Accuray's CEO Discusses F4Q12 Results - Earnings Call Transcript

| About: Accuray Incorporated (ARAY)
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Accuray (NASDAQ:ARAY) F4Q12 Earnings Call September 6, 2012 5:00 PM ET


Tom Rathjen - VP of IR

Euan Thomson - President and CEO

Derek Bertocci - SVP and CFO


Raj Denhoy - Jefferies

Steve [Busha] - Morgan Stanley

Tycho Peterson - JP Morgan

Charles [Crawson] - Sidoti & Company

Junaid Hussein - Dougherty & Company


Good day ladies and gentlemen, and welcome to the fourth quarter 2012 Accuray Incorporated earnings conference call. [Operator instructions.] I would now like to turn the conference over to Mr. Tom Rathjen, vice president of investor relations. Please go ahead sir.

Tom Rathjen

Thank you operator. Hello, and thank you for joining our conference call this afternoon as we review Accuray’s fourth quarter and fiscal year 2012. Joining us today are Dr. Euan Thomson, Accuray's president and chief executive officer; and Derek Bertocci, Accuray's senior vice president and chief financial officer.

Please note that today we will be referring to financial data which can be found in a summary slide deck on the investor relations page of the Accuray website at

Before we begin, I need to remind you that our presentation includes forward-looking statements that involve risks and uncertainties. There are a number of factors that could cause actual risks and uncertainties to differ materially from our expectations, including risks related to our ability to achieve projected revenue, gross margin, and profitability targets, achieve our TomoTherapy integration goals, launch new technologies, and improve performance in the U.S. through a realignment of our sales organization.

These and other risks are more fully described in the press release we issued earlier this afternoon, our form 10-K for fiscal 2012, which will be filed shortly, and other filings with the Securities and Exchange Commission. We assume no obligation to update any forward looking statements.

And now I would like to turn the call over to our president and chief executive officer, Dr. Euan Thomson. Euan?

Euan Thomson

Thank you, Tom. And thanks to everyone for joining us today for Accuray’s fourth quarter of fiscal year 2012 conference call. To help illustrate the main points discussed this afternoon, we have posted slides to the investor relations page of the Accuray website.

This afternoon, I’ll review the progress in our strategic plan and provide an update on our outlook for fiscal 2013 and beyond. I will then turn the call over to Derek Bertocci who will provide a detailed financial review.

As we’ve done in previous quarters, we’ll provide both GAAP and non-GAAP numbers. When Derek talks later, he will refer to both measures, but for the sake of clarity, I will refer only to the non-GAAP numbers, since they give you a clear picture of Accuray’s ongoing core operations.

Today our results show that we have achieved good progress in our strategic plan, although we know there is still work to do. Fiscal 2012 was a year of transition at Accuray, as we integrated our acquisition of TomoTherapy. It represented the first year of our multiyear strategy and execution story.

The first phase of our strategy centered on integrating the two companies, with a strong focus on solving the liability issues surrounding the TomoTherapy system. I’m pleased to report that we have now engineered solutions to TomoTherapy systems reliability issues, with upgraded technology that we’re in the process of rolling out to the field.

The second phase of our strategy is to drive system orders and revenue growth through a major technology release that we will unveil at the ASTRO trade show next month. This aspect of the plan we were not able to announce until today for commercial reasons, but I’ll talk more about it in a few minutes.

And the final phase will be to accelerate earnings growth, but I’ll concentrate today on the first two phases since they represent the year we just concluded and the period we’re now entering. Let me first provide a review of the fourth quarter and full fiscal year 2012. During the fourth quarter, total revenue was $101.1 million. 15 units were installed and 23 units shipped.

Total revenue for the fiscal 2012 was essentially unchanged from prior year when factoring nonrecurring platinum revenue and the difference in TomoTherapy product revenue accounting. This met a goal of maintaining revenue in the year in which we integrated two sales forces.

For the full year of fiscal 2012, we placed 99 system orders into backlog, and we shipped 92. The number of new orders increased for both product lines internationally, offset by a decline in U.S. orders for both products. There was a net worldwide increase in orders for TomoTherapy systems over the prior year, and a year on year decline in CyberKnife orders, although I’m glad to report that Q4 was a strong quarter of CyberKnife orders. We believe this is a sign that we’re reversing the decline in the CyberKnife product revenue that we observed during the first year of integration.

