Good day ladies and gentlemen and welcome to the fourth quarter and fiscal year end 2009 Accuray Incorporated Earnings Call. (Operator Instructions). At this time, I would like to turn the call over to your host for today's conference Mr. Tom Rathjen, Vice President of Investor Relations. Please proceed, sir.

Hello and thank you for joining us this afternoon for Accuray's conference call for the fourth quarter and fiscal year 2009. Joining us today is Dr. Euan Thomson, Accuray's President and Chief Executive Officer, and Derek Bertocci, Accuray’s Senior Vice President and Chief Financial Officer. As we have done in past quarters, we will again be referring to backlog data, which is found in a PDF file on the Investor Relations page of the Accuray website at 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 Factors sections of our annual report on Form 10-K as updated from time to time by our quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. Now, I would like to turn the call over to our President and Chief Executive Officer, Dr. Euan Thomson. Euan?

Thank you, Tom. Thanks to everyone for joining [Technical Difficulty] year end fiscal 2009 conference call. I’ll start the call with a recap of some of the business highlights of the quarter and fiscal year. Next I will comment on the current state of the sales environment for the CyberKnife procedure growth. I will then turn the call over to Derek who will give a detailed review of our financial results and outlook. So to begin with, I'd like to provide a review of the financial highlights for the quarter and fiscal Year. During the quarter, Accuray's total revenue was $58.8 million, a 15% increase over the same period last year. Services revenue was $18.6 million in the fourth quarter, nearly one-third of total revenue and representing an increase of 58% over the same period last year. We continue to see growth in this recurring revenue stream as very positive, since it represents a steady predictable revenue flow from long-term contracts. For the full year fiscal 2009, total revenue was $233.6 million, an 11% year-over-year increase and in line with our annual guidance. We added 15 new CyberKnife Systems to backlog in the fourth quarter, representing a total value of $75 million, dozen of these were from the United States and eight were from international customers. We continue to see significant growth in international territories. Derek will provide a more detailed analysis of backlog in a few minutes. During the fourth quarter, 12 CyberKnife Systems were installed which is double the number of installations in the fourth quarter last year. The worldwide installed base is now 176 systems, 36 systems were installed in fiscal 2009 representing a 16% increase over the number of installations completed in the previous year, reconfirming the growing demand for full body radiosurgery treatment with the…

Thank you, Euan. This afternoon, I will review our financial operating results for the fourth quarter and fiscal year 2009. As Euan mentioned, total revenue for our fourth quarter was $58.8 million, a 15% increase over the fourth quarter last year and a 4% decrease sequentially. Accuray generated net income of $1.2 million for the quarter, or $0.02 per diluted share, compared to a net income of $191,000, or breakeven during the same period last year. For the full fiscal year, total revenue was $233.6 million, an 11% increase over last year. Net income for fiscal 2009 was $609,000, or $0.01 per diluted share, compared to net income of $5.4 million, or $0.09 per diluted share in fiscal 2008. Significantly impacting net income during fiscal 2009 were non-recurring charges of approximately $5.8 million, or $0.10 per share. These one-time expenses were associated with employee severance, inventory write-downs and other charges related to the workforce reduction earlier this year. Taking a closer look at fourth quarter revenue, $39.5 million were associated with CyberKnife product sales. Services revenue was $18.6 million or nearly 1/3 of total revenue for the quarter. Our services revenue is generally derived from long-term maintenance agreements of four or five year terms, and is ratably recognized over the length of the contract providing stability and predictability to our revenue stream as our installed base grows. Fiscal fourth quarter 2009 services revenue represents an increase of 57% year-over-year, demonstrating the growing importance of this recurring revenue stream. Shared ownership arrangements produced $455,000 of revenue during the fourth quarter, an anticipated decline from $2.2 million during the same period last year, following the buyout and recognition of sales revenue on 12 shared ownership units in fiscal 2008. At the end of the fourth quarter, Accuray had a total of two…

Thank you, Derek. The fourth quarter was highlighted by strong installations and continued sales momentum. Service revenue continued to expand providing a growing predictable stream of recurring revenue. Despite some continued economic uncertainty, we believe the clinical demand for the CyberKnife is robust and expanding. We will now be happy to take your questions.

(Operator Instructions). Our first question comes from the line of Erik Schneider with UBS. Please proceed.

Can you just go into a little more detail on the backlog change and it sounds like three systems were cancelled out of non-contingent, you downgraded your expectations for others. Did any of those downgrades actually change something from a non-contingent order to a contingent one? Do you have a sense of how far that line is going to move for where you're drawing the line between contingent and non-contingent when you make that change for next year?

