Varian Medical Systems Inc
Q2 2010 Earnings Call Transcript

Published: 29 Apr 2010

[Operator:]

Good evening ladies and gentlemen, and welcome to the quarter two, 2010 Varian Medical System’s earning conference call. My name is Madeska and I would be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Spencer Sias, Vice President of Investor Relations and Corporate Communications; please proceed.

[Spencer Sias:]

Good afternoon and welcome to Varian Medical Systems conference call for the second quarter of fiscal year 2010. With me are Tim Guertin, President and Chief Executive Officer; Elisha Finney, CFO; and Tai Chen, our Corporate Controller. Tim and Elisha will summarize our results and we’ll take your questions following the presentation. To simplify our discussion, unless otherwise stated, all references to the quarter or year are fiscal quarters and fiscal years. Quarterly comparisons are for the second quarter of fiscal 2010 versus the second quarter of fiscal 2009. All results are for continuing operations, which exclude the sale of the research instruments portion at XL. Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, could, will, believe, opportunity, can, continue, possible, optimistic, hope, expect, and recover, and similar expressions are intended to identify those statements which represent our current judgment on future performance or other future matters. While we believe them to be reasonable based on information currently available to us, these statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the important risks relating to our business are described in our second quarter earnings release and in our filings with the SEC. We assume no obligation to update or revise the forward-looking statements in this presentation and discussion, because of new information, future events or otherwise. And now, here is Tim.

[Timothy Guertin:]