In the fourth quarter, we added $74.2 million in new orders to backlog. The rolling four quarter book-to-bill ratio is 1.02. For the past three quarters, the book-to-bill ratio was 1.12, and for Q4 it was 1.15. This indicates growing momentum in new order performance, a leading indicator of future revenue growth.

I’ll now briefly review the environment in the U.S. As we announced last quarter, we have realigned our U.S. sales force to address our recent U.S. weakness. Although the business environment in the U.S. remains somewhat weak, in certain territories we continue to do well.

As we described last quarter, our intention is to replicate best practices in all U.S. territories, which will also help us to capitalize on our new technologies. Early signs are encouraging, with a significant increase in the quality and quantity of opportunities in our pipeline.

Another factor in the U.S. market that could work in our favor is the potential change in Medicare payment rates for calendar year 2013. The proposed deep cuts to freestanding IMRT payment rates would improve the business case of both of our technologies when compared to competitive products.

First, because of its unique architecture, unlike other systems the TomoTherapy system can mitigate the loss of IMRT revenue by billing for daily imaging. Second, CMS’s proposal would bring IMRT freestanding rates much closer to CyberKnife levels, making CyberKnife a more attractive financial proposition, especially for the treatment of prostate cancer. This is significant today as we have relatively low penetration in the freestanding segment of the market.

We significantly grew Accuray’s service business during fiscal 2012, with 18% growth in service revenue. For the full year, service gross margins improved year over year from negative 1.9% to positive 15.1%, with the fourth quarter comparison changing from negative 2.3% a year ago to 19.9% this quarter.

The end of fiscal year 2012 marks the end of the first phase of our strategic plan, with Accuray on track with the integration milestones that we gave you. I will now turn to the second phase, which will see the exciting results of our intensive investment in recent quarters into research and development.

I’m happy to announce today that we are ready for a significant technology release at ASTRO in October, with the unveiling of two advanced platforms. We’ll reveal the details of these technologies at ASTRO, but we believe they have the potential to change the dynamic of the market. A microsite indicating the technology launch went live today at market close, and can be found at

Although we’re not making a formal new orders forecast, we do expect new orders to accelerate during fiscal 2013, with most of the associated revenue being recognized in fiscal 2014 and beyond.

You will remember that when we launched CyberKnife VSI in 2009, there was a significant increase in new orders over the next 12 months. The impact of these technology releases will dictate the pattern of our financial profile through the current fiscal year. Already, some customers have asked to see the technology release before accepting shipment. We are, of course, in discussion with these customers now, but we expect Q1, traditionally our weakest quarter of the year, to be further affected by this customer behavior.

Also impacting the comparison with prior year is that in the first quarter of fiscal year 2012 we were able to ship some of the systems sitting in TomoTherapy’s backlog that we had just acquired. Accuray, over the years, has developed techniques that minimize the time between booking and shipment.

These techniques gave us a one-time benefit in Q1 of last fiscal year. Since that time, we’ve consistently applied these techniques to TomoTherapy orders as they’ve been generated. We therefore expect total revenue for the first quarter of fiscal 2013 to be substantially lower than that of the first quarter in fiscal 2012.

Going forward, however, we believe that we will see a number of customers upgrade their orders to the newer technology after ASTRO, which would enhance revenues. The timing of these revenues may be affected by a ramp up in production. Despite the softer Q1, our revenue guidance for fiscal 2013 is $405 million to $425 million.

After operating expenses, we expect to both R&D and marketing expenses will rise as we go through ASTRO, but will then decrease in Q3, reaching levels seen in the first half of fiscal 2012 in Q4. We expect service gross margins to continue to improve and are holding to our forecast of 20-22% for the full fiscal year.

I want to paint this picture for you so that you understand why we foresee a year of two distinctly different chapters. First, we expect weaker revenue and increased operating expenses in the beginning of the year, followed by stronger revenues and lower expenses in the second half. The turning point between these two chapters is the launch of the innovative platforms at ASTRO, which history suggests should strengthen our growth in orders within the fiscal year and then revenue in the coming fiscal years.

We expect Q4 revenues to be higher than in fiscal 2012, with improved service gross margins and operating expenses in line with those before the new technology rollout. As a result, we can reaffirm our expectation of reaching profitability by the end of this fiscal year, and believe we can achieve sustainable profitability on an annual basis in the future.

