TomoTherapy CEO Discusses Q3 2010 Results - Earnings Call Transcript

Executives

Tom Powell – CFO and Treasurer

Fred Robertson – President and CEO

Analysts

Ben Andrew – William Blair

Jeff Johnson – Robert W. Baird

Mark Arnold – Piper Jaffray

Josh Jennings – Jefferies & Co.

TomoTherapy, Inc. (TOMO) Q3 2010 Earnings Call October 27, 2010 5:00 PM ET

Operator

Good day Ladies and Gentlemen, and welcome to the Third Quarter 2010 TomoTherapy, Incorporated Earnings Conference Call. My name is Alisha, and I’ll be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Tom Powell, Chief Financial Officer. Please proceed, sir.

Name

Tom Powell

Thank you, Operator, and good afternoon. Joining me on today’s call is Fred Robertson, TomoTherapy’s President and CEO.

Before we begin, I’d like to preface our remarks with the customary Safe Harbor Statement.

Today’s conference call contains certain forward-looking statements. These statements are based on the current estimates and assumptions of TomoTherapy’s management, and are subject to uncertainty, risks, and changes in circumstances. Given these uncertainties and risks, you should not place undue reliance on these forward-looking statements. Actual results may vary from the expectations contained in today’s call and those differences may be material. Important factors that could cause such differences include among others, those described under the heading Risk Factors, and our most recent 10-K, and 10-Q filings.

I would now like to turn the call over to Fred for an overview of the quarter and key highlights. And I’ll provide a more detailed review of our third quarter performance, and Fred will close with a discussion of our 2010 outlook. Fred.

Fred Robertson

Thank you, Tom, and good afternoon everyone.

We’re pleased to report that our third quarter performance showed continued improvement demonstrating our efforts on several fronts are paying off.

For the quarter, we reported revenue of $43.6 million, an increase of 27% over the 34.4 million in the third quarter of 2009, reflecting strength in both product sales as well as service.

Our loss from operations decreased 10% year over year from $16.1 million to 14.6 million. And we reported a net loss of 10.9 million, or $0.21 per share.

Our revenue backlog at September 30^th was $146.4 million, a 5% increase from the 139.2 million backlogged as of June 30^th, 2010. This includes $35 million of new equipment orders in the quarter. This increase continues the trend from last quarter, and reflects the positive impact of our stronger, more integrated global sales and marketing effort, as well as the market’s demand for our new more diverse product offerings.

In the quarter, we also continued to maintain our strong capital position with $140 million in cash and short-term investments.

From a macro perspective, global market conditions remained difficult to assess, yet we have seen positive indications recently the demand is stabilizing.

Similar to last quarter, we continued to be encouraged by the environment in North America. While there is still uncertainty and the recovery appears slow, we’ve seen a number of prospects both in the for-profit and not-for-profit segments begin to come off the sidelines.

In addition to U.S. wins in the quarter, just this week we reached an agreement to install a TomoTherapy system at the Swedish Cancer Institute in Seattle. At the largest and most comprehensive cancer treatment program in the Pacific Northwest, this is important for our West Coast presence.

With respect to Europe, there has been mixed news with continued uncertainty throughout various regions. However, we have had some success there and continue to believe that there is substantial opportunity.

During the quarter, we announced the installation of our treatment system at the Nottingham Radial Therapy Center in England as part of the service expansion and relocation project. This facility is a division of Nottingham University Hospital’s National Health Service Trust, which is one of the country’s largest teaching hospitals.

Also in July, James Cook University Hospital in Middlesboro, England began treating cancer patients on the TomoTherapy system enabling this hospital to offer leading radial therapy to cancer patients in the Northeast region of England.

In September, the European Society for Therapeutic Radiology and Oncology, or ESTRO, held their bi-annual meeting in Barcelona. We saw very strong customer interest at this conference where more than 80 studies highlighted the critical benefits of TomoTherapy technology.

So while the operating environment remains uncertain through several regions, we’re confident that Europe will be an important market in the long term.

