Ladies and gentlemen, thank you for standing by and welcome to the Accuray Incorporated Earnings Call for the Third Quarter Fiscal Year 2008, ended March 29, 2008. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Tom Rathjen, Vice President of Investor Relations. Please go ahead.

Thank you very much and good afternoon. Thank you for joining us today for Accuray's third quarter of fiscal 2008 conference call. Joining us this afternoon is Dr. Euan Thompson, Accuray's President and Chief Executive Officer; and Bob McNamara, Senior Vice President and Chief Financial Officer. This quarter we will be referring to financial data which is found in a PDF file on the investor relations page of the Accuray website at www.accuray.com. Please log on to this site to view this information. Before we begin, I need to remind you that, except for the historical information, the information that follows contains certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include the matters described in the risk factor section of our report on Form 10-K for the 2007 fiscal year as updated from time-to-time by our quarterly reports on Form 10-Q and other filings with the SEC. And now I would like to turn the call over to our President and Chief Executive Officer Dr. Euan Thompson. Euan?

Thank you Tom. I would also like to thank everyone for joining our call this afternoon. Today I would like to provide highlights of the third quarter of our 2008 fiscal year. I would also like to discuss our sales environment and the changing market conditions and how we are addressing these changes. Finally I will outline our continued clinical growth. Following my remarks our CFO Bob McNamara will discus our third quarter financial results in detail. First let me share the highlights of the quarter. This is our fifth consecutive quarter of record revenue and our fourth consecutive profitable quarter. Total revenues for the quarter were $58.8 million a 57% increase over the same period last year. Net income was $584,000 compared to a net loss of $785,000 in the third quarter of last year. Our Services revenue grew 141% to $11 million compared to the third quarter of fiscal '07. We generated 16 new orders during the quarter with a total value of $76.6 million. Now given the Accuray sales environment, last quarter we discussed how changing conditions in the marketplace were impacting a segment for our US market. Specifically the impacted segment represents free standing providers of CyberKnife Radiosurgery. Those customers operate outside of a hospital environment. I want to run through that explanation again to make sure it’s clearly understood and then I will try to quantify some of the impact and how we are addressing it. To start, despite constant comparisons between ourselves and other manufactures of radiation equipment, I want to reinforce that Accuray is not in the business of providing traditional radiation therapy technology. I can understand why these comparisons arise particularly in light of confusing marketing claims by some of our peers. But the important thing to remember is that we provide…

Thank you Euan and again thank you all for joining us on today's call. This afternoon I'll review our financial and operating results for the third quarter of fiscal 2008. As Euan mentioned in the third quarter Accuray achieved its fifth consecutive quarter of record revenue. Total revenue was $58.8 million a 57% year-over-year increase from $37.3 million in the third quarter of fiscal year 2007 and a 13% sequential increase over last quarter. For the nine months ended March 29, total revenue was $159.4 million, an increase of 65% over the first nine months of last fiscal year. Net income was $585,000 or $0.01 per diluted share compared to a loss of $785,000 or $0.02 loss per share during the third quarter of last fiscal year. This marks Accuray's fourth consecutive profitable quarter, since becoming a public company 14 months ago. Net income was $5.2 million or $0.09 per diluted share for the nine months ended March 29, compared to a loss of $6.1 million or $0.26 per share during the first nine months of last fiscal year. Taking a closer look at revenue for the third quarter $40.7 million was generated from product revenue, an increase of $11.2 million over the same period last fiscal year and up 4% sequentially from last quarter. Services revenue contributed $11 million during the third quarter, an increase of 141% over the third quarter of last fiscal year. Services revenue primarily is associated with maintenance agreements that our customers enter into with us, generally for four year terms and the associated revenue is recognized ratably over the respective service period. It is important to note that services revenue was 19% of total revenue this quarter, up from 12% during the same period last year. This expanding stream of revenue provides Accuray with…

Thanks Bob. In summary despite challenges to one segment of our US market, our over sale performance continues to be solid and our revenue once again reached record levels this quarter. CyberKnife is once again been validated as a clear leader in the fast growing field of body radiosurgery and our clinical programs continue to expand. This is an excellent indicator of future growth to come and now we'd be happy to answer your questions.

Thank you. (Operator Instructions) Our first question comes from Tom Gunderson with Piper Jaffray.

Its actually Amy calling in for Tom this afternoon.