In summary, fiscal 2012 was a year in which we completed the first phase of our strategic plan, successfully integrating TomoTherapy and essentially solving the TomoTherapy system reliability issues. We’re embarking now on the second phase, the introduction of technology innovations which are anticipated to drive top line growth. We expect to return to profitability by the end of fiscal 2013.

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

Derek Bertocci

Thank you, Euan. I share your confidence about Accuray’s future and prospects for a return to profitability. Now I will address some financial topics.

In our press release announcing our results for this quarter, we provided details of the adjustments between GAAP and non-GAAP results. We also provided pro forma results for the 3- and 12-month periods ended June 30, 2012 and 2011. Unless stated otherwise, all results I discuss represent non-GAAP results and prior year results represent the combined total of the results reported separately by Accuray and TomoTherapy as standalone companies, excluding expenses related to the acquisition.

We acquired TomoTherapy at the end of fiscal 2011 to broaden our product portfolio. With our two product lines, we now provide leading technologies to address the needs of clinicians and patients for both radiosurgery and radiation therapy treatments.

The challenges in this acquisition were to engineer improvements to the TomoTherapy system to address reliability issues and to combine two large organizations into one smoothly functioning team. We have made tremendous strides in meeting both challenges and are confident that we will continue to see improvements in the coming year.

During the fourth quarter, we continued to make good progress toward our goals of returning the company to profitability and positioning it for revenue growth in the future. We delivered strong performance in a number of areas as described in the following points. Our book-to-bill ratio was 1.15 during the fourth quarter. This reflects continued improvement since the first quarter of fiscal 2012 and strong demand for our products in the market.

Solid new orders are the key driver of future product revenue. TomoTherapy product revenue increased over the prior year, up 9% for the quarter and up 4% for the full year on a pro forma basis. These increases reflect the benefit of good orders in the opening backlog, plus the solid level of new orders for TomoTherapy systems booked during fiscal 2012.

Service revenue increased over the prior year, up 13% for the quarter and up 18% for the full year on a pro forma basis. These increases was driven by the continued sale and installation of systems, most of which represented new Accuray systems for these customers.

The service gross profit margin continued to show strong improvement. The service gross profit margin improved to 19.9% in the fourth quarter from a loss of 2.3% in the prior year quarterly on a pro forma basis. The improvement was driven mainly by improvement in the reliability of TomoTherapy systems and the resulting reduction in service calls and repairs on these systems.

While positive developments were numerous, we also encountered some challenges that are described in the following points. New orders for systems in the United States were below our expectations and the prior year. As previously noted, we experienced challenges combining the two companies’ direct sales teams in the United States after the acquisition of TomoTherapy. We restructured the U.S. sales team in the fourth quarter of fiscal 2012 and look for improved performance in the future.

CyberKnife product revenue decreased from the prior year, down 36% for the quarter and down 27% for the full year. The decline in the United States market was due principally to the shortfall in new orders in this market. We also experienced a decline in CyberKnife product revenue in our EMEA region caused by the timing of customer installation schedules rather than from a decline in new orders.

CyberKnife system orders and backlog were solid in Europe in fiscal 2012, and we expect CyberKnife product revenue to increase in fiscal 2013. New orders for CyberKnife systems were solid in the fourth quarter of fiscal 2012, and prospects look good going forward.

Product gross profit margin of 52.3% was down from 58.1% in the prior year fourth quarter. This decrease stems from an active program to trade up older generation systems to the most recently approved versions of the CyberKnife in Japan. We recorded revenue for three such sales in the fourth quarter.

Operating expenses rose in the second half of fiscal 2012, reaching their peak in the fourth quarter. The increases were driven mainly by higher R&D spending, plus a smaller increase in spending on marketing. These costs were incurred to develop significant new technologies and prepare to begin marketing them at the ASTRO industry meeting in late October 2012.

Now I will address our balance sheet and cash flow. We maintained prudent control over our balance sheet during the fourth quarter of fiscal 2012. Decreases in receivables and inventories were offset by a decline in current liabilities. The $9.7 million decline in cash during the fourth quarter was driven mainly by the net loss. When we transition to profitability, we expect to generate positive cash flow from operations.

As we look to the future, we are encouraged and believe that we are on track to return to profitability and long term growth. Our belief is based on the following key points. New orders for products rebounded after the weak showing in the first quarter after the close of the acquisition of TomoTherapy.

In addition, we believe the exciting new technologies that we plan to introduce at ASTRO should boost interest in our products even further. We saw this effect after we introduced the VSI model of the CyberKnife in the fall of 2009, experiencing significantly higher new orders for systems during fiscal years 2010 and 2011.