I'll try and answer those in sequence. We did have some orders that were downgraded from non-contingent to contingent contracts in that group, and we did have some cancellations out of contingent backlog also. In terms of the evaluation of backlog, our goal is to provide an assessment of backlog that is able to give investors and analysts an accurate prediction, a more accurate prediction of what our business is doing and where it will go in the future.

Then, no one is going to provide contingent backlog information, will you be breaking out or can you directionally break out the proportion of the CyberKnife non-contingent backlog that's direct versus distributor. So, we have a sense of the margin distribution and the number of systems that will add to your future service revenue streams?

Well, we will be able to provide you guidance as to or insight as to what our actual shipments and installation are, but as far as our non-contingent orders, we are not going to be reporting that. We have not yet identified any way to give a reliable indicator of that early stage business, contingent business.

Our next question comes from the line of Junaid Husain with Soleil Securities. Please proceed.

Derek, just a few questions for you, some odds and ends. I think you had mentioned from a call, but I think I missed it. Could you tell us what the percentage of total sales representing your legacy sales were on the balance sheet? These were the Platinums and if you could split that up by instruments and software?

Yes. The total sales during the quarter that were related to Platinum was $12.6 million and $7.2 million of it was related to systems, the balance was related to service which was about $5.3 million.

The gross margins were at times soft relative to my model and it was down sequentially. Can you tell me what was going on there?

Well, we do have changes in mix from quarter-to-quarter in terms of both direct and distribution and in different regions of the world. If you look at our overhead, our gross margin rates over the last year and two, we've had periods where it has fluctuated up and down. This was a quarter where we just had a mixture of events where it was down a bit from our average.

Our next question comes from the line of Mr. Peter Bye with Jefferies & Company. Please proceed. Peter Bye - Jefferies & Company: Just a couple of questions; one, on the dropout from the non-contingent, can you give us any sense about, are these very old orders, are they newer orders? Just sort of the timing of that and can you give us the kind of approximation of the age of the backlog in terms of non-contingent?

The backlog that came out of non-contingent was not especially old, and some of it was for a variety of factors. I might add that one of the customers that canceled their non-contingent order did so as a result of some internal issues in their group. They've already fixed a number of those issues and have placed a new order with us which at this point we're showing as a contingent order. So, we’d see these as somewhat unusual and not representative of the ongoing part of our business. Peter Bye - Jefferies & Company: Okay. I guess still on an apples-to-apples basis, just trying to back out the legacy, the Platinum revenue contribution and doing apples-to-apples, I mean you're still expecting, I guess net installs or net revenue generating CyberKnife Systems to increase next year or fit over this year I guess, fiscal '10?

We're already into it, I guess.

If you look at the overall guidance of 215 to 230, and then the expectation that the amount of Platinum revenue that we'll rollout of $23 million, that would leave an amount of around the $200 million mark plus or minus and that's significantly up from the revenue of $174 million last year exclusive of Platinum and the $152 million the year before exclusive of Platinum and the sell out of some bulk sales of shared ownership systems. So, if you look across those three periods, it shows a nice up trend of the business excluding those unusual, the Platinum and the shared ownership systems. Peter Bye - Jefferies & Company: Can you give us the breakdown in '08 on legacy from systems and service? I got the $34 million, right, that's what you said from legacy in '08?

I don't have that breakdown right handy. I will see if I can get that for you. Peter Bye - Jefferies & Company: Maybe to follow-up on the margin, I appreciate the vagaries of mix and shift and that sort of stuff, but it is a fair amount, is it simply that or I guess what more specifically, obviously things that happen quarter-to-quarter and we do try and tend to look at gross margin on a sort of trailing nine-month basis as opposed to a three-month type of thing or 12 months, but can you speak to any of the specific vagaries in the quarter beyond mix?

It was really an issue of mix and customer differences across all of our regions. There wasn't some specific overarching theme behind it. Peter Bye - Jefferies & Company: When you're talking about maybe tightening up the standards of what the non-contingent for 2010, can you give us an example of what makes the cut or are you in the process of doing that now or where are you in that process? Will we see it in the K?

No. we probably won't see it in the K. What we're trying to do is look at our information and try and identify the characteristics that are most accurate in predicting orders that will be successful. It will not change the total number of orders we have. It will merely be a shift from one category to another. Peter Bye - Jefferies & Company: We're only going to be seeing one category right?

