Varian Medical Systems F4Q07 (Qtr End 9/28/07) Earnings Call Transcript

Varian Medical Systems Inc. (VAR)

F4Q07 (Qtr End 9/28/07) Earnings Call

October 24, 2007 5:00 pm ET

Executives

Spencer Sias - VP of IR

Tim Guertin - President and CEO

Elisha Finney - CFO

Tai Chen - Corporate Controller

Analysts

Tycho Peterson - JP Morgan

Amit Hazan - CIBC

Jason Wittes - Leerink Swann

Dalton Chandler - Needham & Company

Amit Bhalla - Citigroup

Junaid Husain - Soleil Securities

Julie Hoggatt - Noble Financial

Mark Richter - Jefferies & Co.

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2007 Varian Medical Systems Earnings Call. My name is Rob, and I will be your coordinator for today. At this time, all participants are in a listen-only mode, however we will conducting a question-and-answer session towards the end of this conference. (Operator Instructions).

At this time, I'd now like to turn the presentation over to your host for today's call, Mr. Spencer Sias.

Spencer Sias

Thank you. Good afternoon and welcome to Varian Medical Systems' conference call for the fourth quarter of fiscal year 2007. With me are Tim Guertin, President and CEO; Elisha Finney, CFO; and Tai Chen, our Corporate Controller. Tim will start this afternoon by summarizing our financial results and operational highlights for the quarter, and for the fiscal year, Elisha will detail the P&L and balance sheet, and Tim will finish with the company's outlook for first quarter and full fiscal year 2008. We'll take your questions following the presentation.

To simplify our discussion, unless otherwise stated, all references to the quarter or year are fiscal quarters and fiscal years. Quarterly comparisons are for the fourth quarter of fiscal year 2007 versus the fourth quarter of fiscal year 2006; annual comparisons are for the fiscal year 2007 versus fiscal year 2006.

Please be advised that this presentation and discussion contains forward-looking statements. Our uses of the words and phrases such as outlook, expect, should, prospect, intend, believe, opportunity, can, are confident, anticipate, estimate and similar expressions are intended to identify those statements which represent our current judgment on future performance or other future matters. While we believe them to be reasonable based on information currently available to us these statements are subject to risk and uncertainties that could cause actual results to differ materially. Some of the important risk providing to our business are described in our fourth quarter earnings release and in our filings with the SEC. We assume no obligation to update or revise the forward-looking statements in this presentation and discussion because of new information, future events or otherwise.

And now, here is Tim.

Tim Guertin

Good afternoon and welcome. Today we are reporting solid results for the fourth quarter of fiscal 2007, coupled with our third quarter performance, we finished what has been a challenging year on a strong note that gives us a positive outlook for fiscal year 2008 and beyond.

To summarize the results of the fourth quarter and the fiscal year, net orders increased 17% for the quarter and 14% for the year. In that respect, we are now a $2 billion Company. More than three times our size eight years ago when we became a “stand alone” medical company.

Our year ending backlog, including our acquisitions increased to 21% and 17% excluding the acquisitions. Revenues increased 15% for the quarter and 11% for the year. Operating earnings increased 16% for the quarter and 8% for the year.

Reported net earnings per diluted share were nearly equal to the year-ago quarter, but were up 17% on an apples-to-apples basis after excluding the dilutive affects of acquisitions in fiscal year 2007 and the benefits of some discreet events in fiscal 2006.

Reported annual net earnings per diluted share increased by $0.02 per share, up 15% on a apples-to-apples basis that I mentioned a moment ago.

Elisha will give you the details, but all-in-all we are very happy with the numbers given our rough start in the first half of the fiscal year.

I will focus now on operational highlights for the quarter and comeback to you with our guidance for the first quarter and the full fiscal 2008.

Starting with Oncology Systems, fourth quarter net orders grew by 11% to $522 million including 3% growth in North America, where orders grew 25% in the year ago quarter and 27% growth in the international market where orders decreased by about 4% in the year ago quarter.

Oncology's fiscal year net orders were $1.6 billion, up 7% from the 2006 totals with 5% growth in North America and 9% growth in the international market. Fiscal year net orders hit record highs in North America, Europe, Asia and the rest of the world.

While we had gains in most oncology product lines, orders for our Image Guidance products continue to drive growth. Our On-Board Imager or OBI is now routinely included in nearly 100% of new machine orders in North America and better than 70% of total global orders for new high-energy machines.

We had more than 630 OBI installations complete, or in progress, by the end of the quarter; we are far in a way the leader in deployment of this technology and we are opening up our lead.

Contributing to our rapid expansion in the IGRT arena, is an increasing OBI upgrade business. It's proving that our five-day OBI upgrade installation time meets customer requirements. We are now seeing customers, who previously ordered OBI on a new machine, beginning to upgrade some of their other machines to give their clinics additional IGRT capability. As expected, orders for OBI upgrades are now taking the place of orders for IMRT upgrades.

We also made nice gains in our total software business and our service business. Our service business in particular grew orders and sales by better than 15% for the quarter and for the year. We had some big wins during the quarter that illustrate the ongoing success of our long-term strategy to help radiation and medical oncology clinics beat cancer with a complete set of reliable and versatile tools that can easily be integrated for fast, easy, effective and affordable treatments. To cite a few examples; The Kaiser Permanente Health System in Northern California, Barnes-Jewish Christian Hospital Group in St. Louis, Paul-Papin Cancer Center in France, Bernard Verbeeten Institute in the Netherlands and [Acıbadem] Hospital in Istanbul. All of awarded Varian with large multiple machine orders during the quarter, Trilogy orders were included in most of those orders.

Sideline Health contracted with Varian for six OBI equipped accelerators as well as our Eclipse Treatment Planning and [RS] offer for urology practices in the Southwest.

Our treatment planning and information management software, and in particular our medical oncology management tool, helped us win a multi machine deal at (inaudible) City Medical Center in Alabama. These are big centers that are banking on Varian to put them on the leading edge of Cancer care now and in the future.

In the past several weeks we have announced several significant product developments and a key partnership that creates our most compelling offering for stereotactic radiosurgery. Together with BrainLAB we have created Novalis Tx a radiosurgery offering that combines our high-energy Trilogy accelerator, On-Board Imager, our new high definition 120 lead collimator and software for planning and information management with BrainLAB ExacTrac imaging system robotic couch and surgery planning software.

We believe this offering combines “best in class” capability for every element of radiosurgery, whether its planning, imaging, patient positioning, high resolution beam shaping or treatment speed. It's more versatile, affordable and more patient user friendly than any other radiosurgery system on the market.

Customers and patients are already asking for it and I'm pleased to report that Varian and BrainLAB have taken their first orders for Novalis Tx configuration. We're also getting an excellent reception to the new Smart Segmentation capability in our Eclipse software, for cutting treatment planning time by about 25%.