Good afternoon and welcome. A lot was happened since we talked about first quarter results, and I am pleased to say that we had a very good second quarter. To quickly summarize results, we reported 6% growth in revenues and 11% gain in operating earnings, and a 14% increase in earnings per share from continuing operations. I am especially pleased to report that net orders for the company grew 13% on the strength of the international business. Our quarter ending backlog grew 6%. I’ll now focus on operational highlights. Oncology system of the second quarter net orders grew by 10% to $476 million, with a 34% increase in international markets, and the 12% decline in North America. International markets accounted for 58% of oncology orders during the quarter, and these markets have now comprised the majority of oncology orders for four consecutive quarters. Net orders arose by about 70% in Asia, driven primarily by Japan, where we benefited from a government stimulus package. Net orders arose by 15% in Europe and order activity in Australia drove very strong growth than the rest of the world. North American orders declined as a result of smaller hospital capital equipment budgets that were established in response to uncertainty related to healthcare reform and recession. For the domestic market to recover, we will need to see more hospitals move into new more normal budget cycles. Our outlook for the North American Market remains cautious. We hope to have a more optimistic view about this market in coming quarters. Oncology solid net orders growth was also driven by our service business, as well as demand for our new accelerators. We saw increased demand for unique or new accelerator for fast affordable image guided treatments in international clinics and encouraging early interest in our new True Beam platform for advanced image guided radiotherapy and radiosurgery. Many of you participated in our official unveiling of the True Beam in New York two weeks ago. It was a highly successful event, and I am pleased to report that customer interest in this new platform is tremendous. During the quarter we booked revenue on two True Beam systems and recorded more than 15 orders for these systems, including some backlog conversions. We believe True Beam will be a real game changer in the fight against cancer, and we expect it to stimulate stronger demand for our surgical products, as well as fast replacement of older systems in our installed base, which now stands at more than 5,900 Varian machines. We believe that this is quite simply the most advanced radiotherapy, radiosurgery system in the world. Designed from the ground up, it offers an un-precedent combination of speed, precision, imaging capability, versatility and ease of use. It is a clinical tool that leading centers can use to develop new protocols, which expand the application and effectiveness of non-invasive radiotherapy and radiosurgery in the fight against cancer and other medical conditions. To sight just a few of the more significant features, True Beam offers up to a 2,400 monitor unit per minute dose rate, that can more than double treatment speed, and up to five fold reduction in the number of steps needed for imaging positioning and treating patients. Higher quality 3-D cone beam CT images that can be generated in under a minute, with 25% less X-ray dose to the patients. The ability to induce the patient in real time with every breath during the treatment. The world’s fast first gated RapidArc capability, where clinicians can compensate for respiratory motion, even while the guarantee is rotating around the patient, 7 millimeter precision through completely inaugurated imaging and delivery components, up to 5 x-ray energy levels and up to eight electron energy levels from more tailored dose delivery, automatic accuracy checks every 10 milliseconds and a new simplified user interface with additional safety enhancements. Reduce capabilities, as we believe True Beam has the potential to make a big difference in lung and liver treatments when speed and better motion management technologies required to improve precision. As an example, this platform can delivery an 18 gray gated RapidArc lung treatment that’s nine times higher than a conventional RapidArc treatment in just seven minutes, nothing that we know off comes close to this capability. The True Beam automation we made it possible to deliver conventional five filed non-RapidArc IMRT treatment for the prostate or head and neck in a little over two minutes. With RapidArc, True Beam can deliver a prostate IMRT treatment in a little over a minute. As Dow Wilson says, this thing is Ferrari fast. Sufficed to say, we are all very excited to see what new treatments are going to be developed with this platform. Over the next several years we expect that this system could grow to between 30% and 50% of our new machine orders. Initial customers for this platform will include early adopters and clinical pioneers in University, Hospitals, as well as international centers that need higher throughput. They will include centers that want the versatility to offer patients both radiotherapy and radiosurgery. For all of these customers True Beam offers the value of speed, that can enable them to generate higher throughput, lower cost per patient, improve patient comfort and reduce staff overtime, and shorten the patient waiting list. It also offers marketing value and health centers attract patients and recruit top clinicians and staff. Preparing this platform tops a broad line of clinical products for radiotherapy and radiosurgery, starting with Unique and going up to Clinac IX, to Trilogy, to Novalis Tx and finally to True Beam, and True Beam STX. I am also pleased to say that the True Beam product development lead to a significant enhancement to our Clinac IX and Trilogy accelerators, which can now be upgraded, for example with RapidArc and other advanced motion management capabilities. This was also announced two weeks ago during the True Beam event. Oncology has significantly refreshed its product line since 2004, with the introduction of Clinac IX, Trilogy, Novalis Tx, Unique and now True Beam. We have added RapidArc, the onboard imager and the new HT 120 and LCB shaper for high-resolution radiosurgery, and we are continually enhancing our software for true complaining and information management. With this line up, oncology has given itself an excellent set of platforms for growth. Turning to our X-ray products business, net orders for the second quarter were a record $1.5 million, up a remarkable 52%, versus the 17% decline that we saw in the year ago quarter, with solid gains in both tubes and in flat image detectors. We believe we are seeing signs of recovery in the global imaging industry. Net orders for X-ray tubes increased by about 30%, as imaging equipment manufactures around the globe began returning to more normal ordering patterns. Net orders for our panel products rose by about 80%. We are enjoying very strong demand for our new line of radiographic panels and renewed interest in our dynamic panels. Our customers are commercializing new digital imaging systems and converting existing CR at home based imaging installation to digital radiography. In our other business category, including our SIP, Security and Inspection Products business, our particle therapy business and our Gimson Technology Center, combined net orders for the quarter declined $9 million or 42% to $12 million. In our particle therapy business we have resubmitted a bid in response to a revised public tender to a Skandion Kliniken in Sweden, with our photon therapy systems, and we continue to pursue other photon center projects that are in various stages of development. SIP net orders declined as the business experienced some timing delays in large orders. Now I’ll turn it over to Elisha for a review of the numbers, and then come back to you with our outlook for the third quarter and the full fiscal year of 2010. Elisha.

[Elisha Finney:]

Thanks Tim, and hello everyone. As usual I will walk you through the income statement, as well as cover a few balance sheet items. Second quarter revenues of $586 million increased 6%. Oncology systems posted an increase of 4%, X-ray products posted a gain of 19%, and revenues from businesses under the other category decreased by $4 million or 19%. As a result of the weaker dollar, on a constant currency basis revenues grew 3% and net orders increased 10%. The second quarter gross margin for the company was even with the year ago quarter at 43.4%, as the gain in oncology systems was offset by decline in our other businesses. Oncology’s gross margin increased one point, to 45.2%, due primarily to higher mix of software and service revenue, and improved quality cost. X-ray products gross margin fell two points to 38.5%, due primarily to product mix in both our tube and panel business, and start up costs for our new radiographic panel. Second quarter SG&A expenses were $80 million or 14% of revenues, a one point improvement from the year ago quarter as a result of ongoing cost controls. Second quarter R&D expenses were $39 million or 7% of revenue, equal to the year ago quarter. Moving down the income statement, second quarter operating earnings rose 11%, to $136 million or 23% of revenues, up one point from the year ago quarter; and for the first half, operating earnings were up 15%. Depreciation and amortization totaled $12 million for the quarter. Net interest expense for the quarter was $300,000. The effective tax rate was 32.6% for the quarter, down about two points from the year ago quarter due largely to a shift in the geographic mix of our earnings. For the first half, the tax rate was 33%, roughly equal to the year ago period. For fiscal year 2010, we continue to estimate that the tax rate will be 31% to 32%. However, due to a timing of discrete tax items, we estimate that our third quarter tax rate will be around 35%. Fully diluted shares outstanding were approximately $124 million at the end of the quarter. Diluted earnings per share from continuing operations rose 14% to $0.73. Turning now to the balance sheet, we ended the quarter with cash and cash equivalents of $655 million, debt of $30 million, and stockholders equity of $1.4 billion. DSO or day sales outstanding for the quarter was an unusually low 76 days, an improvement of 11 days from the year ago quarter due to strong collection. Second quarter cash flow from operations was $94 million, with almost all of it coming from net earnings. Primary uses of cash were $72 million to repurchase 1.5 million shares of stock under our repurchase program, and $12 million for capital expenditure. Now, I’m going to turn it back over to Tim for the outlook.