Correct. Our goal has been to provide information that is reliable and best indicates what we know today as to what will happen in the future. Peter Bye - Jefferies & Company: Okay. I guess what we like to see is to have revenue, reported revenue at some way, at least directionally whether it's a trailing 12 months or five quarters or three quarters approximate backlog appreciation, depreciation. I guess, that's what we're trying to get to. Is that what you're trying to get to as well? Like an R-squared between the backlog and the growth?

I don't think I would put it quite that way, but again, we're trying to give you a picture of the backlog that's going to give you the best answer we know of what is going to be reflective of the future expectations that someone could have for the company. Peter Bye - Jefferies & Company: Just one follow-up on the operating expenses. I guess, you made a comment on gross margin. Some of the OpEx, we're certain that obviously it was pretty lien there I guess relatively speaking on that. It's just a function of the full cost savings from the restructuring going through. Is that kind of leanness we’ll see in ’10 or?

We would say that we are expecting to be slightly above that level through ‘10, but we are seeing benefit of the workforce reduction plus we are trying. There are differences from quarter-to-quarter when we have tradeshows or meetings. The fourth quarter happens to be a quarter when there aren't any of those big events. So it's a little bit lighter just by its own nature, but you should expect that in fiscal ‘10, we would do our best to try and keep our expenses down.

Our next question comes from the line of Tycho Peterson with JPMorgan. Please proceed.

Hi, this is Sung Ji sitting in for Tycho. Thanks for taking the questions. Would you mind breaking out your non-recurring charges for the fourth quarter from the full year, $5.8 million and also between COGS and operating expenses?

You mean which of those non-recurring charges occurred in Q4?

Right.

No, there weren't any in Q4.

Then for 2010, I think you had previously mentioned around $8.7 million in annualized savings. Is it something you continue to expect?

We are expecting savings in that ballpark, yes.

Then lastly, in terms of international opportunities, could you give us some color as to kind of where you expect to see continued strength kind of heading into 2010?

Well, we've historically been seeing some strength in Europe. I think as we said, we believe that's because of the strength in clinical profile of the CyberKnife, and we would anticipate that that would continue to be strong for us.

Sung Ji, I just wanted to make sure you had one point perhaps clear; the expense reduction that we anticipated is from our levels before Q4. I don't want you to see those as reductions from that Q4 number.

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

Could you just maybe talk about the 2010 revenue guidance and any variables you've factored into that? Obviously, there's a lot that's happened in the last year, and I mean not specifically, but just directionally can you talk about how you looked at the outlook for hospital spending going forward here the next year, the general economy, what's happening OUS and just in general kind of maybe just hit on some of the key variables and at least directionally kind of talk about how you thought about those as you put together that guidance range?

Well, I'll start and then Derek can chip in, but I'll start with revenue guidance just to look at the shipment schedule. So we go through quarter-by-quarter, we go through everything we have in backlog, the full range of backlog. We discuss in detail with the sales people. Increasingly, we have direct points of contact with the hospitals themselves and we get higher and higher quality data I would say all the time about when these installations will take place. Then, we fill out what amounts to a fulfillment schedule. Then, we do a revenue analysis of associated with each of those shipments and we build it up. So we're basically building it from the ground up.

Maybe just to clarify on that. So as you guys look forward here over the next year, you're giving this guidance. I guess directionally, do you feel that more confident in those schedules and kind of how, I mean obviously there's some level of subjectivity on those timing, the timing of each of those individual shipments. How are you guys kind of taking into account where we are today versus where we were a year ago, six months ago as you continue to update your guidance for '09? I guess, I'm just looking for some general direction in terms of how you think the markets?

Yes. Overall, I'd say looking back to last year, I think probably we had a higher quality, high quality data than ever before about the timing of installed. So as we look back and analyze the sort of the wins and losses, the ones we were right on and the ones we were not right on, we gain information from that too and we apply that knowledge to going forward. The other thing that's happened during this year is that we've invested fairly heavily in ways of working with hospitals to shorten their time between contract and installation. So we have now teams of people, more extensive teams of people than we had before. We have more contact points with the hospital. So not just for example, say the lead physicians who are responsible for bringing the CyberKnife in but we maintain and contact with the operations group at the hospital, with the facilities group at the hospital and we work with sometimes directly with the contractors themselves who are carrying out the work. So we have in doing that in trying to bring forward, bring down installation times, we actually also have I guess higher quality data all the time about the specific timing of installations. So I think we have as time has gone on moving through last year and into this year, we've certainly I would say gain confidence in our installation timing.

