Accuray's (ARAY) CEO Josh Levine on Q4 2014 Results - Earnings Call Transcript

| About: Accuray Incorporated (ARAY)

Accuray, Inc. (NASDAQ:ARAY)

Q4 2014 Earnings Conference Call

August 21, 2014 16:30 ET


Jamar Ismail - IR, Westwicke Partners

Josh Levine - President, CEO

Greg Lichtwardt - CFO, EVP


Steve Beuchaw - Morgan Stanley

Jason Wittes - Brean Capital

Tycho Peterson - JPMorgan


Good day, ladies and gentlemen. And welcome to the Q4 2014 Accuray Incorporated Earnings Conference Call. My name is Jason, and I will be your operator for today. At this time, all participants are in a listen-only mode. And later we will conduct a question-and-answer session. (Operator Instructions)

I'd now like to turn the conference over to Mr. Jamar Ismail. Please proceed.

Jamar Ismail

Thank you, Jason. This is Jamar Ismail, Accuray's Investor Relations Counsel from Westwicke Partners. Thank you for joining us today on our conference call as we review Accuray's fourth quarter and fiscal 2014 results. Joining us today are Josh Levine, Accuray's President and Chief Executive Officer; and Greg Lichtwardt, Accuray's Executive Vice President and Chief Financial Officer.

Before we begin, I need to remind you that our call today includes forward-looking statements that involve risks and uncertainties. There are a number of factors that can cause actual results to differ materially from our expectations including risks associated with the effects of the adoption of the new CyberKnife and TomoTherapy Systems; commercial execution; future order growth, future revenue growth, future profitability; and guidance for fiscal 2015.

And there are other risks that are more fully described in the press release, we issued earlier this afternoon as well as in our filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.

Now, I'd like to turn the call over to Accuray's President and Chief Executive Officer, Josh Levine.

Josh Levine

Thank you, Jamar, and thanks everyone for joining us today as we review our results for the fourth quarter of fiscal 2014. I think you will hear over the next 15 to 20 minutes that we made significant progress against the objectives and initiatives we have been discussing throughout fiscal year 2014.

I will begin today's call with an overview of the quarter and highlight some of our achievements. Then Greg provide a more detailed financial review including a discussion of our fiscal year 2015 guidance and I will close with some thoughts on our most important strategic imperatives in this new fiscal year. And then, we will open the call up for questions.

Fourth quarter financial results were strong, highlighted by impressive growth in orders, revenue and profitability. With respect to fourth quarter orders, we are reporting today gross orders of $74.5 million and net orders of $63 million. This represents a year-over-year growth in gross systems ordered of 10% and net dollars growth of 8.4%. Importantly, we came in at the upper half of our full year guidance range provided at the end of the second quarter at $221 million for the full year compared to the guidance range of $215 million to $225 million.

As has been the case most of the year, our international regions and in particular our EMEA region delivered very strong new order results for the quarter. We are also reporting, total revenue of $102 million in the fourth quarter representing a 20% year-over-year growth. We continue to see improving trends with our backlog conversion to revenue that resulted in our first $100 million plus total revenue quarter in two years. This is an important milestone in the overall turnaround of our business.

Further, we reported adjusted EBITDA profit of $2.5 million in the fourth quarter up 143% year-over-year. This result was driven by revenue growth, gross margin expansion and operating expense control. We continue to be focused on maintaining or improving the positive year-over-year revenue growth and adjusted EBITDA profit metrics going forward.

Now, I would like to share with you some of our achievements in the quarter and provide an update on important product and business indicators. During the quarter, we announced the results of the second quarter 2014 MD Buyline report that indicate for the sixth consecutive quarter, the CyberKnife and TomoTherapy systems received the highest composite overall user satisfaction rating among radiation treatment delivery systems in the U.S. The report noted higher scores for system performance, system reliability, service response time and applications training for both the CyberKnife and TomoTherapy systems validating the company's focus on service excellence and technology performance.

It is clear from some of the customer feedback interviews in this most recent report that TomoTherapy users see the system as a workhorse product with broad treatment capability. This independent third-party feedback mirrors what we have been hearing from a growing number of our reference sites and provides additional market validation for the products capabilities.