[Timothy Guertin:]

Thanks Elisha. We now believe that revenues for fiscal year 2010 can grow by about 6% to 7% over fiscal 2009, and that net earnings per diluted share for the fiscal year could be in the range of $2.82 to $2.88. We believe that for the third quarter fiscal year 2010, revenues could increase by about 13% over the prior year period. Third quarter operating earnings should increase by about 16% to 17%, but including our higher quarterly tax rate, net earnings per diluted share are expected to be in the range of $0.60 to $0.63. Thanks for your attention, and we are now ready for your questions.

[Operator:]

(Operator Instructions) Your first question comes from Amit Bhalla - Citigroup.

[Amit Bhalla:]

I wanted to start, first with a question on the overseas oncology business, and hoping you can give us with some currency growth rates for Europe, Asia, and the rest of the world, and if you go in to a little bit more detail there, because you said that the Japan government stimulus provided a boost. You talked about Australia, but you didn’t mention China, where there are typically some quota limits. So I will really like to get some color there on the sustainability and strength in the quarter. Thanks.

[Elisha Finney:]

Yes, let me go through and address the constant currency growth rate first Amit. So in Europe, the growth in dollars was in the mid teens. On a constant currency basis it was in high single digit 8% or 9%. These numbers are for oncology only. In the Far East, we grew approximately 70%, and really very little effects from currency. It was close to almost 70% in constant currency as well. Then in the rest of the world, which is primarily Australia, again it grew about 70%, a little more than 40% in constant currency.

[Timothy Guertin:]

So, speaking to what’s happening, yes and Japan has had a very strong business as I said in the past. This happens periodically where a country will start ordering a lot more equipment as it tries to beef up its programs, and then those programs end, and then other countries tend to join in. In the long run, we need more North American growth. We need North America to come back, because we can’t expect Japan to keep this up forever, although I would certainly love it if they did. I think we can do better in China. I think we did fine in China. We certainly grew in China, but I think we can grow share in China, and we are not really doing that. So I think that we have an opportunity in China to do even better. I think we are very strong in most countries. Certainly extremely strong in Australia, which has continued to be a surprisingly good location for many quarters over the last few years, and we had very strong in Belgium, Spain, and India as well. So this is not a one trick pony. We are seeing a lot of strong performance in a lot of locations. I think True Beam is going to help us. Also Korea, we saw some good growth. So I think True Beam will help us going forward. We are going to have to get approval to sell True Beam in all the locations where people are going to want it, and so that will cause strong potential growth, especially I think in next year as we get those approvals. So we have lots of growth potential internationally, but I still want the US market to show some strength. The US market has resisted showing strength, and I’m hoping as those budgets that people set last year graduate this year and we see the new budgets come up for next year, that they are going to show some additional strength. We’ve had tremendous amount of interest from people. We’ve had lots and lots of customer visits, and of course lately since the announcement of True Beam and little bit before that, people have come though to try and understand where we are taking our products, and whenever we show them True Beam they get very, very excited and all of that, whether they are a North American customer or whether they are an international customer, and all of that leads to believe that we are on the right track.

[Amit Bhalla:]

Tim just my follow up question is on the US market. You did say there was 15 True Beam orders in the quarter. Were most of those US? Then for the US market, is it just simply the fact that shorter cycle products are showing up in orders such as X-ray, but long cycle products like linear accelerators are just going to take a couple more quarters, is it as simple as that?