Just one more point of clarification on the guidance then, do you expect the mix of business between US and OUS to be relatively similar to this year, maybe a little bit more skewed toward the OUS side versus what it has been this year and in the past? How should we think about that?

Yes, I think the OUS business, the outside US business as a proportion is likely to grow as we go forward. Now we may see some changes in that towards the end of the year if sort of US market start to open up, but I think we've actually maintained pretty good sales momentum in the US but it hasn't been matched by the excellent performance we've had outside of the United States.

Mark, it's more of an issue that our OUS business is growing more quickly than our US business, not really a problem with the US business.

Finally, just one more thing, the treatment planning service, you talked about 20% of your sites here in the US have picked up that service here. Can you remind us how that is currently impacting the income statement and how we should look at that as it ramps up here?

Yes, there's very little impact so far. Stage one was obviously to launch this. You can think of it as a new product, a new service, talking to customers, finding out what their expectations and needs are. They then sign up to a contract for us to deliver the plans. The number of plans in the contract varies from site to site. We're kind of at the stage where we've signed contracts but the number of plans being delivered is not at a point where it's going to be impacting our P&L.

In terms of the cost side though, I'd assume there's some infrastructure that you guys have already built up there in terms of just hiring physicists, so is there a little bit of leverage there or is it just not significant?

There is some leverage there. We've balanced the cost structure with the revenues, and so as we grow the business, we would expect that it will contribute profits and gross profits to the bottom line, but we're at an early stage in terms of the total development of it. So at this point, it is still not a significant driver of revenue at the bottom line.

One of the important points to remember as well is this is not just about the revenue we generate from the service, although that's obviously important, it's also about solving problems for hospitals and taking away one barrier to buying a CyberKnife that of the infrastructure required to run it.

Our next question comes from the [Robert Manning], individual investor. Please proceed.

Could you talk at all about what you see is the impact of this favorable Medicare decision in Florida? I know that they have reimbursed prostate in Florida in the past, but that was always a little bit up in question and of course there was a lot of publicity about this. Do you see this impacting the business in Florida sufficiently that may help you sell more systems there?

I think talking to our customers in Florida, clearly they were very concerned about the outcome of that decision process and they were disconcerted when the initial decision was made to hold back from reimbursing prostate. So I think those customers if I contact, where they are sort of much relieved that this is now freed up, and I think they do see this is a very important part of their business. Geographically of course, look at the patient demographics, Florida has been a very important state, or prostate has been very important to the State of Florida and those customers in that state. So I think it is certainly very, very important. The other thing that I think is significant to take from this is, is this the second movement in the same direction, Palmetto being the first, and then the Florida provider being the second, and I think that that's a good trend. Of course, it's not necessarily a firm indicator of what will happen in the future, but it is a good trend and it shows that when people get behind it, then they can make a good enough case for these service providers to support the treatment.

Let me ask a follow-up. If you could quantify to the extent you can the effects of the hospital financial stresses on your business. Obviously that's part of the reason for this, obviously, I assume that's part of the reason for the slow installations, probably part of the reason for the backlog dropping off, and I'm wondering if there's any price pressure associated with this? I know it's hard to be too precise, but what color can you give us in trying to make a judgment about how much better things would be if it weren't for this extraordinary financial stress?

Well, I’ll look that in a couple of ways. I think certainly the indication we've given about Q1, I wouldn't say is related to any macroeconomic indicator. It's really a shipment timing thing, and I think if you look back over the installations we've made over prior Q1's, Q1 has historically been slow for us. Last year, I think there were five installations only and in the year before that, there were five as well. So we've noticed a definite Q1 effect and this year, we've pinned it down mainly to people vacation schedules. It's harder to get people to accelerate. It's harder to get their attention on a particular project. A lot of people really want to get summer out of the way and then they ramp up after that. So it's not something which we feel will affect the year and hence the guidance we've given for the year. We have installation schedules, obviously that go way beyond Q1, but it's sort of a perfect storm of activity inside Q1 itself. I don't think that answers all of your questions.

I wasn't thinking so much about Q1, but just, I mean it seems to be looking at this thing from afar that given everything that's going on in the hospital environment, I mean hospitals don't have money for anything and yet your orders have been pretty good. Obviously, offset by some of these backlog reductions and I'm trying to get an idea of normalized taking that stress out of it, how much better would your business be and I know you can't be too precise, but I'm just interested in any color you can give.