As a note, I would point out that our co-founder and chairman, Rock Mackie, was awarded honorary membership into the European Society for Therapeutic Radiology and Oncology for his scientific contributions to the field of radiation oncology. This is a distinguished honor, and speaks to the value of our platform.

In the Asia-Pacific Region, we remain encouraged by recent performance there and continue to believe that this is a marketplace for significant growth. We recently held our Asia-Pacific User Symposium in South Korea where we saw attendance double over the 2009 levels.

TomoTherapy’s installed base in this region has increased by 27% in just the last year with consistent growth of about 30% in the last several years. Key growth drivers for the region have been Korea, Japan, and more recently China. During the quarter, we announced that General Hospital of Guangzhou Military Command of PLA purchased the first TomoTherapy radiation therapy system to be installed in Southern China. This hospital treats more than 1 million patients annually, and presents a tremendous opportunity for our treatment system to benefit a broad range of patients.

At ESTRO and the Asia-Pacific user meeting combined, nearly 100 abstracts were presented highlighting the efficacy of TomoTherapy radiation treatments. This growing body of clinical evidence underscores the fact that the global market is increasingly recognizing the benefits of our radiation therapy approach.

We announced this morning that more 75 additional abstracts that addressed TomoTherapy technology will be presented at the annual meeting of the American Society for Radiation Oncolgoy, or ASTRO, which begins Sunday in San Diego. We’re pleased to see the sustained momentum in this critical indicator of the importance of our radiation therapy platform.

Of course at the root of our progress are the advances we continue to make in our product platform. Building on a solid core, we’ve continued to successfully diversify and enhance our offering.

To begin, there’s been continued market acceptance of TomoDirect, our static field treatment modality. We’ve seen steady growth in the uptake of TomoDirect with it now being included in three out of four new system orders. Importantly, TomoDirect provides a substantial opportunity for us as more than 85% of overall U.S. orders come from single and dual Linacc centers. Customers that demand options that will allow them to treat any patient that walks through their door with high-quality radiation therapy. This is a large market where TomoTherapy is now well positioned to effectively compete. We continue to further enhance and refine our TomoDirect offering. And to that end are currently in the process of upgrading systems.

As you’ll recall, TomoHD is our premium product offering hardware design changes and future configuration improvements. Interest in this product, which combines the best features of our helical and direct treatment remains high. And our rollout is on schedule. We recently shipped our first system to University Radial Therapy Center of Antwerp. And as we announced just this morning, installation is underway.

In the product area, the last area I’d like to touch on is TomoMobile. We’re seeing continued interest in this offering in both the rental capacity as a bridge to further technology upgrades, and the installation for standalone radiation therapy centers. We currently have a total of four TomoMobile solutions deployed at customer sites in markets that were previously underserved. TomoMobile has also yielded ancillary benefits as we’ve been able to adopt pieces of the technology utilized in the TomoMobile format, and broaden their application.

For instance, as an outgrowth of the TomoMobile initiative, we worked with Nelco, a leader in medical shielding solutions to develop a customizable external shielding enclosure for TomoTherapy treatment systems called TotalShield. TotalShield, which was designed to fit around a TomoTherapy system within existing conventional linear accelerator vaults in cobalt treatment rooms provides a cost-effective and time-saving solution that eases the adoption of cutting edge technology, treatment technology for any facility.

The TotalShield product will be showcased at the TomoTherapy ASTRO booth. We’re very excited about our current offerings, and we look forward to sharing our developments with you at ASTRO next week.

Finally, I’d like to spend a few minutes on the service side of our business. As I mentioned, during the quarter we saw improving performance in our service organization with revenues increasing 37% over the prior year period. At the same time, we maintained our leading customer service rankings. According to MD Buyline, our overall system performance and service response time marks remain high.

That said, we’re continuing to take steps to further improve the reliability of our systems. Specifically, we’re working to enhance machine uptime and reduce maintenance required. We recognize that these elements are critical as we pursue our path to return TomoTherapy to profitability.