During the quarter, we reached a significant milestone with the installation of our 500 TomoTherapy system at the grand opening of the Palo Verde Cancer Center in Scottsdale, Arizona. The system, a TomoTherapy HDA model is the only radiation therapy device at the new center, which also offers medical oncology services.

The center's decision to invest in the latest TomoTherapy platform reflects growing market confidence in the enhanced performance and clinical versatility of the technology, long known for its superior radiation therapy delivery, precision and treatment quality.

As I've shared on previous calls, we believe the investments we have made in building our strategic account selling capability is an important element of our overall commercial strategy and a driver in future sales momentum.

Today, I'm pleased to announce that we have received a signed multisystem purchase order from the Veterans Administration Health System for our TomoTherapy HDA system and we expect more to follow. Although, this is not the first Accuray system to be sold into the VA System, this order is the first multisystem impact we have seen of our new H series and is configured with our latest technology advancements.

This order represents the first tangible impact of our focused efforts to build the meaningful strategic accounts contract portfolio that includes not only GPO and IDN related groups, but also government customer channels such as the Department of Defense and the VA Health System.

We expect that agreements with these government customer segments has with GPOs and IDNs will improve our visibility to potential deals earlier in the sales cycle and will result in new opportunities for our products and services over time.

I would like to take a moment and share the progress we have made with the Multileaf Collimator or MLC for our CyberKnife M6 series. As we have identified in prior communication, our focus and primary goal has been to ensure that we introduce a clinical effective and reliable Multileaf Collimator and to ensure that we minimize the possibility of customer disruption.

To support that goal, I can confirm that the first evaluation unit has been installed and commissioned at a customer site. We expect subsequent units to be installed soon. This is a major milestone for us. We are encouraged by how well the unit has performed in bench testing and believe that the field-based evaluation process will leave to a clinical impactful, reliable MLC. We will be working closely with these evaluation sites to obtain feedback against a predefined evaluation protocol that covers a broad range of functionality and performance parameters related to the MLC.

We expect the evaluation site feedback and our assessment of those learnings will ensure that we are fully informed in decision-making and we expect to provide an update on our second quarter earnings call regarding future commercial launch. In the meantime, we continued to receive positive customer feedback on the CyberKnife M6 system and the impact that it is having on increasing throughput in particular and our booking orders and installing systems with Fixed and Iris Collimators.

Finally, I would like to share my thoughts on the CMS 2015 proposed rule changes for radio surgery and radio therapy services. If the proposed changes are adapted, payment rates for hospital based procedures will remain relatively flat with the biggest negative impact hitting freestanding centers. However, because the largest proposition of our business continues to be driven by hospital purchases, we believe that the potential negative impact to Accuray is minimal and we do not believe these changes if enacted would impact the commercial momentum in our business.

With that said, we strongly believe that patient should continue to have access to potentially life saving technologies regardless of the setting in which they are treated in. We are committed in actively working with multiple radiation industry partners to advocate for Medicare to withdraw its proposed payment reductions to freestanding centers.

I will now turn the call over to Greg.

Greg Lichtwardt

Thank you, Josh, and good afternoon everyone.

Total revenue for the fourth quarter at $102 million is comprised of $51.8 million in product revenue and $50.2 million in service revenue. We are pleased to follow-up our previous quarter's performance with year-over-year revenue growth of 20% in the fourth quarter driven primarily by strength in our product revenues which increased 34%.

Service revenue represents year-over-year growth of 8% driven by the increase in our installed base and conversion in customers to higher value service contracts. You may have noted that we are providing additional geographic detail on revenue performance in our press release. This information has been available in our quarterly SEC filings and we will now be providing this in our press release from now on.

In regards to our fourth quarter revenue, the Americas region comprised 49% of total, the EMEA region 22% of total and the remainder attributable to the Asia Pacific and Japan regions.

For the full year, we reported revenues of $369.4 million which is a 17% increase over fiscal 2013. On a full year basis, the Americas region comprised 42% and our EMEA comprised 31% of total revenue.

Total gross profit of $38.4 million for the quarter increased 41% over the prior year fourth quarter indicating a further expansion of margin due to higher product revenues and lower excess and obsolete inventory charges. Product gross margins were a strong 44.4%; however, they were down slightly compared to the prior quarter of 46.3%.