You may have noticed recent releases on new products that simplify and speed up breaking therapy treatment and planning. We expect that these products will help us to resume growth in this market. Most exciting, however, is the new product for a unique and highly advanced form of Volumetric Arc Therapy, which takes IMRT to the next level by both measurably improving this accuracy of those distribution and speeding of treatment time is by an order of magnitude. This is a win for patients, a win for clinics and a win against competitors with slower more cumbersome approaches to IMRT.

We are well ahead of the competition with this technology and we've already filed with the FDA for 510(k) clearance on this product. An early version of this technology has already been used with the Varian accelerator and multileaf collimator at the British Columbia Cancer Agency in Canada to deliver a prostate treatment in less than two minutes. It's a game changer and we will be talking more about this development at the Annual ASTRO Meeting in Los Angeles next week.

We realize that some clinics have been making buying decisions on the basis of being able to market unique treatments. We believe Varian can now offer these customers new Novalis Tx and volumetric arc products, that enabled them to differentiate themselves with true improvements in patient care. We've already begun to be more active in the area of marketing with newspaper ads and billboards, and you will be seeing more of this as we go forward.

Our advanced treatment technology is getting some nice play in the media. Wall Street Journal Radio, which goes out to 120 stations across the U.S., broadcast interview with (inaudible) 0:44 9 who is treating breast cancer more quickly with the hyperfractionated therapy, and she and another radiation oncologist will be featured on Radio Health Journal which will air during the last week in October on 425 stations across the U.S.

Trilogy has been featured on several television broadcast. Univision, which targets millions in the global Hispanic audience, also featured Varian's advances in radiotherapy. Subsequent to the close of the quarter, we have learned that Varian again ranked first in overall service performance compared with our major competitors according to an annual survey conducted by IMV.

We ranked first in 15 of 34 service categories including overall service performance, satisfaction with the manufacturer and the probability of purchasing again from us. We are particularly pleased to have scored above our competitors in “system ease-of-use” and “system integration” for therapy planning, two areas that we have focused on improving.

Turning to X-Ray Products: net orders grew 16% to $79 million for the quarter and 13% to $273 million for the fiscal year. We generated respectable growth for both X-ray tubes and our flat panel image detectors. During the quarter, we began shipment of engineering evaluation units of our new radiographic flat panel imaging detector to a number of large customers, some of whom are actively integrating our imager into their next generation of imaging products.

We anticipate receiving production orders in the second half of fiscal year 2008. The introduction of this new radiographic panel fills out our product portfolio and enables us to address the largest portion of what we expect will be a $2 billion flat panel market. We believe our new radiographic imager is better, more affordable and easier to use than CR plates that are currently on the market standard for digital radiography.

Our panels could become the new standard for digital radiography and we believe this application could trigger a new wave of growth for our flat panel product line. We continue to believe that our flat panel product business has the potential to reach several $100 million over time.

Demand also continued strong for our X-ray tube products, particularly for our high-power CT tubes. We started shipping production versions of a new high-power anode-grounded tube, designed to support 256-slice CT scanning. This tube is designed for very rapid, high-resolution CT scanning for minimizing dose to the patient.

I want to take a moment to talk about X-Ray Products annual operating earnings which improved by 40% over the previous year. Improved gross margins from a larger mix of high-end CT tubes and flat panels contributed to this gain, but we also improved X-Ray Products profitability significantly with higher volumes and ongoing cost reduction initiatives which are beginning to pay dividends.

Let's turn now to our other category which includes our Security and Inspection Products and ACCEL proton therapy businesses, as well as our Ginzton Technology Center.

Fourth quarter net orders for these businesses rose by $31 million to $38 million, with some $16 million of growth coming from our new ACCEL and BIR acquisitions. Fiscal year net orders for these businesses increased by $124 million to $166 million, including $50 million of backlog that we acquired from ACCEL and BIR.

SIP had an outstanding quarter, capping off a terrific year. We noted in our third quarter report that we were beginning to get volume orders for these products and this continued in the fourth quarter.

Net orders including BIR, which supply detectors and imaging software for cargo screening, were up by more than 350% for the quarter and by more than 100% for the year. Total annual orders for this business, including $11 million in contributions from BIR, have now topped $80 million. Subsequent to quarter and the BIR acquisition enabled us to win a $15 million order for several cargo screening installations at U.S. ports.

Clearly, the global market for a port and border security has expanded, and we are seeing increasing demand from cargo screening system integrators for our security products in the U.S. as well as in our traditional international markets. We are also beginning to see rising orders for our higher priced dual energy accelerators, which are capable of automatically identifying the presence of radioactive materials in cargo containers.

As a consequence of this product and the BIR components, and when added into our SIP product offering, the average deal size for this business has increased. SIP manufacturing is keeping up with the demand and we are on track to open our new expanded productions facility in Las Vegas in the third quarter of fiscal 2008. We continue to believe that SIP will achieve annual revenues approaching $200 million over the next few years.

The company finalized its purchase price allocation for the acquisition of ACCEL in the fourth quarter and recorded an additional $36 million of goodwill and accrued liabilities. This adjustment resulted from completing the cost estimate associated with pre-acquisition contingent liabilities related to commissioning of protons therapy center at a site in Munich.

We are continuing to work closely with customers interested in acquiring proton therapy systems. We hope to win deals, so we don't expect to book any orders in the backlog until all contract contingencies have been cleared. This could take a year or longer.

We continue to believe that there is a long-term global market for this field and that Varian will be a leader.

Now, I'll turn it over to Elisha for a review of the numbers and then come back to you with our outlook for the first quarter and full fiscal year 2008. Elisha?

Elisha Finney

Thanks, Tim, and hello everyone. As usual, I will walk you through the income statements attached to the press release, as well as cover a few balance sheet items. Let me state at the outset that my numbers include the effects of our recent acquisitions of ACCEL and BIR. These acquisitions increased our top line by 2 points for the quarter and the year, and reduced earnings per share by $0.02 in the quarter and $0.06 for the year. We have posted earnings per share reconciliation in a footnote attached to the press release and on our website.

As Tim pointed out, the company's fourth quarter revenues increased 15% to $522 million. Oncology Systems posted an increase of 12%, X-ray Products posted a gain of 12% and the other category, including the ACCEL and SIP businesses, posted an increase to $16 million or 130%.

For the full fiscal year, total company revenues are up 11%, with Oncology Systems posting gains of 8%, X-ray products climbing 13% and the other category rising $45 million or 135%.

Gross margin for the quarter was 42% about even with the year ago quarter. Oncology Systems gross margin was 43%, down a little less than half a point from the year ago quarter due to currency hedging contract.

X-ray Products gross margin was 39% for the quarter, up nearly 4 points due to higher volume, a larger mix of flat panel and high-power CT tube and cost reduction efforts.