We have two programs in particular that are aimed at reducing our service costs. First is our FastTrack program, which we talked about last quarter. In total, this is a $3 to $4 million investment, which will bring newer technology advancements to select older systems in the field. This process is progressing smoothly. And we’re on track to complete the initial phase of this program by year end.

In addition to our FastTrack program, we recently launched TomoLink, a new remote service solution that enables our remote service personnel to virtually troubleshoot and diagnose issues in the field. We’re confident that these programs will help us achieve our goal of accelerating the profitability of our service business while delivering customer expectations for best in class support.

In closing, I’d like to say that we’re encouraged by our third quarter financial performance. While we still have work ahead, we’re making good progress with the number of key initiatives, which are delivering clear results. We remain intensely focused on continuing to bolster product sales to grow the top line, while also reducing our support costs while with the goal of returning to profitability and delivering shareholder value.

With that, I’ll turn the call over to Tom for further details on our third quarter financials. Tom.

Tom Powell

Thanks, Fred. To reiterate, the company reported third quarter 2010 revenue of 43.6 million, an increase of 27% from 34.4 million in the prior year period. We incurred a net loss attributable to shareholders of 10.9 million, or $0.21 per share compared to a net loss of 13.9 million, or $0.27 per share in the third quarter of 2009.

In the third quarter, product revenue increased 23% from the prior year period, and represented 68% of revenues.

Service and other revenue increased 37% versus the prior year period, and represented 32% of revenues. The increase in service and other revenue was largely due to a 30% increase in the number of sites in our service contract combined with a 3% to 4% increase in pricing.

From a geographic standpoint, North America accounted for 38% of our third quarter 2010 revenues, EMEA 36%, and Asia-Pacific 26%.

Average selling prices increased 12.2% in the third quarter of 2010 versus the prior year period. On a constant currency basis, ASP was up 13.2% during the quarter.

The year-over-year price increase is primarily the result of three factors. First, the sale of one TomoMobile system in the quarter, which carries a higher ASP to cover the cost of the coach.

Second, the sale of one particularly high-end system in Europe. And third, the average price from a year ago period within the low end providing an easy comparable.

For the year-to-date period, product ASP is up 1.3% versus the prior year, or 3% on a constant currency basis.

Gross margin in the third quarter was 16% compared to 10% in the prior year period. The margin improvement versus the prior year quarter is largely due to gains in both service direct contract margin and service overhead costs in addition to the previously mentioned increase in pricing.

Sequentially, third quarter gross margin decreased 10 points from the second quarter gross margin of 26% largely due to higher percent of third quarter revenues being derived from the lower margin service business combined with a 4% sequential decline in the product gross margin and the 14% sequential decline in the service and other gross margin. The 4% sequential decline in the product gross margin was due to the mix of aftermarket options sales. And was not related to the change in the system gross margin, which increased 1% during the quarter.

More specifically, during the third quarter aftermarket option sales were heavily skewed towards hardware, which carry a lower margin than the software related options that accounted for the bulk of the second quarter.

During the third quarter, the service and other gross margin improved 21 points versus the year ago period to minus 47%, yet showed a 14-point deterioration from the second quarter.

While still a very meaningful improvement versus 2009, the third quarter service margin was not on par with the rate of improvement achieved in recent quarters due to a number of factors including productivity investments, such as FastTrack, and the installation of onboard scopes on systems in the field, an increased failure rate of system components primarily Linacc, that resulted in an increased provision for the estimated cost to refurbish the components were reused by the service organization. Excluding such factors, the third quarter service and other gross margin would have been more in line with the second quarter margin.

Operating expenses were 21.6 million for the third quarter of 2010, an increase of 1.9 million, or 10%. The key driver of the increase was the $1 million increased in research and development primarily resulting from a $1 million reduction in capitalized software expenses. As a result, all third quarter R&D expenditures flowed through as period expense rather than a portion being capitalized, and then flowing through as product costs as the case in the prior year period.