The decrease is primarily due to product mix and certain one-time cost part of which includes the transition of the CyberKnife systems production excluding lathe guide assembly for our manufacturing facility in Sunnyvale, California to our facility in Madison, Wisconsin. We have made significant progress in this project and expect our Madison facility to be producing CyberKnife units by the end of this calendar year.

Fourth quarter service gross margin is also higher than prior year at 30.7% representing continued improvement of TomoTherapy systems reliability and higher priced service contracts.

On a sequential basis, service margins were negatively impacted by increased parts consumption, service infrastructure spend as well as warranty expense pertaining to certain performance issues of isolated systems that we are proactively addressing. We expect our service margins moving forward to be more in line with the third quarter's service margin of 35%.

For the full year, we reported total gross margins of 38.7% compared to 30.9% in 2013 driven by our higher revenues and improved service margins.

Operating expenses of $43.1 million in the fourth quarter represents an increase of approximately $3 million or 8% compared with spend in the preceding fiscal year fourth quarter. This year-over-year comparison is now on a common basis following the organizational restructuring we initiated in the third quarter of fiscal 2013, so we would not expect to see the decrease in spend year-over-year from this point forward that we have been reporting for the past year. Having said that $43 million is higher than our previous guidance of $40 million a quarter and our most recent quarterly spend.

During the fourth quarter most notably we settled our longstanding litigation with Best Medical in which we incurred significant legal expenses. This was a proactive decision made by us to reduce ongoing expenses and management distraction. Additionally, certain sales compensation and marketing expenses occurred in the fourth quarter that had been expected earlier in the year. Overall though at a $161 million for the year-to-date the average was roughly $40 million per quarter.

As a result of the strength in revenues improved gross profit and controlled operating expenses adjusted EBITDA improved to a profit of $2.5 million compared to a loss of $5.9 million in the year ago fourth quarter. For our balance sheet perspective we are ending the year with $171.9 million in cash and investments which is an increase of $2.1 million from the immediately preceding quarter end. All balance sheet metrics remain consistent and inline with our expectations and working capital increased minimally.

As mentioned last quarter we had a large round of cash collections in the third quarter of 2014 which we identified would lead to an increase in accounts receivable this quarter and that growth was $13 million, but it was largely offset by decreases in inventory and increases in liabilities inline with our expectations.

Before I move on to guidance for fiscal 2015, I would like to highlight a couple of factors related to our full fiscal year performance for 2014. First of all total net orders going to backlog increased 29% from the prior fiscal year. This growth was pretty consistent between the two product platforms and occurred after the net adjustments for age outs and cancellations.

We feel very confident that those systems and specifically the TomoTherapy System are generating a great deal of interest with a lot of positive feedback from our customers regarding product reliability and performance. TomoTherapy H Series is gaining a reputation as a workhorse solution that can treat not only complex cancer cases, but also simpler more routine cases. Consequently, we anticipate this product will be seen as a more viable treatment option in increasing numbers of dual-vault sites and in the longer term single-vault sites.

Looking at the income statement with a 17% total revenue growth 46% gross profit growth and a decrease in operating expenses of 10%, adjusted EBITDA increased 124% or approximately $69 million to $13.3 million for the full fiscal year. We believe substantially higher levels of profit are possible for Accuray and remain focused on managing to that long-term outcome.

Lastly, total cash used during the year was a mere $2.5 million as compared to $80 million in the prior year when excluding the infusion from the convertible debt offering last year. This is a major change in the financial capability of the company and it's critical to stopping the dilution of stockholders that can come from continual and significant cash usage followed by capital market transactions.

With regards to our financial guidance for fiscal 2014 we're introducing both revenue and adjusted EBITDA guidance. We are guiding to a revenue range of $390 million to $410 million representing growth of 6% to 11% over fiscal 2014. While we will not be providing quarterly guidance on revenues we would expect a similar calendarization for our fiscal 2015 revenues as compared to fiscal 2014. We believe the revenue guidance reflects the appropriate amount of conservatism while still showing a healthy percentage growth over prior year.