For the full year, the company achieved a gross margin of 41% about even with the prior year. A nearly one point decline in the Oncology Systems margin was offset by a five point gain in the X-Ray Products business. I should take a moment to point out as in the side that the SIP growth margin improved about three points for the quarter and five points for the year. This improvement was offset by the expected low margin from ACCEL.

Fourth quarter SG&A expenses were 14% of revenue, an improvement of about half a point from the year ago quarter. Fourth quarter R&D expenses were 6% of revenues, even with the year ago quarter. For the year we held combined operating expense at about even at 22% of revenue, and in spite of significant operating cost associated with ACCEL.

Moving down the income statement, fourth quarter operating earnings increased 16% to $113 million or 22% of revenues. Oncology Systems and X-Ray Products together contributed $124 million in operating earnings with the other segment and corporate consuming a net $11 million. For the year we achieved an 8% increase in operating earnings, and sustained an operating margin of 19% of revenues. Depreciation and amortization of intangibles totaled $9 million in the quarter and $32 million for the year.

Net interest income totaled $1 million for the quarter and $7 million for the year, both down from the respected year-ago periods due to lower cash levels and higher borrowing associated with our share repurchase program.

Our annual effective tax rate was 30%, up significantly from fiscal year 2006 when we benefited from the repatriation of cash under the Jobs Creation Act of 2004 and from a tax true-up resulting from an adjustment of deferred tax asset differences.

Average fully diluted shares outstanding for the year were 131 million, down by about 5 million shares from the prior year, due largely to the ongoing share repurchase program. We reported fully diluted GAAP earnings per share of $0.61 for the fourth quarter and $1.83 for the year.

Turning to the balance sheet, we ended the quarter with $263 million of cash, $90 million of combined short and long-term debt and $821 million of stockholders equity. DSO for the fourth quarter was 88, an improvement of 6 days from the year ago quarter, resulting from higher sales volume as well as strong collection activity.

We achieved record quarterly cash flow from operations of $137 million, bringing total cash flow from operations for the year to $300 million, about $60 million more than net earnings for the year. Other sources of cash in the quarter included $14 million from stock option proceeds. Primary uses of cash were $85 million for the stock repurchase program and $23 million for capital expenditures.

During the quarter, we repurchased 2 million shares, including 1 million that completed the 4.5 million share repurchase authorization that ended in the fourth quarter and another 1 million shares under a new 12 million share repurchase authorization that extends through the end of calendar year 2008. At the end of the fourth quarter 11 million shares remained under the existing repurchase authorization. Since 2001 when we started stock buybacks, we have repurchased 31 million shares at a weighted average price of $38 per share.

Now I will turn it back to Tim for the outlook.

Tim Guertin

Thanks Elisha. Our strong finish in fiscal 2007, together with several important new product developments that we are announcing next week at the annual ASTRO meeting, positioned the company for continued growth in fiscal year 2008.

We believe that for the first quarter of fiscal year 2008 total company revenues should increase by 12% to 13% over the prior year and that net earnings should be in the range of $0.39 to $0.40 per diluted share. For the full fiscal year 2008, we expect that company revenues should increase by 10% to 11% over fiscal 2007 total, and that net earnings should be in the range of $2.04 to $2.06 per diluted share.

Let me just say in closing that this has been a challenging year, but we are confident that our long-term strategies for growth in our Oncology, X-Ray Product and Security businesses are succeeding.

Thank you and we are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question is from the line of Tycho Peterson of JP Morgan.

Tycho Peterson - JP Morgan

Hey, good afternoon, congratulations on the quarter.

Tim Guertin

Thank you, Tycho.

Elisha Finney

Thank you, Tycho.

Tycho Peterson - JP Morgan

I maybe jumping the gun little bit on with the question on New York, but could you talk about it briefly. I am wondering if you could just give us a sense as to how we should think about the upgrades paths here, what's involved for a customer and then to the extent any federal interest where its comes from?

Tim Guertin

Let me talk about that a little bit. I will say that Volumemetric Arc is something that I first saw us do in a very limited form in the early 1990s. And where we actually arced around the patients, Arc which just refers to the machine we are taking around the patient and we move the multileaf as the arc. We didn’t call it Volumetric Modulated Arc, we called it dynamic arc but it comes to the same thing.

And what we’ve done now is we’ve managed to improve the speed of it dramatically and improve the treatment planning associated with it dramatically by some changes inside the Clinac and the multileaf and by changes in our treatment planning system. And the result is that for example a head and neck treatment that might have taken 12 to 14 minutes and that’s with a fast customer can now, I’ve seen those plans run in less than a minute and a half, which is why we refer to the order of magnitude improvement. That’s where the most difficult cases, for prostate cases you won’t see an order of magnitude, but a prostate case that used to take 5 minutes will probably run in about a minute and a half now. So that’s a substantial improvement in throughput and we think there are customers who didn’t like it.

The other nice thing is its not only faster, but the treatment plans are much better. The Confirmality is greater, the amount of dose that we give to critical structures. Critical structures meaning structures that you don’t want to give much dose to is much better, we’re just giving a lot less dose.

What was the second part of that question?

Tycho Peterson - JP Morgan

Just the mechanics of upgrading and what that evolves from the customer standpoint?

Tim Guertin

Initially Tycho we’re focusing on new systems going out. The machines that we are making now are capable of supporting rapid arc providing that the customers alters their order to include rapid arc. So we are expecting some customers who have not yet taken delivery to want to add rapid arc to their order and of course we will be talking to them about that.

In terms of upgrades, we want to see how rapid arc performs and it places additional demands on the machine and so the number of machines that we're likely to upgrade is pretty small because I expect this upgrade to be fairly expensive right now.

Tycho Peterson - JP Morgan

Okay. And I guess on the Novalis introduction as well, if you could give some colors to where some of the early demand has come from? And then, you've gotten existing basis difference out there, presumably these are not upgradeable, but how do you address, maybe some of those customers?

Tim Guertin

Yeah, since we've announced it, we have gotten tremendous amount of interest from a number of customers. I think we've got as many as 15 strong prospects for this and of course as we've already indicated, we have some deals that have occurred already. It does create, I think the most powerful, versatile and affordable radiosurgery offering, because it takes the best of what BrainLAB does and it takes the best of what Varian does and puts them together, and it stops the kind of customers having to choose between what we offer and what BrainLAB offers.

In our case, I mentioned the HD120 which is the highest precision multi-leaf on the market, and the on-board imager which enables you to get cone beam CTs of the patient for image guidance, and from BrainLAB, the ExacTrac which is a beautiful room-mounted system for imaging the patient and they have a wonderful stereotactic treatment planning system and a nice couch, they call the 60-couch that enables you to position the patient not only up-down, in-and-out, and right-left but also angle the patient. So you get (inaudible) that gives you a lot more precision about how you do.