In addition, during the third quarter, selling, general, and administrative expenditures increased by $900,000 primarily due to increased employee costs including an investment in additional sales and marketing headcount, and a $700,000 charge for bad debt expense associated with the distributor parts sales.

For the third quarter, the loss from operations was 14.6 million compared to a loss from operations of 16.1 million in the same quarter of 2009.

Turning now to the balance sheet, we ended the third quarter with cash and short- term investments of 140 million, a $5.6 million decrease from June 30^th, and a $14.3 million decrease from year-end 2009.

Cash used in operations was 3.2 million for the third quarter, and 15.5 million year to date. Of the 15.5 million year-to-date operating use of cash approximately 5 million was used by CPAC. Another 9 million is due to the Tomo net loss as adjusted for non-cash items. And another $1.7 million was tied up by net changes in working capital.

The large component of the year-to-date net change working capital was inventory, which increased by 5.3 million from year end 2009 to 53 million. The increase was related to work in progress and finished goods inventories necessary to meet our fourth quarter system shipment schedule.

Out of the end of the third quarter, the net accounts receivable balance was 34.5 million, a $900,000 increase from year end 2009. Day sales outstanding were 57 days.

And finally, let me address orders and backlog. As of September 30^th, backlog totaled 146.4 million, a $7.2 million increase from June 30^th, and a $10.6 million increase from December, 2009. For the quarter, we had new orders of 35 million.

As for backlog pricing, the average system order price in current backlog is down to 1.3% when compared to the second quarter. And is down 8.3% versus the average of September, 2009. Of note, at each quarter end, we revalued our reported backlog based on the foreign exchange rates effect as of that quarter’s end.

For the third quarter, the foreign exchange impact accounted for only a minimal amount of the 8% decline in backlog pricing from the prior year quarter.

I’ll conclude by providing a roll forward of the backlog balance. We began the quarter with a backlog of 139.2 million. We added 35 million of new orders, recognized 29.8 million as product revenue, had no removals from backlog, and had a $2 million net increased from other items such as foreign exchange to give us an ending backlog of 146.4 million.

Now I’d like to turn the call back over to Fred to provide our outlook for the rest of 2010 and a few closing remarks. Fred.

Fred Robertson

Thanks, Tom. Based on our year-to-date results and our backlog growth, we now expect stronger topline results than anticipated earlier in the year. As a result, we’re revising our fiscal 2010 guidance upward. We now expect revenue to be in the range of 175 million to $185 million compared to the previous range of 160 million to $180 million with a net loss in the range of $0.65 to $0.75 per share as compared to the previous projection of $0.65 to $0.85 per share.

As previously communicated, we continue to make incremental investments in R&D, sales and marketing, as well as up to $4 million in the customer support FastTrack program, representing a sizable increase in fourth quarter spending.

In summary, while there is still uncertainty in the macro environment, we’re encouraged by the improving trends in what appears to be stabilization in certain markets. We’re also seeing continued interest in our expanded product offerings throughout North America, EMEA, and Asia-Pacific and believe that these geographies offer significant long-term growth potential. We have a great deal of confidence in our treatment systems, and as evidenced by the growing clinical evidence in published reports, it seems clear that the market is increasingly recognizing the efficacy of TomoTherapy’s approach.

We look forward to sharing these benefits with you first hand at ASTRO next week. And I encourage you to stop by our booth to view our exciting lineup of offerings. And we also look forward to seeing many of you at the investor and analyst meeting that we’re hosting on November the 1^st in conjunction with ASTRO.

With that, I’ll turn the call back to the operator, and I’ll open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ben Andrew from William Blair.

Ben Andrew – William Blair

Good afternoon, guys.

Tom Powell

Hi, Ben.

Fred Robertson

Hi, Ben.

Ben Andrew – William Blair

Tom, maybe talk a little bit about the impact of FastTrack in the quarter and how we would expect that to roll out in Q4 and beyond. Is that 4 million an annual spending level and was that already in there? And what exactly does, you know, will that do for you, you know, in terms of overall cost savings over time? How does that play out?