We are also introducing a new earnings guidance measure as you are aware we have been presenting adjusted EBITDA in our quarterly press releases throughout fiscal 2014 as we became more – to become more focused on earnings and the turnaround of our business becomes more predictable, we feel that it's important to provide an earnings measure to further assess our performance.

We are guiding to an adjusted EBITDA range of $18 million to $27 million representing growth of 36% to 103% over prior year. To achieve this adjusted EBITDA range, we expect gross margins flat to increasing by 100 basis points or so compared to the full fiscal year 2014 and operating expenses growth to be approximately half the percentage rate of growth in revenue demonstrating strong operational leverage.

As in prior years, gross margins during the year will fluctuate with revenue volume given the element of fixed costs in cost of goods sold.

And now, I'd like to hand the call back to Josh.

Josh Levine

Thanks Greg. And looking back at fiscal 2014, we have come a long way in the past 12 months. In the last fiscal year, we drove significant improvements in Accuray's commercial momentum and overall financial performance including increasing revenues and gross profit and substantially reduced net operating loss and cash use.

We have stabilized this business and have clearly identified pathway to profitability. The positive changes in financial performance coupled with our improving commercial execution skills will ensure that more patients and clinicians will have access to the superior precision associated with our innovative technologies.

Turning to the key strategic imperatives for fiscal year 2015, we are focusing on four key areas, growing U.S. market share, maximizing growth outside of the United States, continued focus on service excellence and customer satisfaction and optimizing the product portfolio to enable growth.

As you heard me comment before, improving our commercial momentum and growing U.S. market share is going to be a key focus for us going forward. In fiscal year 2015, we will continue to focus on activities that will generate new leads as well as those that will drive conversion of U.S. customers currently in the sales funnel.

The core of our strategic marketing efforts will be a continued emphasis on communicating the unique benefits of our products and highlighting the role in the treatment of a broader range of tumor types. From a service perspective, we are continuing to focus on customer education and support from purchase throughout the ownership life cycle.

In addition, we are involving our customers in the development of new platforms and programs to ensure that we introduce technologies that address their needs and maximize the potential of our products.

Finally, we are enhancing our customer marketing tools and providing physicians with well-tested information and materials to help increase patient interest in their practice and our precise innovative radiation therapies.

The second strategic focus will be to continue to leverage the tangible commercial momentum that we have established to pursue additional growth opportunities in regional markets outside the U.S. including both developed and emerging markets in Europe, Asia Pacific and Japan with a direct sales or distributor base. What has become more clear over time is that while there is no single blanket go-to-market strategy that satisfies every region of the world, we have the potential growth opportunities everywhere.

With that said, we need to be – we need to remain disciplined about how we prioritize these opportunities. From an emerging market perspective, China remains our biggest opportunity and our number one emerging market focus. The unmet need in China is truly extraordinary when the overall population of 1.3 billion people and forecasted disease incidence rates are compared to the installed base of radiotherapy capacity at roughly 1200 LINACs.

When you compare that ratio of one linear accelerator for million people in China versus the 12 to 13 linear accelerators per million in the U.S. market, you can see why we have repeatedly said that we believe that investment in China as a potential return unlike any other emerging market.

The third strategic area will be a continued focus on service excellence and customer satisfaction. While the MD Buyline data indicating significant improvement in the reliability and performance of our product is gratifying, there is still a great deal of work to be done if we want to get to the level where that experience becomes a sustainable competitive advantage.

Initiatives focused on product and supplier quality, service technician training, parts availability and their resulting impact on system uptime will all be measured closely to ensure continued improvement in fiscal 2015. We will be investing in this area and as a result service gross margins will flatten for the next four quarters which is why Greg stated that we expect comparable overall gross margins in 2015 compared to 2014.

The last of our four strategic imperatives focuses on continuing to drive innovation that expands our product portfolio and allows us to leverage our unique positioning in the two fastest growing radio therapy treatment applications SBRT and image guided IMRT. Successful execution and advancement of our existing development pipeline will provide a combination of both incremental and game changing benefits for our customers and their patients.

In the context of innovation, I'm referring to both new products and improved functionality as well as expanded clinical applications for our existing treatment platforms. We will also continue to support our unique technologies with the critically important evidence based data that drives both clinical and economic justification in today's healthcare environment.