So neurosurgeons are very interested in this, lots of prospect interest of course will be reporting on this in future quarters how it goes. This is not without work for BrainLAB and Varian to do, but we've been working together for long time. The Varian and BrainLAB relationship is quite an old relationship, and so I am very confident that this is the best possible approach for both companies.

Tycho Peterson - JP Morgan

Okay. And then just finally on the other businesses, you talked about 15 million in cargo orders, can you give us a sense of where those came from in. Is this just the beginning of a cycle here or this kind of pilot studies or how we look at that?

Tim Guertin

Well, some of them are clearly pilot studies, especially the U.S. customs deals are pilot studies. These are things where -- I am not saying that they are small orders. They are not small, but compared to the level of business that we could get if all of customs objectives are achieved, well then that could be substantially more business.

So, I can't tell you exactly where these are going to go, but they are pilot and training centers. And clearly if the pilot -- if the training centers workout and customs and border patrol is as impressed with these things as we think they are going to be, then I would expect to see a lot more business from that in the future, so the big increase was in the U.S.

Tycho Peterson - JP Morgan

Okay, great. Thank you.

Tim Guertin

Thank you.

Operator

And your next question comes from the line of Amit Hazan of CIBC.

Amit Hazan - CIBC

Hey, good afternoon guys.

Tim Guertin

Hello, Amit, how are you?

Elisha Finney

Hi, Amit

Amit Hazan - CIBC

Very good. Just maybe, Elisha, I will start with you at the question on gross margin. It looks like it rebounded sequentially. But with the kind of growth we saw in revenues, I am just wondering if you can give us a little bit more color apples to-apples on what we might expect with gross margin going forward, in particular with oncology. Should we expect an increase there or are you seeing kind of is it stable or do we think about that and what's happening at if you look at FX effects?

Elisha Finney

Yeah. And that's the difficult part Amit is to really try and put the center back in without the FX effects which has been rather difficult for this year. As a remainder for the quarter, we ended up at total company with the flat margin at 42%, with gains in X-ray offsetting a very small decline in the oncology sector. What we saw there is 25% of our sales were into Europe in the fourth quarter, was a very strong year in Europe. The Euro obviously helped our top line, but as we talked in the past at the time we booking order we put a hedge in place to protect the gross profit dollar. So when the sale materialized, the top line was higher but I had an offsetting bank contract, and so the gross margin percentage is lower, and that is virtually the entire effect you thought for oncology in the fourth quarter.

So going forward, I can tell you, you've seen the guidance that was in the press release, our belief is that EBIT will grow EBIT dollars in the 13% to 145 range for '08 and that the EBIT margin will be up about 0.5 point and some of that from gross margin and some of that from leveraging SG&A expenses.

Amit Hazan - CIBC

Okay, that's fair. And then in terms of what you were referring to with regard to the OBI upgrades being a little bit stronger. It sounds like from what you're talking about, can you give us a little bit more granularity there as far as maybe general numbers as to how many upgrades you're seeing and what we maybe might expect that kind of growth in that, in the upgrade side?

Elisha Finney

Yeah, I mean it was up year-over-year if I look at FY'06 versus FY'07, it was up close to 40% in total dollars, so we are seeing pretty significant growth. What happened as we expected is that the multi-leaf collimators became very penetrated as IMRT became penetrated. We stared to see a study decline of IMRT upgrades. Now that our install times are down to five days to an OBI upgrade, we are seeing the uptick and we had somewhere around 40 OBI upgrades in the fourth quarter. I don't want to give you exact dollars, but it was pretty significant growth over the year ago quarter.

Amit Hazan – CIBC

And is it your sense from your install base, can you give us a sense of how many units of your install base out there should have IGRT if we think about it over the long-term?

Tim Guertin

Over the long-term I think IGRT will be fully penetrated. There is nothing, it's like IMRT is zipped pass the 50% point and is on its way what would the current.

Elisha Finney

I think maybe one way to…

Tim Guertin

I don't think we analyze that number lately. But I think it will be upgraded, I mean what will happen is IGRT will become more and more penetrated. Now, very old machines will probably be replaced in order for that to happen. So, it's not going to happen overnight. But I would say that over the course of the next few years, you will see this number probably run up to 50%.

Elisha Finney

And I think the most telling number in the quarter to meet was 70% take rate on OBI with close to virtually a 100% in the U.S. So, clearly it has become mainstream.

Amit Hazan – CIBC

Okay, great. That's very helpful. And then I guess, off of that just if I can ask one last question, off of that. We have seen a couple of your competitors report now. It seems like the market growth, it continues to be very strong. And I guess, I am just wondering if we kind of try to isolate replacement units from new units or additional units into the market. Are we seeing because IGRT is being adopted, I am guessing throughput, at least that the margin is going down, are you seeing an increase in additional units coming into the field are the request, or the purchase of additional units as oppose to replacement units?

Tim Guertin

Yes. Can I add more color to that, but the answer is yes. We are seeing more.

Amit Hazan – CIBC

Do you think it's because of the throughput issue?

Tim Guertin

You mean in terms of our ability to install them more quickly, or that they work more quickly. Yeah, I guess, I don't think that's it. I think that as IGRT has caught on and has more people have done IGRT, I think more people want to do it and they consider it part of what they need for the future. And every version of IGRT we put out is faster and more intuitive, we're going to announce some versions at this ASTRO that have some very nice more intuitive approaches for acquiring and are much faster.

My goal has been, I call this two plus two to our organization internally and that is, I want to take two minutes for imaging more or less and two minutes for treating more or less. And with the introduction of the volumetric arc approach, we have achieved a less than two minutes for treating. And our latest versions of the on-board image are around just a little bit over two minutes for imaging. And so, we actually ran through one the other day that took about three and a half minutes. So, I think throughput counts, but I think the bigger effect is that people want this for clinical and as it's growing faster and has growing more intuitive to use they feel more confident that now is the time.

Amit Hazan - CIBC

Okay, that's very helpful. Thanks very much.

Tim Guertin

Thank you.

Operator

And your next question comes from the line of Jason Wittes of Leerink Swann.

Tim Guertin

Hello Jason.

Jason Wittes - Leerink Swann

Hi. Guys how are you?

Elisha Finney

Hey, good.

Jason Wittes - Leerink Swann

Just to start a house-keeping question. In terms of the impact of currency on order rates, could you break that out for us for Oncology and X-Ray?

Elisha Finney

Sure. For Oncology, we were 11% orders growth for the quarter in dollar, 10% local currency, and for the total company it was 17% in dollar, 16% in local currency.

Jason Wittes - Leerink Swann

That's for Oncology.

Elisha Finney

That is for the…

Tim Guertin

Total company…

Jason Wittes - Leerink Swann

Total company has got it.