[Timothy Guertin:]

Well, I think we’ve said in the past that imaging products tend to see recession sooner and then tend to come out of recessions sooner, and I think that what’s your seeing from the imaging side. For oncology, because a lot of our imaging business is OEM business, we are selling to manufactures who are including our products in their businesses. So when they see increased growth potential, they pass those orders on to us. So sometimes it’s a little opaque for us to see what their end markets are like, but clearly they are showing some strength, and that’s emboldening them to give us larger orders. For oncology, we tend to be slow going in to recessions because capital budgets tend to stick around longer, and so we were slow to go in, and we’ll be slow to come out as it takes a while for people to do that. We now know -- I guess we’ll no longer call it healthcare reform, we’ll call it insurance reform. We know now what insurance reform looks like, and so we are continuing to look at unemployment rates. I think hospitals are doing that. They are calculating how they should manage through this, but I would say that we are seeing lots and lots of customers who are showing lots of interest, and I think pressure is building up in the North American market for people to turn the situation around; at least that’s what we are looking for.

[Amit Bhalla:]

The True Beam question, just what was the split.

[Timothy Guertin:]

True Beam is mostly North America. I don’t have a split for you, but it's mostly a North American things, and it's mostly new systems, but there is a few backlog conversions.

[Operator:]

Your next question comes from Vincent Ricci - Wells Fargo Securities.

[Vincent Ricci:]

First question is on SG&A, it's actually down year-over-year in terms of spend, and you talked about when the recession first hit, about trying to control spending and not wanting to turn the knobs on some unappealing valves. I’m wondering if this is more in that direction or is this still just kind of holding back on spending.

[Elisha Finney:]

What’s happening is that we are stating to anniversary. When we put some pretty stringent cost controls in place about a year ago, until it gets tougher and tougher to keep improving on top of that, I will say for the year as a percentage, you will see that based on our guidance, our EBIT margin should go up by about a point, and a vast majority of that is going to come from leveraging our SG&A expenses. So we are still managing to grow the SG&A expenses slower than the top line.

[Vincent Ricci:]

And then in terms of also in operating expenses and R&D, we did talk about R&D probably drifting up overtime with care reform and what not. With the True Beam rolling out, how much of that can you see as a leverage point or are there other projects in the pipeline that will kind of fill that hole.

[Elisha Finney:]

We have got a pipeline that will take us forever, and an unlimited number of dollars if we were to do everything. So I would say in terms of R&D it may go up slightly as a percentage of sales, but should still be somewhere close to 7% annual sale. So that means it's going up in absolute dollars and we have tons of projects to fill that up, but it will stay relatively flat as a percentage of sale, maybe a couple of days that points, 20,30 between top-up.

[Vincent Ricci:]

Just on last quick question; in terms of Asia and the Unique system, obviously that’s a lower price point product for you. Can you talk to us qualitatively about volume what you are seeing in Asia, as that wouldn’t be a great apples-to-apples comparison with the higher ASP trilogies and what not.

[Timothy Guertin:]

I don’t have numbers for you today, but we are continuously getting interest in Europe as well as in Asia, and we announced this product and are still getting clearance in a lot of markets. So there are some markets we are not yet able take orders even though we have interest. So I would expect that over the next few months you’ll see those clearances happen, and I think probably I’ll just report on that in future calls and let you know how that’s going, but the funnel looks good for Unique. I think it's a strong product, it's well received and as we get more and more countries to give us permission to import it, we will be able to report more activity there.

[Operator:]

Your next question comes from Josh Jennings - Jefferies & Company.

[Josh Jennings:]

Just a follow-up on the Unique question previously, can you sort of quantify how impactful having the Unique system onboard was in order growth international. First four quarters you guys had that product out there.

[Timothy Guertin:]

Well its significant for the low energy line. It didn’t dent the high-energy line and that isn’t stealing any business, but almost all of its impact is in Europe. So it's not a big factor yet, but for certain kinds of deals it was crucial. So the way we look at it is it's a product, it's a nitch product. We are not expecting a huge amount of growth from it, because that’s not what we invented it for. We invented it to solve the problem of certain kinds of customers who have limited capital resource, and who are trying to solve a problem for a particular set of patients, and we created it for them. So I don’t think it's ever going to be a huge part of our growth plan, but it is an important part of our growth plan for a certain customer seg.