Tom Powell

Well, FastTrack, the way we should be thinking about it, it’s a one-time investment that we doing in 2010 with the intent of addressing some of the systems out in the field that have got higher than average service maintenance costs. And we’ve identified neuro systems that, you know, kind of fit this mold and we’ve got solutions in mind. What we’re doing is making the investment this year to address those issues so that we realize a savings going forward as a result of the fixes.

Now, in terms of how we think about this it this year, the majority of the spending will be in the fourth quarter. We had, you know, a minimal amount in the third quarter of the year associated with FastTrack and the vast majority of that up to 4 million will happen in the fourth quarter.

So what you’re going to see is, obviously an impact on the margins in the fourth quarter. As you go into 2011 we anticipate realizing those savings. And the payback on it, we figured was 18 months or less, so a pretty good investment for us.

Ben Andrew – William Blair

And is there any revenue coming from that from the customers or are you doing this to really save on service?

Tom Powell

It’s really designed as a savings effort, you know, to the extent we can realize revenue we will. We have not identified a great amount of revenue opportunity from the program so far, and tentatively, I don’t expect that to change.

Ben Andrew – William Blair

Okay. And then, thinking about the overall upgrade program in the field in terms of some of the older systems, are there other things beyond FastTrack going on that can represent revenue opportunities for you?

Fred Robertson

Well, this is an opportunity to upgrade the install base to TomoDirect as an offering.

Ben Andrew – William Blair

Are you seeing any of that yet, Fred, or is it – is it material or could it be next year?

Fred Robertson

I think we’ll see some of that in the fourth quarter, and we expect some install base upgrades to continue into the 2011 timeframe, certainly.

Ben Andrew – William Blair

Okay. And then you’ve narrowed the range on the revenue for the fourth quarter pretty materially, which is helpful. You know, other than just timing of deliveries, are there things that would push you to the upper or the lower end of your revenue target that you can talk about?

Tom Powell

I think it’s primarily the timing of deliveries. You know, as you’re aware, you know, with the relatively expensive device in the numbers that we ship, you know, having a couple of units slip in and out of our quarter can be a pretty big swing in revenue.

Ben Andrew – William Blair

Sure. Of course. Okay, but the overall environment in terms of – and this will be the last question from me. The overall environment, you talked about in the U.S., is encouraging, you know, can you compare it to kind of a previous period? Does it feel like we’re all the way back to ’08 in terms of trends, or early ’08 before the downturn began or are we still working our way back there?

Tom Powell

I think we’re still working our way back. You know, clearly the environment for us feels a lot better than last year, but I don’t think we’re back to the ’07-’08 robust times.

Ben Andrew – William Blair

Okay. Thank you.

Operator

Your next question comes from the line of Jeff Johnson form Robert Baird. Please proceed.

Jeff Johnson – Robert W. Baird

Thank you. Good evening, guys. Hey Fred, wondering if I could maybe start with you. It looks like a little bit of a change in the definition of backlog. Is that just because TomoMobile’s contracts have started to layer in there, or could you maybe walk us through the reason for the change there?

Fred Robertson

Well, it’s really a change that has happened in kind of connection with the change in our business. We – as you know, we rolled out the TomoMobile System. We both sell the system and we also offer it for rental as a bridging solution to our customers who are looking for an interim solution in between either getting a full bunker built, or perhaps retrofitting one from a previous installation. And in connection with that, we started renting a system. So we have that included in our backlog as revenue. It represents a pretty small amount right now, but it’s included in the backlog, and as a result we’re changing the definition to explain that that is now included.

Jeff Johnson – Robert W. Baird

Okay. No change though in going to a rental model for your standard system or any of the Linaccs that goes into a hospital itself?

Fred Robertson

No, not as of yet. This is strictly related to the TomoMobile System.

Jeff Johnson – Robert W. Baird

Great.