Elisha Finney

Total company was 17 to 16.

Jason Wittes - Leerink Swann

Got it, okay. And Tim, just kind of some more clarification on, it sounds like you are now out of every new orders, basically order with IGRT at this point?

Tim Guertin

For the U.S.

Jason Wittes - Leerink Swann

For the U.S., and how did that compare with last quarter because I think you implied it was something like 70% or was that the worldwide number again?

Tim Guertin

That was the worldwide number.

Jason Wittes - Leerink Swann

So has it basically been the last few quarters, pretty steady about most people that order a systems will get it with an IGRT in place?

Tim Guertin

In U.S., it's been climbing towards the 100% and it's been asymptotically approaching a 100% for the last couple of quarters but now its there.

Jason Wittes - Leerink Swann

Okay. And in terms of the amount of time, sorry what was that?

Tim Guertin

It was a cough.

Jason Wittes - Leerink Swann

So in terms of the time it takes between when someone decides to upgrade and the time it gets to install. Its been now narrowed down to about five days. Is that, figured that correctly and I guess…

Tim Guertin

Five days means the amount of time it takes to install it. So from the time we start putting it in until the time that we can turn it over to them for clinical use is five days. They may order it months before that.

Jason Wittes - Leerink Swann

You've kind of always said the Oncology backlog is about 9 to 12 months, 9 I think is U.S., 12 maybe overseas? Can we assume if you order an onboard imager it takes about 9 months to get that filled?

Tim Guertin

If you order it as an upgrade the cycle time is much faster than that. I don't know what the number is, but I am sure it's more on the order weeks than it is in months. And those average numbers that you are giving are for complete machines and that's a much longer time.

Elisha Finney

And it has really moved up a lot couple of quarters by about three months.

Tim Guertin

Yeah exactly. What you saw earlier in the year when we had those trying quarters and quarters one and two was that we were seeing North American the time from order to shipment, stretching out and so now its sort of looking more like our international orders.

Jason Wittes - Leerink Swann

Okay, but I mean this is the first quarter, I mean that you started to see the upgrades actually start to pick up and I guess the lot has to do with the installation times. Is that a fair…?

Elisha Finney

It's not the first quarter Jason, because again for the full year it was up close to 40%. So we've just seen steady pick up as we've gone throughout the year helped by the fact that its only by clinical day we shutdown.

Jason Wittes - Leerink Swann

Okay, that's fair. And so you have also in the past sort of said that the people that are using IGRT right now, are kind of the earlier adaptors. Is there any evidence at this point from who is getting upgrades in that that's going beyond the earlier adaptors here?

Tim Guertin

Yeah, we are definitely moving beyond the earlier adaptor phase and at this point I would have to say that the upgrades demonstrate that, and the new orders proved that, and we are seeing a lot of papers being published now and so all of those things lead me to believe that we are moving beyond the earlier adaptors.

Jason Wittes - Leerink Swann

Okay, and if I look at next year. I know you don’t give guidance on order rates, but can we assume that your U.S order rates get back into the double-digit 10% to 11% range for next year, especially with the new product flow. Is that the assumption we should be making here or is it a little too early to make that call?

Tim Guertin

As one of those things I don’t do, but definitely Oncology has had better news lately than they've had before. They were up in the first half 2% and they are up in the second half 11% and that's good, but beyond that I am just reluctant to say.

Jason Wittes - Leerink Swann

Okay, fair enough. And I guess one last question. Is it the right assumption to assume people that are upgrading to IGRT, it's about $500,000 add-in, is that the general cost?

Tim Guertin

With some software features that people would want and things like that. The hardware is less than that, but by the time people buy various other things that they might buy with IGRT they can get up into the range of $500,000.

Jason Wittes - Leerink Swann

Okay, fair enough. Thank you.

Tim Guertin

Thank you.

Operator

And your next question comes from the line of Dalton Chandler of Needham & Company.

Dalton Chandler - Needham & Company

Hi, first just a follow up on the earlier adopters in the IGRT. Could you talk where you think you are in the adoption curve on radiosurgery?

Tim Guertin

Well radiosurgery is not a technique that a lot of institutions yet offer its growing and that's what we are trying to do is to head the curve here in terms of products. I will say that an increasing and significant percentage of our customers are buying this technology, which means they do intend to add stereotactic capability to our system. This is still a minority, but it's been a growing number especially the U.S. and so OBI is nearly 100% in the U.S. and Trilogy is what about 30% in the U.S. So clearly we are nowhere near the adoption level for stereotactic that we are at for image guidance, but I would expect that number to grow.

Dalton Chandler - Needham & Company

Okay so when you say 100% of your units were shipping with OBI that’s including 30% that's has been are Trilogy?

Tim Guertin

Yes.

Dalton Chandler - Needham & Company

Okay.

Tim Guertin

All Trilogy has been with OBI, but others here do as well.

Dalton Chandler - Needham & Company.

All right, okay.

Tim Guertin

And that 100% is a U.S. number.

Dalton Chandler - Needham & Company.

Right, okay that’s helpful. And just on the U.S. Oncology orders were up about 3% in North America, I know you had a really tough comp a year ago and strong quarter, last quarter in North America but just wondered if there is anything else going on there with that number being a little bit on the left side?

Tim Guertin

I think it was just a comp. If you take last year and this year and sell them together, it's like 28%, so we're averaged 14% in combining those quarter for us in the U.S. And if you take last year and this year, I think international was down 3% or 4% last year in the fourth quarter and was up 27%. So the average of 31% is about 15%. So, if you take the average of those two quarter for us and put them together, you got in the 14% to 15% range.

Dalton Chandler - Needham & Company

Right, okay. And then, just the last question on guidance. Looking at your fiscal first quarter guidance versus the full year, your revenue in the first quarter you're expecting to grow faster than your revenue for the full year, but if you annualize the earning it's much less than what you expect. So could you just talk about how you are looking it probably?

Elisha Finney

Yeah, the real thing there is, remember we have excelled the dilutive effect in this first quarter, we did not have it in the year ago quarter. So if you were to correct for that, you will see that the growth is more in line with the top line.

Dalton Chandler - Needham & Company

Okay. All right. Thanks very much.

Operator

And your next question comes from the line Amit Bhalla of Citigroup.

Amit Bhalla - Citigroup

Hi, thanks for taking the question. First one, can you talk a little bit about the new customers for Novalis Rx, I guess you mentioned in the Q&A that some deals have already taken place. Are there brand new customers to Varian and are they going directly into surgical side of the facility?

Tim Guertin

They are customers that have been probably traditional customers for Varian and BrainLAB. And they are customers who knew BrainLAB and they knew Varian and they saw us as two companies that had competing offerings, it was our linear accelerators that BrainLAB was offering and was often brain BrainLab software that these customers were interested in. So BrainLab was known to both.