Hello Amy.

One quick question as far as international and domestic type order growth, you mentioned that you are seeing some strength internationally whereas on the other hand some of the other players in radiation and oncology field have noted weakness in Europe. I am wondering if you could give us any more color from your perspective on what you are seeing as far as the markets of strength or weakness in different international geographies?

Yes, it is difficult to comment on other people's perspective of the market. I mean I can comment on our own, which Europe is actually one of our high growth areas, quite definitively and I think we have somewhat of a slow start which is not unusual for Europe because European market is very sensitive to clinical data. New technologies tend to be slow to take off. I think some of our peers came into the replacement market and that market was already well established but the whole dynamic was slightly different. And how that market is affected, I really could not say, but from our perspective I think people are really seeing the clinical value and CyberKnife is a technology that essentially reduces the overall cost of treatment of cancer by avoiding the need for surgical procedure. In a price sensitive market like Europe once you have good clinical data, which we're really starting into get now, I think we could definitely expect to see this particular market grow for us. And there are signs of that definitely there right now with it.

Okay and then I have a follow up and at the over the last couple of quarters just done as Bob mentioned with that distributor in fact, how are they to do the install you can recognize the revenue upfront. What is the typical lead time or lag time for that those units to actually be installed.

Well really depends on the distributor but a couple of months it’s certainly reasonable, it depends on how it’s shipped. If its shipped by boat or it is shipped shift by airplane but when we ship they know where its going, they know the end customer because obviously these are very expensive units and they want to make sure that they got their money in hand or at least the money is safe that they know that they are going to get the money before we even shipped. Similarly we want to protect ourselves. So that we want to make sure that we are not shipping any units without certainty of receiving the cash for that.

So you usually definite and quarterly you will see that come through, as far as the install?

Generally yes.

Okay and then one just quick numbers, first on the interest and other line. Is there anything nonrecurring pay for unusual included in that line this quarter?

Well the upgrades of the Japan units and returned about down below, other revenues were just interest.

Okay

If your talking about other income expenses in that line?

Right.

Yes, it's just interest.

Okay, thank you.

We'll take our next question from Peter Bye with Jefferies and Co.

Hi Peter.

Hi this is Peter and Josh Jennings.

Hey Josh.

Could you just comment, I think I may have missed the order number in the quarter? Was it $76 million?

Yeah, total.

Total new orders.

Total new orders correct.

And then how does that compare on a year-over-year basis from the fiscal third quarter last year?

It's, well year-to-date orders are about 20% higher than year-to-date last year.

Okay and you think that you were just about to comment on the other income line. Was there any reason why there was such a big number this quarter? Was it just timing and it just happened to work out that way?

Yeah for other, are you referring to other income or other revenue?

I'm sorry other revenue, excuse me.

Yeah, that's just a mater of timing.

Great and then just back to new orders, can you break out, sort of the break down between international and domestic orders for the quarter?

We said six out of the 16 were international orders.

Okay thank you.

Bob, could you give any color on the bump up on the accounts receivables and anything in particular there, international or Japan, or was it…?

Sure, that's that -- there is actually two parts to that but that's really just a timing issue because of the installs occurred towards the end of the quarter then the receivables tend to come in after the quarter.

So would you expect that to come back down in the June quarter?

Correct.

Okay thanks.

I mean it would depend on the number of installs at the end of June, but yeah, though in terms of those dollars coming into the company, yes.

Great. And just one more, I think your comment on the trend have been positive with the sort of refocusing the sales force on the hospital based customers. Can you give us anymore color on that in terms of what those trends have led to. Where those positive in this quarter?

I would say, its still kind of work in progress to some extent, there were generally positive trends. I think the biggest indicator we had during this quarter was the attendance at the Robotic Radiosurgery course. As we said almost 100 different institutes represented there and what we are seeing in the pipeline is a definitive trend towards the hospital versus non-hospital deals. That would add, those deals tend to be ones which are harder to provide incentive for a quick sale. It tends to be more of a process inside the hospital. You can opt for a sales promotion for example when you are dealing with sort of an entrepreneurial site, then its more likely to be effective in closing a deal in short term than going through a hospital, which has just got a natural buying cycle and there is nothing you can really do to push it through the system. So we are very, very positive about the overall trend than what we are seeing in the pipeline. I think to maintain the level of sales activity that we have despite the pressures that we've been pretty open about, I think it is actually a sign of the overall strength of the market. I do want to stress that what we are talking about is just one segment of the US market and all other aspects of the market have really remained strong for us.

