously, three factors represent the keys to success in driving Accuray towards sustained growth in revenue and profits; increasing customer orders, solid gross profit margins, and prudent management of operating activates and expenses. Over the past fiscal year, we have delivered improved results in each of these three areas.

Orders to backlog have been solid and are essential to future revenue growth. Gross profit margins have improved sequentially in the last three quarters. And operating expenses have been reduced from prior year levels. All these trends indicate that we are making good progress towards sustained growth.

Accuray’s balance sheet remains strong with cash and investments ending the quarter at $145.3 million. Reflected in our ending cash and investments balance is the net amount of $5.9 million for transactions related to our short-term investments in auction rate securities that have not settled by June 30, 2010. Remaining balance of our auction rate securities totaled $9.9 million was sold on June 30, 2010.

In addition, on that date, we purchased $4 million of short-term investments. The proceeds from the $9 million sales of auction rate securities in transit at our year end and therefore were reflected as other current assets on our balance sheet. Purchase of $4.4 million of short-term investments on June 30, 2010 were not yet settled at year-end and therefore were reflected in both short-term investments and accrued liabilities on our balance sheet. Both of these transactions settled within the first week of July, adding a net of $5.9 million to our cash.

Turning to guidance for fiscal 2011, we expect total annual revenue to be in the range of $210 million to $225 million. Legacy platinum revenue was $29 million in fiscal 2010 and is expected to decline to $5 million in fiscal 2011, completing the recognition of this deferred revenue stream.

Total revenue, excluding the amounts related to legacy Platinum contracts, is expected to be in the range of $205 million to $220 million in fiscal 2011, up from $193 million in fiscal 2010. Revenue quarter-to-quarter is inherently lumpy and so dependent upon our customers’ construction schedules as they build or renovate facilities to house their CyberKnife systems.

Installations forecast for the first quarter of fiscal 2011 are low based upon customers’ schedules. This is similar to the pattern in the first quarter over the past three years. Most Platinum revenue has already been recognized through fiscal 2010. The amounts to be recognized in the first quarter of fiscal 2011 will be much lower than in the first quarter of the prior year. Accordingly, we believe it is important to inform you that we expect revenue in the first quarter of fiscal 2011 to be in the range of $35 million to $40 million.

Based upon the number of orders placed into backlog in fiscal 2010, we expect quarterly installations in revenue in the second half of fiscal 2011 to be considerably stronger than in the first half. We anticipate that our gross profit margin will be in the range of 48% to 51% for fiscal 2011, up from 46.9% in fiscal 2010, due mainly to improved margins on system revenue. Our gross profit margin is expected to be relatively low in the first quarter of fiscal 2011 due to the low expected system shipments and revenue.

We believe that we have opportunities to further advance the role of CyberKnife radiosurgery, but continue the investment in R&D. We also believe that we have opportunities to increase market awareness of the benefits of treating cancer patients with CyberKnife radiosurgery. We believe that progress towards these goals will be critical to maximizing the long-term growth in revenue and profitability of Accuray for our shareholders.

Accordingly, as Euan commented earlier, we plan to increase our efforts in R&D, including development of next generation CyberKnife technology. In addition, we plan to pursue sales and marketing activities to increase awareness of CyberKnife radiosurgery. To support these programs, we plan increases in spending in fiscal 2011 principally on R&D and also on sales and marketing.

With continued careful management and control of operations, we anticipate a modest reduction in general and administrative expenses in fiscal 2011. We anticipate that we will operate at approximately breakeven for the full year fiscal 2011, with the second half of the fiscal year being significantly stronger than the first half.

Based on the strong order flow we achieved in fiscal 2010 plus the developments in R&D and market awareness that we plan to pursue in fiscal 2011, our longer term goals are to grow annual revenues while maintaining solid gross profit margins and prudent management of operating expenses. We believe these are the essential elements to generate pretax profits of 10% or possibly more.

Now I’d like to turn the call back to Euan.