Fred Robertson

And then again, it’s a very small part of our backlog.

Jeff Johnson – Robert W. Baird

Yeah, got it. And then, you had talked about, Tom, the FastTrack investment being very minimal in Q3 and close to that 4 million maybe later into Q4. As I look at my model, it seems like to get you more in line with Q1-Q2 service margins would mean it would have took maybe a $2 million hit this quarter. If it hadn’t been for that 2 million hit you would have been in line with Q1-Q2. So I guess I’m trying to figure out, you know, you said it was a little bit of FastTrack, but it was also some higher failure rates. You know, are those higher failure rates something we have to worry about them going forward, and we need to build into our model going forward or are those one-off issues that we can – just stuck in Q3?

Tom Powell

Well, there were a number of things that happened in Q3. You know, certainly FastTrack was one piece. In addition to FastTrack, we also made some investments in putting on-board strokes on a few systems. That was about ½ million of the – those two combined were about ½ million of this 2 million that you’ve identified as being the difference between our Q1 and Q2 run rate versus third quarter. During the quarter, we had a pretty high level of Linacc returned for refurbishment and that really drove the majority of the margin deterioration in the quarter.

In terms of expectation going forward, historically we’ve seen pretty significant moves in terms of variability from quarter to quarter on a number of systems, or the number of Linaccs coming back for repair.

This quarter was fine. We’ve looked at it, based on our analysis, the aging of the systems in the field and the Linacc; we think that the kind of expense will subside in the following quarters. But you know, we’re going to watch that pretty closely. It’s obviously a risk to our forecast. We don’t think it’s going to be a significant issue past the current run rate, but we’ll obviously keep an eye on that.

In addition, there was one other charge associated with one distributor that cost us a couple hundred thousand dollars associated with a distributer that was a one-time issue as well.

Jeff Johnson – Robert W. Baird

Okay, so about half of what I identified as 2 million, or anyway, close to ½ of that is kind of the FastTrack, Onboard Scopes and a distributor issues, and those definitely feel like kind of short-term in nature at least.

Tom Powell

Exactly.

Jeff Johnson – Robert W. Baird

Okay, fair enough. And then I guess the last two questions, I guess from a model standpoint, and Tom, you described pricing and highlighted three different factors that impacted pricing this quarter; the TomoMobile order, the high European – or the high – the TomoHD order I guess in Europe maybe, and then the year-ago easy comp. You know, if you break out TomoMobile and the European system order it sounds to me like kind of more mix in pricing. What was – if you took just the Hi-Art System a year ago versus the Hi-Art system today, how have those pricing trends been lately?

Tom Powell

I’m not sure if I’m ready to get into that level of detail, or I’m really prepared to get into that. But I think, you know, just big picture if you look at this, what our expectation is, full year we expect our placing to be about flat, maybe down a point or two versus a year ago.

On a year-to-date basis we’re up a point or two, so you know, we’re going to see quarter-to-quarter swings in pricing given whether it’s a high-priced system or a TomoMobile. But overall, you know, we’ve seen pretty flat pricing. And then, that’s what we expect to continue throughout the year.

Jeff Johnson – Robert W. Baird

Okay, thanks. That’s helpful. And one last question, it sounds like you’re maybe intimating that cash flow could be close to break even in Q4 if some of that inventory reverses out the working capital need? Is that a fair way to think about it, or should we still expect a cash flow use next quarter?

Tom Powell

Well, we actually have a situation where, you know, we really model demand going into the next year in terms of building inventory to meet that demand. So we expect to further build an inventory year end. You know, last year we were able to bring down our inventories pretty dramatically year end. We don’t expect that to be the case this year. In fact, we’ll let you take them up from the third quarter into the fourth.

So as we look to the fourth quarter, we expect to use cash during the quarter. And probably the best way to think about it is if you take the loss and add back our non-cash items, which generally run around $4 ½ million a quarter and maybe a million or two of PP&E, and he’s got an inventory built on top of that. That probably gives you pretty good ideas as to, you know, cash expectations. We do expect to use cash in the fourth quarter.