Now BrainLab is probably better known to neurosurgeons, and Varian is better known to radiotherapist. So the combination of the two brings the company that's extremely well known to neurosurgeons BrainLab and attaches to customers that's well known to radiotherapist and that's a kind of one-two punch for these institutions, because now the radiotherapist line up to do it and the neurosurgeons line up to do it. But I can't say that they are customers that are unknown to us.

Amit Bhalla - Citigroup

But I guess the orders that you have taken, so they are going directly to the neurosurgeons?

Tim Guertin

Some of them do go directly to the neurosurgeon, and we do have some neurosurgeons who have become good friends to us and are very helpful to us and are helping us in several cases to figure out what our next generation of products looks like.

So, yes, we have a lot of customers that are neurosurgeons; however, I would have to say the majority of these machines still probably wined up being placed inside radio therapy departments, although the neurosurgeon is more active with these machines than they have been in the past.

Amit Bhalla - Citigroup

Can you talk a little bit about the number of units that customers are looking to purchase in the oncology business both U.S. and OUS?

Tim Guertin

The number of units?

Amit Bhalla - Citigroup

Yeah, and given the order, are you seeing the number of units customers are looking to buy increasing or they general…?

Elisha Finney

Average deal size.

Amit Bhalla - Citigroup

Average deal size.

Tim Guertin

I don't have that calculated, but based upon conversation I have had with sales management, yes, I would say that the average deal size is increased and also the amount of it that has software involved has increased.

Amit Bhalla - Citigroup

Okay. Just two more quick ones. Last quarter, you had some issues in the brachytherapy business to pricing it from a competitor and flat panel orders as you saw some inventories coming down, are we through those issues?

Elisha Finney

We saw slight decline in the Brachy in the year-over-year quarter. It did not have any negative impact on the margin, no significant impact on the oncology margin. And in terms of the flat panel inventory adjustments with OEMs, that appears to be largely behind us and we were back to more traditional growth in that business this quarter.

Tim Guertin

Let me add that we will be introducing some new Brachytherapy products at ASTRO and I think those will help us in 2008 as well. So, I think we are going to arrest this slide and probably turn it around.

Amit Bhalla - Citigroup

Okay, just a close out. You did mention in prepared comments, there were record order numbers in oncology throughout all the regions. Can you give us a little bit more granularity there, where your order growth a region?

Tim Guertin

We don't break out the international territories. We said that just so that you would know that it was broad-based across all the territories. But in comparing the territories themselves, as we said North America was up 3%, international was up 27% and I would have to say that that number is sort of like kind of like that same number in each of the territories.

Elisha Finney

Yeah.

Amit Bhalla - Citigroup

Okay, thank you.

Tim Guertin

Thank you.

Operator

And your next question comes from the line of Junaid Husain of Soleil Securities.

Junaid Husain - Soleil Securities

Good afternoon guys.

Elisha Finney

Thanks Junaid.

Tim Guertin

Good afternoon.

Junaid Husain - Soleil Securities

Elisha, help us understand your Asian business. Couple of questions for you. It's really been after the races, good growth with this geography. But as we get into next year, the costs are obviously are going to get tougher. So the first question for you is, do you get the sense that this business is going to slow down heading into '08? And then as a follow-up to that, could you give us a sense about your new Chinese manufacturing facility. Where are you with capacity as you ramp up by the end of the quarter, or you have 50% capacity, 60% capacity just if you can help us out of it?

Elisha Finney

Let me answer the second question first, and I will take the easy one. We are probably at about 5% capacity right now. So, we do have orders, we have just started production in China which is very exciting. But we have room to grow for years and years and years in the China market and are looking forward to that.

In terms of the second question, I am not exactly sure, where you are headed with this. I can tell that our Far East business for the year was up in single digit. So, the comps for next year, I would think it's not a terribly easy or tough comp, I guess is one way to look at it. Not sure, where you are going with that Junaid.

Junaid Husain - Soleil Securities

Okay, thanks. Then Tim, could just a bit more color on your collaboration with BrainLAB with Novalis. You worked with BrainLAB for the last 10 years. And I guess the sense that the success of this collaboration was somewhat mix, that's debatable. Help us understand with the extension of this collaboration, what's new and how this collaboration different from years past?

Tim Guertin

Well, in the past, for example Varian had a multi-leaf and BrainLAB had multi-leaf. And now we have an HD120 multi-leaf that Varian has developed and BrainLAB agrees that that is a good multi-leaf for stereotactic applications. And it will probably create more colors of that multi-leaf going forward. But this multi-leaf is a good one. So, rather than BrainLAB inventing another multi-leaf to try and take that technology forward, they are going to work with us.

At the same time, they've done some beautiful work in the area of treatment planning and in the work of couches. We have a generalized treatment planning system. It can do stereotactic planning. But the BrainLAB treatment system was designed from the ground up to appeal the neurosurgeons and they are pleased that neurosurgeons are pleased to be able to use something that was designed to work with them. We designed our treatment planning system. I would say to work with radiation therapist and radiation therapy physicist and that's a different crowd than neurosurgeons. And so, they like iPlan, and for the reason, the 6D couch and the Exac Trac from BrainLAB grade and BrainLAB is well known to neurosurgeons. They create a thing called a operating room suite, you may have seen it in the popular literature and it's a suite of applications that enable surgeons to function.

So, they know BrainLAB very well. So now when surgeons come to BrainLAB or they come to Varian, rather than seeing a Novalis being offered by BrainLAB, it's based upon our low energy platform and it's trilogy from Varian based upon our high energy platform. They see one platform and one solution, and Varian and BrainLAB, have put the best of both products on there. And plus, that BrainLAB has a really excellent software organization, famous for their user interfaces and for their simplicity of use. So I think that is great. I've known their CEO for many many years, I think I safely can call him a friend and he and I have wanted to do this for a while and it's just taking us a while to work out how it should be done and the exact moment that it should be done.

Junaid Husain - Soleil Securities

Sure, okay. That's helpful. And then, could you give us a sense of a number in Novalis machines in the U.S. and then maybe the number of Novalis machines OUS? That a number you can give?

Tim Geurtin

I think there it's around 100 but I'm not exactly sure.

Junaid Husain - Soleil Securities

And then, you know just given your 510(k) approval for your high-end collimator and then the expansion of the Novalis collaboration. I get a sense that you guys are starting to go hard in stereotactic radiosurgery. So two questions for you. First, your customers view that Trilogy is a machine that can form SRS applications. And do you have a sense for what percentage of procedures on Trilogy is, in fact for SRS? And then as a follow up to that, how do you view the market for SRS applications against say accurate CyberKnife. In your mind is the Trilogy and the CyberKnife really going after the same patients in SRS or do you see it differently?