Euan Thomson

Thank you, Derek. We had a strong fourth quarter and fiscal 2010 in terms of orders, expanding backlog, improving gross margin, and effective management of operating expenses. Importantly, we saw continued acceptance of CyberKnife radiosurgery, with a 15% increase in the number of patients treated and the steadily increasing CyberKnife installation base.

With that, we’ll now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Bob Labick of CJS Securities. Please proceed.

Bob Labick – CJS Securities

Good afternoon. Thanks for taking my questions.

Euan Thomson

Hi, Bob.

Derek Bertocci

Hi, Bob.

Bob Labick – CJS Securities

Why don’t we start with guidance? I know you just touched on. I appreciate all the color you gave us. It seems to imply absolutely no non-backlog system revenue. But in the past you’ve talked about anywhere between zero and four, zero and three per quarter. Am I missing something there or is there a lower ASP per system, or what else could be causing it to be just the product backlog order that you have at this time plus the implied systems with implied services revenue?

Derek Bertocci

Bob, the revenue that we are forecasting is based on the backlog we have and our expectations for business in fiscal 2011. It’s probably worth noting that the order flow that we had in fiscal 2010, particularly as we’ve gotten towards the middle of the year and the second half of the year. As a result, the first half of fiscal 2011 is based on order rates that were not as strong in fiscal 2009 and the first half of fiscal 2010. The second quarter of fiscal 2010, the orders were very much bunched up towards the end of the quarter. And we are trying to be realistic about when our customer’s site will be ready to accept those. We are not, though, seeing any change in ASP in terms of the degradation in that in our products. So it’s really based on customer schedules for installation of products.

Bob Labick – CJS Securities

Okay. And then I guess as my follow-up I’ll just ask – I appreciate that answer. I’ll ask it slightly differently. You’ve discussed the book-to-bill of 1.5 times but your guidance is for 10% core growth, down from 20% in the current quarter. Is that all because it’s being deferred into fiscal ’12 or –? I mean, 1.5 times book-to-bill and 10% growth are not necessarily – are a little confusing.

Euan Thomson

Well, again, it’s really based on the time periods in which we got the orders and the expectation from a customer standpoint of when their facilities will be ready to accept those orders. We did indicate that we expect the second half of fiscal 2011 to be significantly stronger than the first half. But the first half is really a reflection of the weaker order picture that we had in towards the end of fiscal 2009 in most of the first half of fiscal 2010.

Bob Labick – CJS Securities

Okay. I will let other people ask. I’ll get back in queue. Thank you.

Operator

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

Tycho Peterson – JP Morgan

Hey. Good afternoon. Thanks for taking the questions. Maybe just kind of sticking with the outlook, can you elaborate a little bit more on your comments on spending for 2011? You talked about R&D picking up a little bit. Can you elaborate maybe directionally on where you are putting those dollars? And then I think you may have said G&A down, but I wasn’t sure if it was SG&A down. I’m just wondering if you could talk a little bit about sales, how you’re thinking about that program next year.

Euan Thomson

We can’t get details of exactly what we are spending money on in this area with two generic areas, as Derek indicated. We feel there is considerable scope for accelerating the difference between CyberKnife and other technologies, and we want to take advantage of that fact to make some investment in R&D. Obviously, we can’t be specific about the timing that that will roll out or any details of the product itself. But we certainly feel it’s worth making that investment. Similarly, with market awareness, we think there is opportunity to step up the pace and actually invest in programs and people really to raise awareness of the CyberKnife benefits, which are materializing from the clinical data.

Derek Bertocci

And also, Tycho, in terms of the decline that I mentioned in G&A, that is actually just general and administrative, not selling, general and administrative. We expect that there would be some increases in our sales and marketing costs as we work to improve the awareness of the CyberKnife and radiosurgery with the CyberKnife.

Tycho Peterson – JP Morgan

Okay. And then, Euan, can you talk a little bit about how you think about the market opportunity in Japan in terms of potential system placements over the next couple of years?