Yes, I think, overall we've held our own pretty well in the United States. As Derek indicated just now, I think the United States is not that we're not making progress there despite the economic conditions which I think is remarkably different from a lot of our peers. What we having out to our benefit is the strong return on investment that we can demonstrate with the CyberKnife and that takes away a lot of people's concerns about making an investment in this economic environment. I think overall the US market for us has remained pretty solid. What I'd say is in the US we have to work harder at taking away people's concerns about the risk associated with making investment and harder at demonstrating and proving the definitive return on investment. So, overall, I would say we apply more extensive resources and spend more time with customers to close orders in the United States, but I think we've been pretty successful at maintaining sales momentum there. That's not a pressure we've necessarily seen outside of the United States, where people are more concerned about clinical value and resource savings. I think that's one of the reasons for that accelerated momentum outside of the US.

Are you seeing price pressures or are you having the cut price I guess?

Bob, I would say that our pricing has been in the same league as it's been for certainly the last year. I don't see that it's significantly different than it's been, but just to amplify on Euan's prior comment, one of the thing is worth keeping in mind is the significant increase in the number of procedures done. Ultimately, it's patients who get treated that drive demand for the CyberKnife and we've been having some pretty good growth in the number of procedures done which ultimately demands more CyberKnifes.

Do you have any numbers on total procedures? You gave percentage increases in lung and prostate, but nothing that can help us figure out what total procedures were say year-over-year this quarter versus a year ago?

Yes. I didn't mention the total number and I didn't have number at hand for last year, but I did mention that 25% of the patients ever treated on the CyberKnife were treated during last year which indicates the total growth I think.

Our final question comes from the line of (inaudible). Please proceed.

Just on liver, pancreatic and spine, did you happen to have any numbers on how that's been growing?

I don't have those broken out data at hand, but I think generally the overall trends for extracranial treatments were strong, for liver and pancreas overall I believe stronger than spine, but generally we're seeing good trends for all applications.

Also, is it a fact that Varian is being acquired by Agilent?

I don't think we can comment on any.

That's the other part of Varian. It's not the Varian Medical. The test and information equipment division I think.

Yes. That’s correct.

Also, are there other ablation opportunities you're looking at aside from just tumor destruction, there are other things in the future?

We have our collaboration with CyberHeart, which is looking at treatment of atrial fibrillation with radiosurgery using the CyberKnife, and that's interesting. I think outside of that, there's always work intracranially on sort of psychosurgical disorders and other functional disease, but there are definitely non-cancer applications with the CyberKnife being explored I think in many fronts.

How about proton beam?

What aspect of proton beam?

Well, there was some news from a year ago that somebody was examining using some of your equipment to install or to administer proton beam.

I don't think that would be feasible to use the CyberKnife to generate proton beam. It's really based on expanded acceleration technology, which is an X-ray device. I think people have looked at using protons for some radiosurgery procedures, but I would say that's still not the large part of the proton business, which all the proton facilities clinical workload the ones which have been installed.

Also the ability to use a pre-existing vault for your equipment, what sort of effect do you think that should have? I mean, obviously it'll be positive but how could that accelerate sales? Do you have an idea?

Well I think it becomes another tool in our armamentarium, it's really a question of taking away obstacles to purchase, as well as focusing on the upside of owning a CyberKnife. I think that relates to the point I was making just now about the treatment planning service. We found in the sales environment that often resources, particularly the accessibility, the availability of medical physics support has been an obstacle to people making the decision; likewise, the construction that's necessary to modify a vault, or in some cases to build a vault for the CyberKnife has been an obstruction. So I think we see it as just one more tool in the discussion with facilities to try and get them over the line to buy CyberKnife and to potentially accelerate the time between installation and contract.

Do you have any idea of what the total market might be for your equipment? There is some kind of a ballpark figure and then how far have you penetrated that market?

Well, we think that the penetration that we have achieved so far with 176 systems around the world is really a small, small portion of what might be eventually achieved over the long run. It will be driven by the clinical data and patient and doctor acceptance. So, it's a long-term increase that we would be looking at.

I'll now turn the call over to Dr. Thomson for closing remarks.

Thank you. So the fourth quarter was highlighted by strong CyberKnife installations and continued sales momentum. Despite the ongoing continued economic uncertainty, we believe the clinical demand for the CyberKnife is robust and expanding. I'd like to take a moment and thank all of Accuray's dedicated employees for their tremendous contributions as we make the world better for cancer patients around the world. Thank you for joining us today and we look forward to speaking to you on the next call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and everyone have a great day.