I have just one last question on that front. On a competitive side are you seeing that your sales force is coming head-to-head on accounts they are looking to develop a sort of a Radiosurgery program. Are there any competitors out there that you are seeing more frequently in the quarter?

No, we are seeing a lot of noise and marketing activity, but the reality is I don't think the market has really changed for us. I think that the sort of Novartis for example has always been there. We made this point last quarter and I do want to be very strong about this that the level of competition we tend to see with these part time systems, which are all that, that's real out there is for budget and for space inside the hospital. It is very typical that we will come into the hospital and we will be talking about a full time radiosurgery program where somebody else is there saying you can really make do by upgrading your existing linac and offerings some part time radiosurgery. And that's the big decision that the hospital faces. Whenever they choose to go for a full body radiosurgery program, I cannot think of a single sight where we have seen them choose anything other than CyberKnife and that's really born out by the strength of the market. We tend to answer a lot more enquires and I said this many times to individuals. There are a lot more enquiries about this competitive overlap in the sort of investor relations world that we do in the marketplace. The reason for that is really demonstrated by the Dominic and Irvine data. We have there solid evidence that very few extracranial radiosurgery cases are ever treated on these part time units. And I think the market tends to understand that. The customer market tends to understand that. So the choices is about to be clear for them. So in terms of an overall trend I would say no significant difference other than fair amount of activity noise.

Alright. Great, thanks a lot.

We will go next Junaid Husain with Soleil Securities

Hi Junaid.

Hi Junaid.

Good afternoon gentlemen. Relative to the $54 million of contracts that you moved from backlog, when you scrubbed your backlog assumptions back in the fiscal second quarter. I guess the question becomes why you did not remove the $64 million of contracts back then or was there something different back then what we saw on the fiscal of third quarter.

Sure, first of all, let me just say, the cancellations occurred for several reasons, mostly due to the concerns around the uncertainty relating to regulatory changes, underwriting arrangements with hospitals. So this ambiguity affected customers and most importantly affected their business models, right. So this is why they cancelled their orders, now they've cancelled and at least until there is more clarity around that uncertainty, and what happened originally was there was supposed to be and this is what our regulatory advisors tell us. There was supposed to be a decision or at least an announcement made about November timeframe. So, some people when that decision was not made in November they cancelled other people waited to see, okay well that means they are going to make this announcement soon. Well now what we have heard is that the conclusion or the announcement won't be made until July and so the remaining customers who were sort of sitting on the sidelines waiting for that clarity didn’t get it and so now they have pulled back on their contracts.

And this announcement is relative to…

So Junaid it’s the CMS ruling, when the CMS propose changes to or updates in Medicare reimbursement. When they made their announcement last summer about the proposed changes, they mentioned in that they would be evaluating these under arrangements, which is where such a free standing center contracts with the hospital. The hospital bills Medicare patients who were treated and they pay the free standing center under contract. So, they said they would evaluate this. This wasn’t specifically to do with CyberKnife, so I think they were looking at the broader picture, a lot of imaging centers and imaging services are provided in this way and then everybody was really waiting for clarity. So we have some people that kind of reacted to that immediately and sort of changed that that this might lead a pull back or delayed and that was really the first impact that we saw, and not materialized really over the summer. And then people were expecting when they published the final rule change to have some more clarity and that's the one that happened in November. The reality was that CMS didn't really clarify the situation. They said they would have a lot of data, a lot of input from a lot of different people and that they are evaluating that over the course of time, and I think when people did not get the clarity that they were hoping for, then we did have another batch of people that revaluated their business plans.

Okay that's helpful, lets switch gears just a bit and talk about Alliance Imaging and I kind of appreciate you don't want to give us what the AFP was on the stocks that you sold to Alliance but can you tell me where those revs show up on the P&L. Are they showing up in the product line then?

That is correct.

Okay and the purchase price, does the purchase price represent the fair value of the instruments?

The purchase price technically represents the total value of the unit in the relationship. So an important component of that is, in fact the recurring revenue stream for us is the recurring stream that we will be receiving.