Euan Thomson

Yes. Without being specific numbers, I think it’s clear that Japan is the second largest single country base market in the world. And I think with the new Shonin in place, we are much more compatible now in terms of technology we offer than we have been in the past. We had approval for body Shonin, but it was based on technology approval to treat the whole body rather. But it was based on technology, which was not necessarily optimized for the whole body. The G4 is a system platform, you may remember, was a definite design for whole body applications. We’re seeing acceleration of clinical work in Japan, clinical adoption in Japan, and that should drive adoption rates and sales. That’s been happening in recent years.

Tycho Peterson – JP Morgan

Okay. You can’t quantify kind of the number of Tier 1, Tier 2 hospitals you think you could target?

Euan Thomson

No, I don’t want to go to details of the market size in Japan.

Tycho Peterson – JP Morgan

Okay. And then last one, you said you’re not going to recognize revenues from Siemens in 2011. Can you just remind us why? I mean, given the potential sales synergies there, it seemed like that would be something that could some sooner to you.

Euan Thomson

Right. Obviously, we’re not getting any distribution channel, whether it’s a distributor or a new sales person. They take some time to get up to speed. And we’re really talking about market segments that are not currently CyberKnife market segments. So the first thing we have to do is to engage and to train the sale team to look for appropriate deals and then to work appropriate deals. After that, revenue of course wouldn’t flow until we had actually got to the point of inflation or close to. So there wouldn’t actually be a time lag. So we’re working right now primarily on getting the sales force – their sales force up to speed in the relevant areas. And after that, we would expect sales activity to kick in. After that, we would expect revenue to flow.

Tycho Peterson – JP Morgan

Okay. Thank you.

Operator

Your next question comes from the line of Mark Arnold of Piper Jaffray. Please proceed.

Mark Arnold – Piper Jaffray

Good afternoon, guys. I guess I want to just go back to the outlook question as well. I guess the question about the book and ships and the fact that historically even in this last quarter I think you had three of them. When we think about your backlog number here at the end of the quarter being $132 million on the system side, I guess I’m just still a little confused in terms of how you are thinking about additional book and ships on top that and kind of – are you expecting that that may be a little bit more difficult over the next 12 months or are you just not including any revenue expectation from that at this time? How should we think about the system sales component of your outlook?

Derek Bertocci

One of the things, Mark, just make sure that you and the other analysts and investors are remembering is that fiscal 2011 is another year when we will drop approximately $24 million worth of revenue out of the picture from the standpoint of ending of the Platinum deferred revenue rollout. So that has to be picked up by additional sales of systems just to break even with this year. In addition to that, we are – we do expect that there will be some number of systems that would be ordered and shipped within the year. The expectation, if you look at our backlog today, is that we would expect some units that would also get ordered and shipped within fiscal 2011.

Mark Arnold – Piper Jaffray

Derek, can you just give us the breakdown of the $29 million in Platinum revenue that you recognized in fiscal 2010? What amount was in the system revenues line and what amount was in the service revenue line?

Derek Bertocci

$12.6 million of it was in the system line. And then in the service line, it’s $16.3 million.

Mark Arnold – Piper Jaffray

Okay. And then just one last clarification question. The other – the interest income and other expense line, can you just tell us what’s in that in the fourth quarter? Why is that number – why are you recording other expense there? And should we expect to see some interest income, given your strong cash and investment balance in 2011?

Derek Bertocci

This quarter was a quarter where we were affected significantly by the rapid decline in the euro from March 31 to June 30. We do have a fair number of sales that are denominated in euros and the translation – or the FX losses on those is what hit our other income and other expense line in the fourth quarter. Looking forward, as we look at fiscal 2011, with the cash balance that we have, we certainly do expect interest income. The exact amount is really going to be dependent obviously on what the markets fair. But I think given that we are trying to take a reasonably conservative posture with our cash, I wouldn’t suggest that you assume it getting a very high interest rate today on potentially one year or less investments.

Mark Arnold – Piper Jaffray

All right. Thank you.