[Josh Jennings:]

Jut on the North American side, with the pressure you are seeing in the US; how does the spending environment look still. Was there any impact at all with the pending True Beam launch in terms of maybe customers delaying at the end of the quarter. Did you see any of that, was that impactful?

[Timothy Guertin:]

No, well we didn’t make our official announcement until after the end of the quarter. Obviously some customers knew what we were up to, because there were lots of articles written by people, speculating on what we were doing, and so we had lots of interest, but I can’t honestly say that we saw anybody delay a decision based upon that. Maybe somebody did, but I don’t know.

[Josh Jennings:]

Can you give us some color on the pricing environment that you are seen out there? Is competitive pricing played overall in this fiscal Q2 more so than in the previous quarters, or has it sort of stabilized.

[Timothy Guertin:]

Well I know my competitors deny it, but I think their pricing is getting more and more aggressive. I think they are cutting their prices in an effort to depend share, and I think that products like True Beam actually increased the pressure on them, and Unique the same way. It increases pressure on competitors, and I’ve indicated this. Our response in the phase of the recession or in the phase of price-cutting is to try to innovate. We innovate and product more options and more technology to try and hold and solve our customers problems. If we can introduce innovations that are clinically valuable, then that helps us defend against just a general trend on the part of people to try to gain share by cutting their prices in the midst of this. True Beam is an example. If we can solve the problems of providing techniques that might improve cancer care, that are fast, that are very versatile and that are very easy used. If we can think hard about what our customers are trying to do to grow their business and provide them with tools that help them grow their business, it can make a difference. If you look at us over the last couple of years, we’ve introduced unique, Unique; we just did an upgrade, a refresh on the Clinac IX and then on the Trilogy; we introduced the True Mean, we’ve introduced the HD120, we’ve interdicted RapidArc and now gated RapidArc, we’ve interdicted onboard inventory, we’ve made multiple series of improvement to it, including now a better image quality and even lower dose and faster imaging than ever before and numerous software enhancements in our aria and eclipse product lines. So all these things I think are making a difference, and it’s why I think our numbers are looking good in many ways compared to other peoples numbers.

[Josh Jennings:]

And just on the pricing environment, just with True Beam coming at a premium price point; are you seeing any pushback at all. I know you spoke about initial enthusiasm and customer responsiveness and interest, but has there been any push back in terms of premium pricing, in terms of the levels that True Beam SDX can come in in the True Beam standard.

[Timothy Guertin:]

No, I mean this is a very expensive machine, but our customers understand why it's an expensive machine. For one thing we’ve added a ton of new capabilities inside this machine that people really like, but were expensive to implement, and I often will joke around here that we build this machine out of unobtanium and expensium, but it's kind of true. We put together a machine that is very able, but it is a machine with a lot of features that it never had before. Overtime what we will try to do, as we always do is figure out how to build the same capability for less moment, but our customers understand that this machine that we just introduced is a very powerful machine. The most powerful machine I think any of then have ever seen or ever expected to see during there carrier, and so I’m not seeing any pushback. I’m sure they would love to see the price build up, but I think they understand why the price is where it is.

[Josh Jennings:]

And just last question, sorry for it. Some through the volume here, but just coming out of the mid pack meeting from last week and in terms external beam treatments for prostate and SRS treatments for prostate. What were your sort of views in terms of the impact of potential changes in reimbursement, your status quo or any risk to any changes, and thanks a lot.

[Timothy Guertin:]

Going into the meeting we were a little confused as to what was going on, since we do know that prostate are well treated with these machines. There seemed to be two points to this meeting, one was to compare early stage treatment for prostates with active surveillance or watchful waiting, and I think that the general consciences was, there was not data there to support one over the other, and so they would like to see more date than that. The mid knowledge is that there is a good evidence that higher dose rates improve prostate treatment, so that’s good, but they want to see more clinical trails conducted and we agree with that absolutely. There needs to be more trials that gather this kind of evidence. I think the second element to this is that there are people who are pushing for special reimbursement for [steriotatic] body radiation therapy for the prostate. I think the decision to this group; once that the evidence was not yet there, I think people are trying to get that evidence, but it was not yet, and so I think it makes it unlikely that there will be new courts added. I think that TMS has indicated that there would not be a national coverage decision, and that means that reimbursement should be normal going on, but I do believe that the radiation therapy community as a whole and especially the research community needs to hear the message, but comparative effectiveness research is going to be the way things are done in the further, and that there needs to be more and more data, and this was short over the valve for radiation therapy and there is going to be one for every other device, and every other form of surgery, and every other drug. People are going to look at CER more and more, and this was the case for us.