We have a solid backlog of orders to support product revenue in fiscal 2013. Service revenue should continue to grow as we expand our installed base. Our current forecast indicates that approximately 90% of shipments in fiscal 2013 will go to new customers or new bunkers at existing customer sites.

In addition, we continue to see TomoTherapy customers convert to our new Emerald and Diamond service contracts, which provide higher levels of service at a higher, more industry normal price. Further, we have taken over responsibility for servicing TomoTherapy systems in Japan from our distributor, which will support growth in service revenue in fiscal 2013.

Our gross profit margin should improve in fiscal 2013, due to continued improvement in the service gross profit margin which we forecast to be in the range of 22% for the full fiscal year 2013, up from 15.1% for fiscal 2012. We expect the product gross profit margin to remain approximately unchanged.

The final step in our march back to profitability will be the return to more normal operating expenses levels by the fourth quarter of fiscal 2013. Through the second quarter of fiscal 2013, we will continue to spend at higher than normal levels on R&D and marketing to bring these exciting new technologies to market. Thereafter, we expect more normal spending in these areas and further efficiency initiatives to enable us to return total operating expense to approximately the level we incurred in the first half of fiscal 2012.

In summary, we believe the major elements to enable Accuray to return to profitability are achievable by the fourth quarter of fiscal 2013. We believe that we will achieve sustained revenue growth and annual profitability in future years by continued progress in these areas.

Now I would like to turn the call back to Euan.

Euan Thomson

Thank you, Derek. As we’ve discussed, fiscal 2012 was a year in which we completed the first phase of our strategic plan, successfully integrating TomoTherapy and essentially solving the TomoTherapy system reliability issues.

We’re embarking now on the second phase, the introduction of technology innovations anticipated to drive greater top line growth and we expect to return to profitability by the end of fiscal 2013. With the upcoming major technology launch, we’re excited and optimistic about Accuray’s future.

With that, we’ll now take your questions.

Question-and-Answer Session


[Operator instructions.] Your first question comes from the line of Raj Denhoy with Jefferies.

Raj Denhoy - Jefferies

Wonder if I could just press you a little bit on the revenue in the quarter, the softness in the quarter. If I’m hearing you correctly from your comments, it was primary CyberKnife, and if I’m hearing you properly, it was primarily related to, perhaps, disruptions in the sales force. First, I want to make sure that’s correct, or if there’s anything else that maybe we should be looking at in terms of why the CyberKnife billings were a little soft here.

Derek Bertocci

Are you asking a question about the forecast for the first quarter of fiscal 2013? Or the fourth quarter of fiscal 2012?

Raj Denhoy - Jefferies

The just-completed quarter, the fourth quarter, that you just reported.

Derek Bertocci

The product revenue in the quarter was within the range that we had guided to. It was approximately down a little bit from the prior quarter. It was not any significant variance, though, from where we had anticipated we would be.

Raj Denhoy - Jefferies

Well maybe, perhaps, just broadly, then. The CyberKnife revenue was down year over year. The revenue that you reported in CyberKnife relative to last year. The TomoTherapy business still did show some growth, and I’m just trying to get at why that CyberKnife revenue, particularly here in the U.S., is seeing that slowdown year over year.

Derek Bertocci

We had indicated that the new orders that we had anticipated for fiscal 2012 in the U.S. did not come in because of challenges we faced in integrating the two sales teams in the United States. And we do have a certain portion of our revenue each year that comes from orders that come in the year, that convert to revenue within the year. So due to the slowdown in orders in the U.S., which covered both product lines - it was not just CyberKnife - we did see a slowdown in revenue on the CyberKnife side in the quarter.

Euan Thomson

There was also another effect, which Derek might want to expand on as well, which was really in EMEA, which remained strong for CyberKnife new orders. There was just some shift in the timing of shipments. So there was a decline in European revenue for CyberKnife, but it wasn’t anything systemic to the business. It was really just a shift in the timing. And those orders are still there, and will contribute to CyberKnife revenue in FY ’13 and going forward, which is why we’re fairly confident in upcoming CyberKnife revenues.