Operator

Your next question comes from the line of Josh Jennings of Jefferies & Company. Please proceed.

Josh Jennings – Jefferies & Company

Hi, good evening, gentlemen. Thanks for taking the questions. Just a quick one just on – in terms of again the outlook, which obviously is treated kind of ahead of itself as I did in terms of (inaudible) expectations. But if you take a look at your 38 units shipped in fiscal ’10, how many units did you actually ship, not just installed, but shipped in fiscal ’09? And are you expecting that 38 number to grow in fiscal ’10 – I'm sorry, fiscal ’11?

Derek Bertocci

In terms of fiscal ’09, we shipped 36 units. But we shipped 38 in fiscal ’10. We do expect that that will increase from fiscal ’10 to fiscal ’11. And that’s a significant reason why we expect revenue to go up. Again, remember, we have to replace $24 million worth of Platinum revenue just to break even. And so we have to ship additional units – significant additional units in order just reach break even in terms of revenues.

Josh Jennings – Jefferies & Company

And just to touch on that, in terms of sort of $24 million that you need to – that market has to break even, I mean, just in terms of thinking about your increased installed base and increasing service component in the backlog, what is – if you increase your installed base by about 15% or so over the course of the year, is that sort of bogey for service revenue growth for fiscal ’11? Is that an appropriate level to expect?

Derek Bertocci

No. Again, I think that it is a little bit deceiving is the Platinum service which in service alone was $16.3 million of revenue in fiscal ’10. That will go down to just a few million in fiscal ’11. So again, just to pull these in, we have to have a significant increase in service revenue and the growth in the installed base just to break even. So that $16.5 million or so represents about 23% of total service revenue. So it appears to have a pretty significant increase in installed base just again to break even.

Josh Jennings – Jefferies & Company

Okay. In terms of reported service level, it’s going to be tough to break even on the service side in fiscal ’11. I think that’s where the disconnect is.

Derek Bertocci

Probably. I think that may be what is confusing folks because of that – as that $16.5 million comes out and we grow the installed base, it’s a tall order to break even given that.

Josh Jennings – Jefferies & Company

Great. And just lastly on the competitive front, I mean, can you – I know you spoke that you haven’t sort of seen competition impact your business at this point. Is any of your guidance breaking in some elevated level of competition next year with Varian launching their TrueBeam early in the – your next fiscal year, I mean? Thanks a lot, guys.

Euan Thomson

I think we’ve had – if I remember the timing correctly, two quarters now since the bookings rather since the TrueBeam launch. So I think we are one complete quarter. And I think we’ve set on both goals so far, but we haven’t seen any impact from that launch.

Operator

(Operator instructions) Your next question comes from the line of Junaid Husain of Soleil Securities. Please proceed.

Junaid Husain – Soleil Securities

Good afternoon, everyone.

Euan Thomson

Hi, Junaid.

Junaid Husain – Soleil Securities

Derek, excluding the legacy stuff, the patterns [ph] on the balance sheet and just given your 2011 guidance, how should we be thinking about the organic rate of sales growth? Shouldn’t – do you call it mid-to-low single digits?

Derek Bertocci

Probably. The guidance that we are providing compared to the $221 million of revenue that our guidance spends, that both above and below, if you look at the results excluding the deferred portion of the Platinum, as we indicated, it’s a range of potentially 6% to 14% organization growth in terms of the ongoing activity of the business, excluding the previously deferred Platinum piece for our business.

Junaid Husain – Soleil Securities

All right. Thanks so much, guys.

Derek Bertocci

Okay.

Operator

And there are no further questions in queue at this time. Part of the interruption, you have a question from the line – please proceed.

Euan Thomson

Okay. After a solid quarter of fiscal – fourth quarter of fiscal 2010, Accuray remains dedicated to expanding the use of CyberKnife radiosurgery, as we change the way cancer is treated around the world. As always, I want to take a moment to acknowledge Accuray employees and the tremendous contribution they make every day. Thank you for joining us today and we look forward to speaking with you on our next call.

Operator

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

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