Tim Guertin

Yeah. In terms of percentage of treatments of course it's going to vary extremely, widely with the institution. Some people buy a Trilogy machine and certainly with the Novalis Tx, they are going to be buying a machine that is going to be used a lot for stereotactic applications. The main beauty of the Trilogy per se is that it can do stereotactic and it can do traditional, which means that you can work in your stereotactic patients and your traditional patients to get the maximum possible revenue.

For those people who are going to do a lot of stereotactic patients and who therefore want very high throughput and they want everything state-of-the-art for stereotactic, because they are going to be doing a lot of them than the Novalis Tx makes sense for them. It's probably something that's never used 100% for stereotactic applications, but certainly wouldn't take very many patients probably to justify the machine under those circumstances, but I think it's the kind of machine that could be used exclusively if you choose to do so.

Comparing CyberKnife with the Tx, they do sell to the same customers. They sell to the neurosurgeon and a radiation therapists and physicist have to describe the treatment and have to prove the quality of the treatment. They will treat the same patients and the advantage of the Trilogy is that its general purpose and it's much, much faster, so its throughput is greater.

Junaid Husain - Soleil Securities

Well, thanks. That's really helpful. And then Tim final question for you. Help us understand your VMAT product, especially as it relates to your presence at ASTRO. You recently hosted an event in New York with your radiation oncology customers; you got Jim Morris giving the presentation at ASTRO at your reception next week. How important is VMAT relative to ASTRO? Have you got a lot of customers calling up saying that they are interested in talking to you about it? And then as a follow up to that help us understand VMAT compares to Elekta VMAT? What is the key differentiator between the two VMATs?

Tim Guertin

I haven't seen the details on the Elekta VMAT, but I will come back to that in a minute and give you my thoughts on it. In terms of customer reaction to it, I've talked to some customers about it and our folks have talked to customers about it. And my personal feeling is that we'll have a revolutionary effect on the way we treat some forms of cancer. More specifically head and neck cancers and prostate cancers, because you’d get better dose distribution and you get really fast treatment. So who wouldn't want to do that. And I think it may enable our customer to do some things clinically that they've always wanted to do but it would take too much time.

In terms of how customers behave when they hear about it, I was reading a note recently by one of our physicist Stuart who was present at a presentation in which a presentation was given about this technology, and she said that although it was given during a meal everybody went incredibly quite. All of the knives and forks start moving, you couldn’t hear anything and people were in rap attention to the speaker. And that doesn’t happen if it's something that they don’t care much about and their reaction to the treatment times that we were discussing and the fact it does the treatment in a single arc was really, very strong.

In terms of what other people can do, I think the advantage that Varian has is we were actually modulating several things at the same time. We can change the dose rate on the fly, we move the multi-leaf on the fly and so we can change the beam shape and we can change the rate at which the machine is rotating on the fly.

So the fact that we can do that means that we are completely optimized for speed. At any given time, everything confirms so that the machine achieves the maximum possible rate of speed. And it does it, and the beautiful thing about the treatment planning approach has been taken, is it provides a plan in a single arc so the machine only has to rotate around one time and it treats the entire volume at once. So where some people just treat one slice or some people just treat a point, we are treating the whole volume of the tumor at once as we rotate.

So in one 360 degree turnaround the patient you get the maximum conformality and you have the minimum amount of time. So, to the best of knowledge no one else has anything like that. I'd certainly never see anything like that demonstrated or talked about whereas with this thing we seen it clinically used, we seen the treatment plans and we’ve incorporated them in our design and we’ve got the 510(k). So, I think we'd probably have a long lasting advantage here.

Junaid Husain - Soleil Securities

Good, thanks so much guys. That’s all I’ve got, see you at ASTRO.

Tim Guertin

See you there.

Operator

And your next question comes from the line of Julie Hoggatt of Noble Financial

Julie Hoggatt - Noble Financial

Hi guys, thanks for taking my question. I was wondering if you could give any color on where you are with ACCEL and if you – when or if you expect a proton system installation and where you are with the FDA with this product.

Tim Guertin

Well with ACCEL what we’ve as we put the product together we've discovered that in hardware terms we think that we are, we got a pretty good product. But we think that the software need some work. ACCEL is not a software company, but they were very, very high tech company in terms of Magnus and Cyclotrons, etcetera. So the core design is solid, but Varian is a company that is a software company as well as a hardware company and we're a clinical company. And so we want to produce a product that all of our customers are going to rave about. So, we're investing right now heavily in the business of improving the software on this product and also looking at the issues of cost and how fast it takes us to install, etcetera.

When we look at, when we talked to proton customers, what we discovered is that they all have a lot of contingencies and ifs and ands and buts in their deals. We decided after negotiating with lot of these folks that we really don't want to book an order until all those contingencies are clear. And so, although we have a lot of discussions underway, I expect it's going to be a while and which is why I think I said in my remarks that I don't expect that we'll be announcing, we'll probably be announcing that we're in discussions, but we're not going to be announcing deal that we book into backlog. This year, I would doubt it based upon the complexity of these discussions and the length of time that the projects go on.

Typically, we are seeing a three- to four-year planning cycle for these customers, and that is quite a long planning cycle. And so although you saw earlier in this year that there were a lot of discussions with customers where they said they were sort of fixing to get ready to build the proton center. There haven't been a lot of booked orders this year. And so we're going to be very careful about this. That being said, they are tremendously enthusiastic, they want proton centers, we're talking to a lot of enormously powerful customers with access to tremendous resource if they want this. And I want to provide them with a product that's worthy of the Varian name and that's why I'm going to be spending the next year or two to put together.

Julie Hoggatt - Noble Financial

Okay. Your tax rate this quarter was a little below what I was expecting, can you give me guidance to that going forward?

Elisha Finney

Yeah, Julie, I am glad you asked that. We did have a relatively low rate this year. It's based on a number of factors, most notably, where profit fall in various geographies. We also had in the third quarter a statute lapse on an open audit year that may or may not repeat itself in the following fiscal year. So all of that said, and with the R&D tax credit that is due to expire very soon, we're expecting somewhere between 31% and 32% for the FY'08 tax rate. So that's why you'll see that while the EBIT growth we are expecting is in the 13% to 14% range because of the higher tax rate, the EPS guidance is a little below that roughly.

Julie Hoggatt - Noble Financial

Okay, thanks. And the last question is, have you seen any market share changes this quarter that you can talk about?