Raj Denhoy - Jefferies

And I guess that’s the point that I’m trying to explore, is that it does seem like the issues that are in that business are, at least by your view, somewhat transitory. It’s the sales force issue here domestically, and then some of the shippings that are occurring in EMEA. And I guess I’m curious what gives you the confidence…

Euan Thomson

That’s a correct assumption. Our view of the international markets is that CyberKnife actually maintained its momentum. There was no indication of a downturn - including EMEA - in international markets. We actually grew the TomoTherapy business through new orders quite markedly. There was a downturn in the United States but we feel we’ve addressed that through the realignment of the sales force, and we’re actually fairly positive about the new activity that we’re seeing among customer sites now for both the product lines in the United States.

So I think it’s certainly there as a fact. The revenue for CyberKnife systems was down. I think a large contributor was EMEA, but as we’ve said, we believe that to be transitory and will correct itself during this year. And the U.S. sales force we’re seeing signs of activity now.


[Operator instructions.] Your next question comes from the line of Steve [Busha] with Morgan Stanley.

Steve [Busha] - Morgan Stanley

Just one on systems revenue. It sounds like, with the guidance for the next year coming in where it did, and to your point with the visibility that we have on service revenues, that the guidance at least contemplates systems revenues that could be flat to down. Am I right there, in my interpretation? And if so, I’m a little confused as to why that would be, given the book-to-bill ratio.

Derek Bertocci

The system revenue, given that service revenue should increase, you’re right, service system revenue, depending on exactly where we end up with all factors, could be flat to down slightly. A couple of factors are affecting that. The first quarter after the acquisition of TomoTherapy we had slow bookings and our book-to-bill ratio was approximately 0.7, and so when you think of orders being light in that quarter, generally speaking a year or so later, on average, you see sort of the rebound effect of that.

The second thing is that as we are introducing new products and new technology this year, we’re being somewhat cautious about predicting exactly the rollout of those products and the introduction of those to customers and getting them into production. So those two factors are things that we’re taking into account in providing the guidance.

Euan Thomson

Just to expand on this, I think you shouldn’t underestimate the impact of these technology releases. I think customers are aware of something significant going on, even before our public announcement on this call. And that gives us a challenge in Q1, as we discussed, which we then have to recover on for the remainder of the year. And I think you should see this level of guidance as confidence that we will definitively recover from that as we go through the year.

And the other factor that I don’t think Derek mentioned, but we mentioned in our prepared remarks, was we did see somewhat of a boost to revenues last year when we were able to ship some of the inherited, or the purchased, revenue from the TomoTherapy. There was systems there that we were able to accelerate out of revenue, and that built up Q1 a little bit, which hurts us a little bit looking back on it for comparison, but I think it was the right thing to do, and it’s indicative of the intensity that we give to taking systems from backlog and shipping them out to customers.

Steve [Busha] - Morgan Stanley

So following up on that, and really following up on Raj’s question too, have you seen any - as a function of the macro-environment, and the competitive environment - acceleration or change in the rate at which orders might be coming out of backlog? Or perhaps there are installation delays as one of your competitors pointed to earlier this week?

Euan Thomson

No, we haven’t seen any installation delays. And I’m not sure which comments you’re referring to, but we haven’t seen anything like that. We feel very comfortable and very positive on a worldwide scale with the rate at which we’ve been generating TomoTherapy systems, and we’ve found that the time between booking systems and shipping them is somewhat less than CyberKnife systems, because they tend to be going into more existing rooms, and it’s less of an upgrade for the room from a radiation shielding standpoint.

Overall, no change really, in the dynamic of shipping CyberKnife systems. When I look at it on a broad scale, across the whole of our first year of integration, I would say I think we integrated the two companies well, we integrated the international sales forces with much success. We faced challenges, which we’ve been open about, in the United States, but I feel pretty comfortable we’ve now addressed those, and we’re seeing signs of new activity.

So that really is pretty much the full story for the first year. And that, coupled with the technology rollout at ASTRO this year, paints, I think, a pretty positive picture for how far we’ve come.


Your next question is from the line of Tycho Peterson with JP Morgan.

Tycho Peterson - JP Morgan

First, just following up on some of the questions earlier on the U.S. dynamics. Can you talk on the competitive landscape? Have you had any swap-outs of your vaults? And can you also just comment on whether you’ve had any traction from the Siemens agreement?

Euan Thomson

No major impact of either of those, really. We haven’t really seen a change in the competitive dynamic. In the United States, in particular, we were feeling, before the U.S. sales force alignment, that we possibly weren’t being aggressive enough in targeting our competitive sockets. And it’s actually a stated objective of ours that we will now be more aggressive. And I think these new technology rollouts will definitively give us some traction there as well.