Jeff Johnson – Robert W. Baird

All right. Thank you.

Operator

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

Mark Arnold – Piper Jaffray

Good afternoon. I guess I just want to start with a couple of clean-up questions. Tom, you mentioned there were a number of systems returned for refurbishment in the quarter that impacted margins. Are those trade-ins that are a part of a new system purchase?

Tom Powell

Well, let me clarify that. The term Linacc can be used to – both for a whole system and for a component of the system. These were just the components. So a Linacc is – maybe Fred can talk more – or speak more eloquently towards exactly what the Linacc does, but it is a component of our system. It wears out. When it does, we bring it back and we refurbish it and the reuse it in the field. It’s a more cost-effective way than buying new ones all the time.

In this quarter we had a number of Linaccs, the components fail. We brought them back and as a result, you know, we incurred expenses associate with them, refurbishing those. And that was one of the big drivers of the increase in service costs this quarter.

Mark Arnold – Piper Jaffray

Okay, that helps explain that. And then, I guess just staying on that for a minute, can you give us an update as to where you are in terms of switching over or balancing your sourcing of Linacc between your Chengdu plant and those that you source from other manufacturers?

Fred Robertson

We’re ramping up our production capacity in Chengdu and we have – we have enough capacity there, I think, to meet our forward production requirements. We continued to sort of see the linear accelerator components from Siemens as well. So our plan is to maintain a dual source of this critical component. We identified this is one of the key risks in a registration statement with reliance on a sole-source supplier, and we will continue to invest in capacity in our facility in China as we gather more information around the life span of these systems and ensure that we don’t have any unknown issues.

Mark Arnold – Piper Jaffray

And are they interchangeable in your existing systems that are in the field?

Fred Robertson

There’s some nuances of the wet-shielding requirements and things, but I’d say generally, yes.

Mark Arnold – Piper Jaffray

And my other question was can you just explain what – Tom, what’s about 1 ½ million of other income that shows up in the quarter?

Tom Powell

We had a fairly-substantial foreign exchange gain during the quarter.

Mark Arnold – Piper Jaffray

Okay. I should have known that. The other area of questioning, you mentioned the – I guess I just want to make sure I’m thinking about this right. TomoHD, you shipped your first system – can you give us a sense on mix of orders, either in the quarter or just some sense of how successful you’ve been in terms of taking new orders on TomoHD in advance of being able to ship those products here in the U.S.?

Fred Robertson

I don’t have the mixed numbers in front of me. I think the market adoption has been really what we’ve hoped. You know, we – the target was– with the initial march to really have this combined helical direct mode that was the next generation hardware platform going out initially to some pilot sites. I think it’s close to 20 percent of the systems that are inter-backlogged today.

Tom Powell

That’s correct.

Mark Arnold – Piper Jaffray

Okay, and then the three out of four new system orders that you said now include TomoDirect, does that include the TomoHD systems?

Fred Robertson

Yes, that includes the Hi-Art systems that are ordered with the TomoDirect feature as well as the TomoHD system where the direct feature is a standard.

Mark Arnold – Piper Jaffray

Okay. And then just the last question for me. You know, obviously you guys have done something here with your portfolio over the last couple of years to be more competitive in those one and two Linacc centers. And you know, so you’ve got the portfolio now, can you talk at all about whether you’re mix of selling into one and two Linacc centers versus percent of your total sales, whether that’s changed at all over the last two years?

Tom Powell

It has. We’ve seen our presence grow and the customer base that has largely one or two Linacc centers as their public offerings, that would be the core profit segment. We – something in order of 85% of the market opportunity is these one and two Linacc centers and we are now certainly getting, you know, beginning to get our first share of that opportunity in incoming orders.

Mark Arnold – Piper Jaffray

Okay, thank you.

Operator

Your next question comes from the line of Josh Jennings from Jefferies and Company