So this is not as if they are buying brand new CyberKnife's from us and their ownership is slightly different. What they're really doing is they're buying the revenue stream associated with those products because the products are already installed at hospital sites and there's a revenue share in place at that site. So a lot of the value for us, as Bob says was in the recurring revenues going forward and in fact that, just to give you an example of value of that, the net change in backlog for us was only about $4 million or so. It’s only simply because they signed up for very valuable long-term service arrangements at the same time.

Okay. And then, Bob on the gross margin front, so the instrument margins are lower than I was modeling and down sequentially. So and when I look over the last year or so the instrument gross margins seem to have been steadily coming down since their highest cost like the low 60s in early 2007, which of course begs a question, what's happening to pricing?

Well, I will just speak to the variables that can affect that. Certainly pricing is one of those. Although we have kept our pricing up in the US, internationally when we are working through distributors and if the product mix is growing towards distributors, they obviously have to have their cut, so that does affect the gross margin.

Understood. Then you know the shared ownership revs, I guess half or more of it going away and you know the shared ownership actually had pretty decent gross margins. So I guess how should we be thinking about gross margins now, I guess, just given the fact that the shared ownership revs are lower with a lower gross margin contribution?

Yeah, well, I think of the total gross margin the way to think about it is, we clearly are going to be and trying to improve that, based on what this quarter would show, because of the two items that we spoke about the shared ownership purchase, as well as the upgraded units in Japan, that did dampen the gross margin. So going forward we would expect to get them more to the historical levels and in the fifties.

So do not forget that with shared ownership program we do have some kind of committed costs associated with that. We have to provide service, we also have to provide a level of upgrade depending on the commit when we make when we sign the original agreement. So they are definitely cost associated with revenue we generate from those and I think what we are looking to do, at least from these particular contract systems is to tidy that up and put it into a more conventional service line.

All right good enough guys. Thank very much.

Thank you.

We ask you to please limit your question to one. We will go next [Eric Meyer] with UBS.

Good afternoon or good evening.

Hi Eric.

I can probably get it into a one question but its going to have a lot of ands in it. So on the backlog first thank you very much for providing more information and I think that's going to be helpful for our Stanford investors. Are you going to restate or provide the details going back further, given how long the window is from order to install, that is I think necessary for people to figure what they should be expecting in terms of revenues in the next year.

Yes I think what your asking is that we are not going to go back historically and restate all of this but we have shown Q2 see we have the breakdown there and if you go way back, I think you have got some non-contingent numbers, as well that have been public. But the way to think about this, because I think what you are really asking is, what's the risk profile of this backlog? And the way to think about it is the non-contingent very, very low, low risk. In fact just under half of this is actually already installed so we are going to be getting the services revenue on that. If you focus on the contingent piece, you know that we've actually pulled out a lot of the contracts out of here based on this quarter’s assessment. When we do that we look at each contract and we say, okay what the demonstrated progress towards contingency resolution is and what milestones have they have achieved. So we've really scraped this now what's left are contracts where the highest risk profile of the customer is probably this entrepreneurial free standing centre, which is about a third of this total contingent. So if you wanted to handicap this backlog, that would be a good way to look at it. But we won't go back and break this out on a quarterly basis.

And I think one of the reasons again for not doing that as Bob indicated is, when we’re giving you non-contingent backlog. We have such a low fallout rate from our non-contingent backlog that it really should reinforce our ability to build the model.

Okay and on the new orders, did those almost all go in to the contingent buck with that backlog and we calculate the changes second or third quarter and look at the new orders it looks like about $69 million of those $77 million of new orders is now in the contingent bucket of backlog is that right or is that in the supplement?

Not all the orders that we take, while if the order immediately goes into any backlog there is an element of it that we consider, that we have to observe for a little while to make sure that we even put into the contingent backlog. It’s rare I would say for orders to go for the dollar value of orders to go straight into non-contingent backlog. The exception to that I think would be international orders. Where we, I think with the numbers five systems from international customers that went straight into non-contingent in this quarter.

Okay I'll respect the request to get back in queue.

Thank you Eric.

And we have six minutes left for today's conference call. We'll take our follow-up question from Tycho Peterson with JPMorgan.

Hi. Thanks for taking the call. I am standing in for Tycho. Just a question about the treatment planning service, which you just mentioned that you were starting to launch last quarter. Can you give some clarity on how that's progressing?