From Siemens, I think it’s a story that hasn’t really changed much over the quarter. We generated about five new system orders from Siemens customers since they announced their exit from the market. It’s a steady trickle. It’s not a gross change in the market dynamic. And as I indicated before, relationships with Siemens themselves, and relationships between companies, I don’t believe, personally, really result in significant sales. It’s the relationships with customers that are most important there. And we continue to work hard on building those.

Tycho Peterson - JP Morgan

And can you comment on how things have progressed post the proposed reimbursement? I think it’s been 68 days or so since you ended the quarter. Can you just talk about how things have progressed in the back half of the summer? Are you willing to comment at all?

Euan Thomson

Absolutely. For us it’s more a story of opportunities, as I indicated in my previous comments. One of the main reasons for that is we haven’t actually, with either product, got a high penetration rate in the freestanding market, and we haven’t been - either company, when they were individual companies, were not selling their systems aggressively or actively to those portions of the market. And that kind of reflects the specialist profile of those systems.

I think going forward, we’re seeing that there is opportunity there for us - and they are proposed changes, don’t forget - should these proposed changes actually be implemented. Our TomoTherapy system clearly is an IMRT product, but it has the added advantage that you take images, as routine, with every patient, every single day. That’s a driver from a clinical standpoint.

When we look at the business case associated with that, then it actually is relatively strong compared to systems that just treat IMRT without that image guidance, which will be, potentially, impacted by these cuts.

From the CyberKnife standpoint, particularly as we embark on an aggressive prostate cancer campaign to raise awareness of how far we’ve come with demonstrating that CyberKnife can be used to treat certain prostate cancer cases. We feel that these reimbursement changes get IMRT treatments closer from a revenue standpoint to what customers can expect in a freestanding center for the CyberKnife.

So there’s not such a marked difference. And with the clinical benefits and the clinical trends that we see, we think that we have opportunities there for attracting freestanding centers’ attention too.

So nothing major to report yet, but we’re not discouraged by the dynamic right now.

Tycho Peterson - JP Morgan

And then I know you don’t want to say much about the new systems, but can you just kind of give us some higher level commentary? Are these using higher level energy sources? Is it leveraging something out of [CPAC]? Just kind of curious. And should we think about an upgrade cycle to the installed base with the new systems?

Euan Thomson

I can answer partially for the second part, but I do want to make everybody aware that this is a major technology launch that will be taking place at ASTRO. What we’re announcing today is the launch, not the technologies. So I’ve got limited ability to discuss them today. We want to, obviously, manage that through our marketing department and have the most impact on our new orders.

I can say we believe these to be very important technologies. We consider them to be significant not just from Accuray’s standpoint, but in the context of the overall market dynamic right now. They will be, I think, exciting to everybody to observe and of great interest to our customers. Beyond that, I’d rather reserve my comments.


Your next question is from the line of Charles [Crawson] with Sidoti & Company.

Charles [Crawson] - Sidoti & Company

First one, just kind of piggy backing on that CMS reimbursement changes. You know, there’s been a lot of talk out there that the current proposed changes don’t really seem to - there’s a lot of sources that seem to think that they’re not going to stick. Based on your conversations with the CMS, what do you get a sense out of that?

Euan Thomson

You know, I can’t say we’re in a real good position to make that judgment call. When you see dramatic changes like this, of course they’re challenged by customers and they’re challenged by professional groups. So after that, it’s a matter of negotiation between all concerned parties.

And it’s a little hard to forecast where they might go. I think our job as a company is to address where we may be should those changes get implemented. And for that reason, we’ve been looking hard at the competitive landscape as it will be post those changes.

It fits pretty well with our strategy overall, which is to point out the relative value of our technologies. For the CyberKnife, as I indicated, treatment of prostate cancer, which is a large part of the freestanding centers’ business. And for the TomoTherapy system, really drawing people’s attention to the fact that there are real opportunities here for having an enhanced business case through use of daily imaging.

And the good news is it’s not just an enhanced business case without clinical value. It’s something that really does benefit patients. So our strategy is to address those markets. I’m being fairly open about our techniques we will use to address those markets, and I think the message today is really that they are robust strategies, even should those changes get implemented.

Charles [Crawson] - Sidoti & Company

And then just one last one. And you might have gone over this, and I apologize if I missed it. But in terms of the purchase orders that entered the quarter, can you give us a sense on what was replacement and what was actual new customers?