In closing, we made great strides in fiscal 2014 and we have a clearly identifiable path forward to create a bigger more profitable business. The entire Accuray team is excited about our opportunities and what we are poised to accomplish going forward.

We're now ready to take your questions.

Question and Answer Session


(Operator Instructions) The first question comes from the line of Steve Beuchaw with Morgan Stanley. Please proceed.

Steve Beuchaw - Morgan Stanley

Hi, good afternoon everyone.

John Levine

Hi, Steve.

Greg Lichtwardt

Hi, Steve.

Steve Beuchaw - Morgan Stanley

Josh, I wondered if we could take it just a little bit further with the conversation around execution in the U.S. For the last 6 or 12 months or so, you've been talking about operational steps, the GPO initiative being one of them to make the business work commercially in the U.S. You've had a pretty good track record in terms of competitive situation wins there.

Can you give us a little bit of a finer point, maybe any granularity around what kind of evidence you think we could see in fiscal 2015 in terms of converting all that effort to new orders in the U.S. market?

Josh Levine

So it's a multistep process Steve. I think we were pretty explicit in the last call and in prior messaging around what we view as – what the challenges were to U.S. sales and commercial momentum. So I am not going to walk back through that, but I will tell you that as we pointed out in our prepared remarks the impact – the beginning of visibility around impact on the GPO strategy, I think are significant, we believe that it's still an important part and a meaningful part of U.S. sales momentum downstream.

But again, there is no substitute for the time involved in the funnel activities that move those opportunities in the U.S. market deeper into the funnel and closer to close. And as I characterize I guess in the last quarter call, we have an improving quality of funnel opportunities in the U.S. to just not as advanced as we would like and we expect in terms of time to close and generating more momentum from an overall sales process standpoint. And I think that as I characterized last quarter, we're still probably a quarter or two away from that kind of traction in the order activity – its – nothing has changed with regards to our focus.

I think that again, I am encouraged by what I am seeing with regards to the activity level – the successes we've had in signing agreements on the GPO side. I think the order the multisystem order from VA System is certainly a visible indicator to me that that traction is going to come and but in the U.S. market specifically we're still probably a couple of quarters away from starting to see that traction kick in.

Steve Beuchaw - Morgan Stanley

Perfect. And then just a couple of quick follow-ups. One on China, can you give us any sense for when you might have – might be able to talk about a more specific distribution strategy there?

And then just one on the MLC, you mentioned that you expect to give an update on the next quarter call. That to me sounds like you are pretty confident that you have a design lock and will go to commercialization with this version of the MLC. Am I reading that correctly? And then I'll drop. Thanks so much.

Josh Levine

Yes. Well I'll take your second question first. I think what we said in our prepared remarks is that we would be back to you by the end of our second quarter earnings call. So I would be thinking more in timeline terms of probably around end of the calendar year or I guess our call through Q2 probably will come by the end of January so that would be kind of the expectation vis-à-vis timeline on having some feedback on our MLC situation.

Quite frankly we are excited about the MLC I think what we've said in our prepared remarks today echoes actually how we feel. We have good data coming off the internal bench testing. We have – we would not have gone to this evaluation quite frankly had we not felt that we had a device that could put in front of these customers in an evaluation sense so and feel good that we get to a good outcome with it. So its – I think all of that should speak to our confidence about momentum in the MLC discussion overall.

And again, I can timeline in terms of feedback on our end around next steps and how what we take out of the evaluations feedback wise informs us on the next steps in commercial launch activities there.

So the timeframe – let me go back to your first question, which is the timeframe for the China distribution strategy. We have been very active in China with regards to investments in commercial infrastructure, investments in marketing support and things are related to market development activities things like med affairs, the things that are pre-cursor types of investments to building a bigger business in a more robust commercial execution capability there.

We probably have a quarter or so of time ahead of us before we'll have a better sense or start to see some of what we've been investing in start to bear fruit. But, I don't think we're more than a couple of quarters away with regards to seeing the tangible impacts of China start to kick in, in terms of the work we've been doing really over the course of the last probably three to four quarters.

Steve Beuchaw - Morgan Stanley

Great. Thanks so much Josh.


And your next question comes from the line of Jason Wittes with Brean Capital. Please proceed.