Yes. We are doing well. We have our first customer lined up. And we are on the verge of initiating the treatment, sorry the service.

So you haven't booked any revenues from that, but it is --

None of the revenue in this quarter is from that service.

Okay. Great. Thank you.

Welcome.

We will go next to Amit Hazan with Oppenheimer.

Hi, first of all

Hi Amit.

Can you hear me.

Yes.

Yes.

First of all on your new orders of $76.6 million, when we calculate as you have asked us to do so in the past we do not arrive at this figure. So do you want to give us the break out of what component of that $76.6 million does not even go into your backlog number?

About 80% went into backlog.

Okay. So what is the point of giving us the other 20% at this point?

We are only showing you the level of sales activity. So I think we recognize that this is a very fast changing environment and I think the perspective from that is the greater clarity and the greater information we can give you the better it will be.

Yeah. Keep in mind that each time we go through this we do look at the customer, we look at their ability to follow through and so these orders are very important. The customer had spent a lot of time getting this contract, reviewing the contract, having their attorneys reviewed. So and they are signing this very important document. So they take it very seriously. Now when it comes into our house, then we do a review of it and we decide whether or not it should be included in backlog, but that does not mean that just because it's not in backlog now, it will not be in backlog later.

We'll go next to David Fondrie with Heartland Funds

Yes, Good afternoon.

Hi, David

I wonder, just thinking about your operating model here and specifically, sales were up and yet we still didn't cover operating expenses, which were relatively flat. As you go forward, are you going to grow into your operating expense, I mean, is that the plan to grow into operating expense, I suppose?

Yeah, thanks for the question. The reason that we weren't more profitable this quarter almost is because of the lower gross margin. That's really where, with the higher gross margin, that we will be able to leverage that and that will drop to the bottom-line. So profitability is clearly one of our priorities but, that said, we want to make sure we're not short changing the future of the company by not investing in things like R&D and things like marketing and sales as build the business. Keep in mind that we really do have to invest quite a bit ahead of when the revenue is recognized, because you build out your sales organization, you sign these contracts and you're not actually going to see the revenue until twelve to eighteen months later.

We'll go next to Larry Haimovitch with HMTC

Good afternoon, could you talk a little bit about your share buyback. You bought back, I think 1.7 million shares, what have you authorized for further buy back?

Yeah, so the existent buyback that is in place was a $25 million repurchase and so out of that we've purchased 18 million this quarter in total we purchased $21.6 million worth, which is 1.9 million shares.

So you bought another 200,000 shares, so far this quarter.

It is actually prior to the quarter.

And are you continuing to buy the stock now, because you do have authorization.

Well, technically we are in a closed period and…

Okay.

During a close period, which begin generally two week before the quarter ends or if there is even material inside information, we can't actually buy it on the open market. So, we have to wait until an open period which is, in this case, 48 hours after.

Bob what’s the long term investment in the balance sheet this quarter that appeared for the first time, $21 million?

So, okay, yes, that is a cash investment. It is auction rate security. So, we have got about $21.4 million in auction rate securities. These are the student loans backed. They are all AAA rated and so; we have been in the long-term portion. We could hold them to maturity. It doesn't really affect our liquidity and we did however take a temporary impairment charge $1.1 million to record the investment at their current value. So, we are going to keep them there until, basically until there is resolution on the entire auction rate security situation. But we don't have a short-term need for that cash given our strong financial balance sheet.

That concludes the question and answer session today. At this time, Dr. Euan Thompson, I will turn the conference back over to you for your additional or closing remarks.

Thank you. To conclusion, there are several key points to take that from our call today. Firstly, despite some short-term regulatory and economic charges to one segment of our US market, our sales pipeline remained strong and sale performance in Q3 was solid. Secondly, the CyberKnife remains the only dedicated full body radiosurgery devices available. Plans by other radiation technology manufacturers, the part time systems can have an impact on the fast growing radiosurgery market are not supported by independent marketing data or by our own experience in a sales environment. And finally clinical data continue to be acquired and published, supporting the use and efficacy of CyberKnife in treating tumors anywhere in the body. We expect to see sustained increases in the number of patients treated and expansion of use of the CyberKnife to treat new condition as clinical studies progress and experience continues to grow. Thank you to everybody for your time today. Wed look forward talking to you next time.

Thank you for your participation that concludes today's conference. You may now disconnect.