Accuray Incorporated (ARAY) Morgan Stanley Global Healthcare Conference September 10, 2012 11:10 a.m. ET Executives Euan Thomson - President & Chief Executive Officer Analysts Steve Beuchaw - Morgan Stanley Presentation Steve Beuchaw - Morgan Stanley
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Euan ThomsonIt’s a good question. Thanks, Steve. I think we have a little debate internally about how much to sort of discuss at the earnings call about the ASTRO release. And I think when we analyzed it, it has a significant impact on our financial profile as we go into this year that it was right and proper of us to do basically a full disclosure on all the financial impacts. And I will talk through that a little bit. So on the cost side it’s clear, we have rising R&D costs, we have rising sale and marketing expense. And we wanted to give investors some clarity around the fact that we don’t expect those to stay that high sort of indefinitely. So there is actually an end point and it is this ASTRO. So that mattered to us a lot. The other thing is that we are seeing some short term impact on revenue in this quarter. Certain customers are aware that something is coming. Very very few customers actually know that details of the technology themselves. But people know that something is brewing and there are certain customers out there who would have been taking installation this quarter. Who were saying to us, it would really be much more comfortable, we know we are going to have this technology for ten years so we will be much more comfortable knowing that we are going to get everything we want from it, and therefore we would like to see what you’re releasing at ASTRO before we take our shipment. So with the prospect of a -- and it’s not a major impact in terms of the year but in terms of this quarter, some headwinds in terms of getting products, if at all, following by or coupled with the increasing expenses and so on. Then we felt it was best to give just complete clarity over what is going on. You know the good news is that I think as we exited there as we pointed out, we already have solid bookings even without the rollout of these new technologies. We had a third quarter of integration. At the beginning of Q1 last year we had a book to bill ratio that was predictably low as we integrated the two sales forces, down at about 0.7. But after that we rapidly recovered and we have been running sort of a double-digit book to bill ration and averaging the last three quarters at 1.12 and exiting the year at 1.15.
So we have very solid indicators already of future growth in the product revenue line. And it’s not a launch that’s done through an act of desperation. This is a good solid launch that supplements our existing momentum in growing our product revenue line.Steve Beuchaw - Morgan Stanley Well, you have introduced quite a few topics there. Let's spend a little bit more time on what's been probably the highest profile topic for investors for the company over the last year, and that’s margins and the evolution of margins. So I think somewhere we are a little bit surprised by the margins in the quarter and we have more spending coming ahead at ASTRO. Can you help people understand though, the trajectory of margins over the course of the year? How the spending that’s happening around ASTRO is somewhat discreet in nature. And then help people think about the longer term trajectory, because you have been very clear about the importance of the  system hurdle. We are still thinking about 10% to 15% margin objective there and we are still thinking about profitability by the end of fiscal ’13. Can you help us walk down that path? Euan Thomson Yeah. The easiest way to answer that is just talking about the individual element and I will give some overall, sort of summary at the end of it. So if you think about the drivers for our profitability, as we entered the year the big question mark was really of the service? And going back beyond that, Accuray had run what I think was an excellent service business with very solid revenue. And if you compare even the topline performance from the service business for the size of our installation versus the other players in the industry, you get a very very positive ratio. So we definitely have always maximized the value of our installed base in terms of service revenue. Read the rest of this transcript for free on seekingalpha.com