Jason Wittes - Brean Capital

Hi. Thanks guys. Can you hear me?

Josh Levine


Greg Lichtwardt

Sure, we can Jason.

Jason Wittes - Brean Capital

Okay, great. So couple of questions, one I appreciate the geographic breakdown for revenues; could you give us a similar breakdown for order rates this quarter and for the year?

Greg Lichtwardt

We are not providing that information publicly Jason. Apologies that is not part of our SEC filings either.

Jason Wittes - Brean Capital

Okay, fair enough. I just want to get a sense – I know that, Josh, you've spoken about being a couple of quarters away from the U.S., the VA's is obviously good example of traction. Can you just kind of give us a sense of how you're doing right now in the U.S. in terms – it sounds to me like it's still a very small percentage of the business and once you get up and running, roughly how much of the market you think Accuray will be competitive in?

Josh Levine

I mean I think if you're talking about orders or revenue, I mean if you look at the information we released in the prepared remarks and our press release on a revenue basis the full year contribution from the U.S. was I think somewhere in the 41%, 42% range. We're not – again, we're not breaking down order activity by region I mean I think from any view at this point you probably admit and be willing to get aligned in the thought process with us that we've got certainly some, I'd say imbalance in terms of order strength and commercial execution momentum when you compare some of the regions of the world that we're really firing on all cylinders with from what we're seeing in the U.S.

The U.S. situation is not related to products – the view of our products not being competitive; the view of our technology is not being able to compete effectively. It's quite frankly just – we are earlier in the sales opportunity funnel in terms of the U.S. market and we characterize the details behind that at a pretty extensive degree over the course of the last call.

But, the feedback we're continuing to get from reference sites in the U.S. are very positive around TomoTherapy HDA. The feedback we’re getting around CyberKnife M6 from reference sites in the U.S. continues to be very positive. And I have a high degree of confidence that over the next couple of quarters we're going to start to see the kind of more granular traction that you'd expect with a growing degree of consistency in terms of sales momentum from the U.S. sales team.

Jason Wittes - Brean Capital

Okay, fair enough. And then just a second quarter I realize TomoTherapy is still going to be the major driver even though it sounds like orders were roughly 50:50 CyberKnife, Tomo. But, we have noticed we have done a little bit of work on prostate and it seems like the insurance companies are now following some guideline changes pretty much open to CyberKnife for prostate, which is kind of a change that's happened over the last two to three years. Do you – are you seeing any impact on the marketplace yet, do you think this potentially is going to start driving more interest in CyberKnife?

Josh Levine

I do. Answer is I absolutely do in terms of its visible impact in terms of momentum right now. I mean I would say in general what's happening is, there is a lot – there is a lot more interest or a lot more interest in conversation and in customers wanting to engage in dialog around the idea of CyberKnife as a prostate option.

Given what's happened over the course of the last year, I think you characterized some of it. We have since the – about this time last year, or maybe early last summer we got the ASTRO position paper on early stage prostate and SBRT, I think we have eluded to the fact that we now have Medicare coverage, or a coverage in terms of CyberKnife for prostate cases through most of – actually all of the Medicare regions there is a growing number of commercial insurers that have stepped into the fray with positive and affirmative coverage decisions around CyberKnife and prostate.

So it's a – I would say all of those factors are moving to drive a kind of – more of ground swell, we are just having an impact on customer perspective – customer interest. The opportunity for us is taking that interest and converting into bookings, which is – we are very, very focused on.

Greg Lichtwardt

Jason, this is Greg. Let me just correct one thing that you said. In my prepared remarks, I said that orders increased 29% for the full year and that the growth rate was consistent between the two products not that the –

Jason Wittes - Brean Capital

Oh, I understand.

Greg Lichtwardt

Half –

Jason Wittes - Brean Capital

My misread. I apologize. One last housekeeping question and I will jump out. And that is the legal charge this quarter, how much was it?

Greg Lichtwardt

We are not disclosing that. We are under confidentiality agreement in the terms of our settlement.

Jason Wittes - Brean Capital

Fair enough. I will jump back in. Thanks a lot guys.


And your next question comes from the line of Tycho Peterson with JPMorgan.