Euan Thomson

Well, we haven’t broken that out by Q4 in particular, but Derek did make some comments, which I think you should definitely log, which are when we look forward to our shipment forecast for the coming year, many of which are systems we took purchase orders for in Q4 and certainly through the last fiscal year. We are seeing approximately 90% or so of the systems that we plan to ship will be systems that are new to us.

And for that reason we are pretty bullish about the continued growth in our service revenue. And couple that with the recent transition to direct servicing in Japan, which we issued a press release on, and the continued uptick in the number of customers that are TomoTherapy customers that are adopting our industry standard level, Emerald and Diamond contracts. I think you can expect to see some positive growth in our service business.


Your next question is from the line of Junaid Hussein with Dougherty & Company.

Junaid Hussein - Dougherty & Company

Derek, assuming that you guys hit the low end of your sales guidance for fiscal ’13, would you still expect to hit profitability by the end of this year? And can you kind of walk us through all the puts and takes on that?

Derek Bertocci

Yes, we do expect, even if we hit the low end. I think the thing that we should probably reiterate is that the first quarter we are expecting to be substantially below last year. So it is a year in which it’s not a question of sales not occurring, it’s just that sales are being delayed by the product introductions and the effect on our shipment patterns. The new products we expect to really begin shipping in the third and fourth quarters.

So we are seeing that the company moves to its sort of future level of activity in the second half of the year. That, combined with the fact that we will be past the peak of R&D spending, having in this past year worked on two major product releases, will be getting back to a more normal level of R&D. And then the third step is that marketing expenditures, which will peak in the second quarter, as we do release those two products, will come back to more normal levels in the third and fourth quarter.

So really it’s a combination of a dip in revenue in the first quarter, followed by new products coming online from a shipment standpoint in the third and fourth quarters, but continued evolution and improvement in service margins. And then the operating expenses coming down to a more normal, historical level - basically the levels we achieved in the first half of fiscal ’12 we’re expecting in the second half of fiscal ’13. When you put all of that together, we do believe that we can be profitable in the fourth quarter of fiscal ’13.

Euan Thomson

And maybe one point to add here is that we’re definitely not feeling that profitability is dependent on successful product launch at ASTRO. We anticipate an extremely successful product launch, but we’re not saying that the bottom end of the guidance range profitability is dependent on that product launch. We had a very positive, we feel, Q2, Q3, Q4, in terms of new orders, bookings. We have a solid backlog, as we indicated. We’re feeling positive about the range that we gave. And even should it be the low end, as Derek indicated, we still expect to be profitable in Q4.

Derek Bertocci

And just to amplify one other point that Euan made, the new products that we expect to introduce at the end of October, typically, when you think of customers ordering those new products, given the time from order to shipment and revenue, of one to two years, those new products will affect our revenue in fiscal ’14 and beyond. So that’s where we will see the effect of the growth in revenue from those new products.


Euan, last question for you. You seem fairly confident about these new products that you’re going to introduce at ASTRO. It sounds like some of your customers have already seen it. Can you tell me if your confidence is based on the early stage customer feedback? Help us understand why you think these two new products could potentially be game changers, if you will.

Euan Thomson

I’ll answer that cautiously, because what I don’t want to do is to send our competitors scuttling around finding out which customers we’ve spoken to, which will probably happen anyway. I can say that I’ve personally been out and discussed these new technologies with some customers, limited customers, under strict nondisclosure conditions. And the response has been universally extremely positive. And some of our comments today about them changing the industry dynamic, for example, are actually comments which customers have stated to me once we’ve spoken about those technologies.

So I think we’ve had great customer discussions so far. We’re feeling extremely positive about it. It’s always hard to forecast the exact timing of an impact on a business, with significant technology releases, but I think as we indicated in the script, there have been cases in the past where we’ve rolled out technologies very successfully and they’ve had pretty substantial impact on our new order flow. So I think customer feedback so far, and past experiences, do lead us to be fairly positive about the future for these.


Ladies and gentlemen, this does conclude the question and answer portion of today’s event. I would like to turn the call back over to management for any closing remarks they may have.

Euan Thomson

Thank you for joining us on this afternoon’s call. I want to take a moment to acknowledge Accuray employees globally for their continued dedication to success and to our continued focus on improving the lives of cancer patients worldwide. We look forward to speaking with you on our next call.

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