Tim Guertin

Well, certainly compared to the first part of the year, we think we've seen a turnaround in our ability to hold on to market. It's difficult to know from any one quarter because you have to analyze the way people -- everybody has different booking rules etcetera. I think we probably are still in the 59% to 60% range worldwide and we are probably in the two-thirds of the North American market range. Once again, we are a company that sees all of radiation oncology which means the slow growing parts as well as the fast growing parts. We are competing with some companies that are only in the fast growing part. So they grow pretty fast there but so do we. Those segments of our business are growing like crazy. But we are also seeing some parts of business that aren't growing like crazy and that makes our average growth rate and just a sheer mathematics, I mean it means that your share of the overall market under those circumstances fell a little bit. But we think we that the 14% order growth rate in '07 is equal to the 14% order growth rate in '06 for oncology, and so in all, we had some trouble in quarters. I think we are probably still the £800 [umbrella here].

Julie Hoggatt - Noble Financial

Great. One last question on the arc therapy, are you able to ship orders right now or is it just that you are taking orders?

Tim Guertin

No, we can't take orders until we have FDA approval. What we are announcing is that we have applied for FDA approval. We don't plan to ship anything even if we got FDA approval. We probably won't ship anything until spring of next year, because we want to complete all of our testing process, etcetera. But the problem is, it works and one of our customers who have worked with us on developing it is able to use it clinically until the time has come to talk about it and it will be a feature in our next release. And our next major release is for early spring.

Julie Hoggatt - Noble Financial

Okay, thank you.

Tim Guertin

Thank you.

Operator

And your next question comes from the line of Mark Richter of Jefferies & Co.

Mark Richter - Jefferies & Co.

Hi, guys. Nice quarter.

Elisha Finney

Hi, Mark

Tim Guertin

Thank you, Mark.

Mark Richter - Jefferies & Co.

Just in terms of Novalis, BrainLAB product and that relationship versus Trilogy. Can you talk about how these products can sort of coexist and market for stereotactic use that sort of in the past you talked about Trilogy being an all-in-one product. So what if anything has changed from your perspective and do you think this will cannibalize any Trilogy sale?

Tim Guertin

Okay. No, I think it actually is better for Trilogy. What was happening in the past was, Novalis was using a linear accelerator and BrainLAB was using a linear accelerator made by Varian and they were attaching their own accessories and software and selling it as a Novalis. We were selling a Trilogy Tx which was a device made by Varian and with Varian software on it and some BrainLAB options and we would go into the marketplace and with kind of the basic same technology and beat the heck out of each other.

And so what's happened is, our customers came to us and basically said look you guys are partners and we want a machine that consists of a solution from both of you that is the product that we want to buy. We don't want to have to listen to this argument over whether or not this machine made by you or this machine made by you is the best machine.

We want you to come forward with a combined solution that is made by you. And so that's what we did. So it's sort of a decision to stop competing with ourselves in this case.

Mark Richter - Jefferies & Co.

And then so how this is seen from a stereotactic use, is that basically an emission that Trilogy cannot do full body stereotactic radiosurgery was one just better for the brain or can you just better help me understand how those are then marketed to the stereotactic part of the market?

Tim Guertin

The truth is both machines were actually able to do stereotactic surgery faster and better than other any machine in the market. The difference is now it's even more so, because we took -- by taking the best of theirs and the best of ours, you get all of these wonderful user friendly stuff from BrainLAB designed for neurosurgeons to use and you get all of these wonderful stuff that Varian design to please radiotherapists and neurosurgeons and you put them together, so you get the best of both worlds. But both products were originally in my opinion better than the competitors products and they were the optimum choices. It's just that in effect BrainLAB and Varian will go in as partners and they are confusing our customers and now we're going in as partners and not confusing our customers.

Mark Richter - Jefferies & Co.

Okay, got you. And then, just the cargo screening business showed nice growth in the quarter, I know it's obviously tough to gauge the government and how this business is going to shake out. But can you help us maybe get a sense of your thoughts on growth going forward?

Tim Geurtin

Yeah. Well, as we already announced, we got a major order right after the end of the quarter that I mentioned in my announcements and that was a pretty significant order. It was actually a huge portion of the orders that we were expecting for the quarter that happened in one week. So, of course being the relentless guy that I am, I've gone back to our guys and said, don't think this let you up a hook, you can take the rest of the quarter off. So they are very optimistic that they are at the beginning of a period of expansion for their products, a lot of technologies they labored on this year are now shippable.

And so, the big hope for the future is that the technologies that we provided for these pilot programs are well accepted within the pilot programs in the U.S. If they're well accepted as pilot programs in the U.S. and we were not convinced, I'm going to need more than 90 days to give you the answer to this. This is what we're going to be looking at over the course of the next 12 months. If they are well accepted, that's going to set us up for huge growth in the future.

So I expect to see growth in 2008. I expect to see a lot more growth in 2009 as these technologies take place. We don't know what the effect of 2008 as an election year is going to have on this business. You can make an argument that it's going to help and you can make an argument that it's not going to help, because there are so many distractions. But certainly when you consider the overall security situation of the United States, you know as I would predict the security is going to become more and more important factor for the U.S. as well as other countries and we have a solution for X-raying cargo containers and for trucks that pass through border processing as the crossing that's the best solution that I know of and under those circumstances I think the opportunities are quite large.

Mark Richter - Jefferies & Co.

Perfect. And then on the last question, just a different sort of way of asking of a prior question, but U.S. Oncology order growth was obviously not really as robust and there was tough comps as international or is it just a sense of that the fourth quarter last year was just so strong from a comparable perspective or are you seeing more aggressive competition in the U.S. versus international markets.

Tim Guertin

If you average the two quarters together, quarter four a year ago with the quarter four now you are still looking at 14% numbers year-over-year. That was an extremely strong blowout quarter in the U.S. a year ago. We knew from the beginning it was going to be difficult comp. I think we even mentioned it in the last conference call that it was going to be a difficult thing for us to do. So the fact that we improved over a 20 something percent a year ago and the fact that we got 27% international where we had such trouble a year ago. I mean, those things that that I am feeling really good about that.

Elisha Finney

And than coupled with flat panel and security, which we are not a one-trick pony, so ended up with strong growth.

Tim Guertin

Yeah. I would have to say, one of the things that I said two years ago was that I wanted to add more legs to the stool. I want us to be in more businesses, so that we have a more balanced company and I think you are seeing that start to happen now.

Mark Richter - Jefferies & Co.

Perfect. Thanks, guys.

Tim Guertin

Thank you.

Operator

And at this point, this concludes our Q&A session. I would like to turn the call back over to management for closing remarks.

Spencer Sias

Thank you for participating. For those who may have come in late, this call has been taped and it will be available for replay beginning at 4:00 PM Pacific Time today on the Investor Relations page under about Varian on our web site at www.varian.com, where it will be archived for a year. You can also access a replay via telephone by dialing 1-888-286-8010 from inside of the U.S., or 617-801-6888 from outside the U.S. and entering confirmation code number 57025018. The telephone replay will be available through 5:00 PM Pacific Time, October 26. Thank you.

Operator

Ladies and gentlemen, this concludes the presentation. Thank you for participation in today's conference and have a great day.

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