Tycho Peterson - JPMorgan

Thanks. Just thinking a little bit more I guess about the U.S. market. I know the single-vault market is a little bit further out in terms of the opportunity for you guys, but can you maybe just talk about when you think that starts to become more meaningful?

Josh Levine

In terms of single-vault or specifically –

Tycho Peterson - JPMorgan

In terms of penetrating the single-vault market, yes.

Josh Levine

Well, I mean, again, it's an N of one, but we talked about the placement of 500 Tomo system in a standalone freestanding single-vault location brand new cancer center in Scottsdale, Arizona. They certainly had the will, the financial capability to choose whatever product they wanted. And they also provide in addition to radio therapy services they provide medical oncology services in that location as well.

But, I mean, I take that as again, it's a positive sign, I mean people are – if you look at the MD Buyline, customer feedback people are seeing TomoTherapy as – from a reliability standpoint, from a technical performance standpoint a much more viable option today than they did, 18 months ago or further back than that. We had some real challenges to go back to those timeframes with regards to getting people to give us even a window of opportunity to discuss this platform as a potential product for a single-vault setting.

Today, it looks very different. But, again, it's the discussion around translating the interest into hard booked orders into the backlog. And so we got earlier stage opportunities that we are tracking in the U.S. funnel related to Tomo that some of which quite frankly are in single-vault settings. But nothing that – nothing that you can point out today that's going to be a – this quarter, next quarter kind of an impact.

Tycho Peterson - JPMorgan

And then I guess, you know, other end of the spectrum, the multisystem orders obviously, nice job with the VA, maybe can you talk about your line of sight to other multisystem orders, I mean you talked about Collimator Leaf, how much of that backlog for example includes multisystem orders right now?

Josh Levine

Yes. So when you have what we have been dealing with and what we have been talking about over the last quarter or two, which is essentially a focus on growing the contracts portfolio which gives you essentially the hunting license to stark down that path of opportunity identification and really getting into the hunt in terms of competitive bidding situations.

The step one is getting the contracts, step two is essentially doing the market activation and the contract – the contract activation and contract implementation work that it takes to start these other pieces moving. And that's the work that we have been really working on and focused on in the last couple of quarters. And I would say that in terms of thinking about it in the context of percentage of the backlog that's represented by that. I would really be thinking about it more in terms of what are the things that – will be able to report in the next couple of quarters that are similar to today's release things that we can point that become visible tangible wins that say that this strategy we deployed is working.

And so I'm excited about where we are at with this, we are growing, the opportunity and the need, I have no doubt that these are activities and pre-cursor work and pre-cursor activities that will drive sales momentum downstream. Again, in the U.S. market we are probably still a couple of quarters away.

Tycho Peterson - JPMorgan

Okay. And then just on the SG&A, the incremental step-up, I know you don't want to call out the magnitude of legal settlement, but you also called out incremental service infrastructure spending. So can you just give us a sense as to whether the bulk of the SG&A step-up was tied to infrastructure on the service side or the legal settlement?

Greg Lichtwardt

So service expenses are captured above the gross profit margin. So they are not part of SG&A. So the characterization of the other expenses that contribute to $43 million total OpEx number are mostly timing related to marketing spend and sales compensation. These were expenses that we had expected to incur earlier in the year that happened to wind up in the fourth quarter pushing the total number up in addition to the legal settlement.

Tycho Peterson - JPMorgan

Okay. So you pulled forward some sales and marketing spend then?

Greg Lichtwardt

They just based on the activities and the way that the sales compensation plan was written those expenses were properly booked in the fourth quarter.

Tycho Peterson - JPMorgan

Okay. Thank you very much.

Josh Levine

Thank you.


(Operator Instructions) And at this time, we are showing no further questions. I would like to turn the conference over to Josh for final comments.

Josh Levine

So I want to take a moment to thank the 1000 plus Accuray employees around the world for helping drive the company's success in fiscal 2014 and enabling the company's ongoing turnaround.

For everyone listening in today, thank you for joining us on this afternoon's call, as a reminder, this year ASTRO is September 14 through the 16 here in San Francisco and we hope to see some of you there. We look forward to talking with you again on the fiscal 2015 first quarter call. Thanks very much.


Ladies and gentlemen, that concludes the conference. Thank you for your participation. You may now disconnect. And have a great day.

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