[Operator:]

Your next question comes from Junaid Husain - Soleil Securities.

[Junaid Husain:]

Jim could you give us a sense for the installation cycle for True Beam. From the time an order is placed to the time the box is instable, are you thinking that the cycle time to instillation from backlog is about average for your typical systems, so call it 12 months plus or minus.

[Timothy Guertin:]

Right now it’s normal. It’s what it would be for another linear accelerator. Dow has got his factory ready to deliver these machines. If the glorious event should occur that people will order more that we can deliver, then that answer will change, but right now I think we can handle the load.

[Junaid Husain:]

The presumption is that we’ll have some groupings installed in the calendar year.

[Timothy Guertin:]

We do now. We have a couple now and more are going in as we speak, and I think that by the end of the year we will have quite a few installed, and I’m hoping to have some great stories for you as to the kinds of things that people are doing.

[Junaid Husain:]

And then obviously the US market is still having kind of a tough go at it. Would you look at the freestanding customers? Is it your sense that perhaps the freestanding customers are still nervous; perhaps about purchasing oncology systems because of the dark fix, the potential 20% cut reimbursement.

[Timothy Guertin:]

I think both hospitals and clinics declined from what we saw a year ago. Freestanding didn’t explode into business when they got their reimbursement numbers. I might have hoped that they would, but I think everybody remains nervous, and even freestandings are using capital budgets that they set during a scarier time, and so we need a new budget cycle. I’m hoping that what’s happened in the X-ray products and flat panel bodes well for OS. As I said, there is always a delay, and I think that the interest in True Beam is indicative that the people are going to go back and ask for capital budgets from their management and that’s good. All of those things bode well, but I don’t think freestanding clinics are going to be a source of strength for the next quarter or two either.

[Junaid Husain:]

Then Tim a last question for you. There’s been a lot of noise on the FDA front regarding the 5, 10K process and possibly greater scrutiny by the agency on these types of application. In your conversations with the FDA, what type or what kind of scrutiny do you expect the agency to put into place?

[Timothy Guertin:]

Well I think the FDA is trying to figure out what changes that it wants to put in place. Obviously, I’m not speaking with the FDA directly, I’m usually working through our organizations like AdvaMed and MIDA and people like that. So what I’m hearing is that the FDA feels like its under pressure to increase the scrutiny, and they are trying to figure out how to do that without being unreasonable in the kinds of delays that they inject into the process. The hazard here is that if they go too far, they could require evidence for things where the whole purpose of creating the new feature is to go get the evidence, and so if they require evidence before evidence is available, they could inject multiyear delays into the introductions of new technologies into the market place, and that would be bad. But I will just tell you, the prices that people are paying right now are based upon the reimbursements that they get, so if the FDA delays approval of new products such that in order to use those new technologies, customers are going to have to do it under IRB and they are going to have to get patients to sign. I think patients will be willing to sign to use new techniques if they feel like those new techniques give them a better chance of survival or lower toxicity than they currently have. So, I believe there is plenty of potential to harm the American healthcare system, and so we are doing everything we can to encourage the FDA to produce changes that won’t slow the course of innovation. But at the same time I understand that the FDA is under tremendous pressure from newspaper reporters and politicians to take a harder line and with innovation, its all part of concern over healthcare costs in the United States. I personally think its the wrong way to solve the problem of healthcare costs, but certainly that’s something we will see. So, we are going to continue to work with AdvaMed. We have a very strong organization in Washington D.C. that can talk to the FDA and we can work through these organizations to try and influence change. I think we are going to see before the end of May, the first ideas from the FDA on what they are going to do, and I’ll know more then.

[Operator:]

Your next question comes from Jeffrey Johnson - Robert W. Baird.

[Jeffrey Johnson:]

So, a couple of things here. I’m trying to just look I think at the puts and takes here for North America. I think fiscal Q2 orders on the oncology side is probably softer than most of us expected. Your comments, you seem to suggest maybe the recovery probably isn’t playing out quite as quickly as we thought, but then again, you also have True Beam here launching, which obviously got off to a good start. The comps turned about 13 to 14 points easier on the North American side next quarter. So just trying to kind of get your big picture idea or thought on where North American orders -- do they stay negative over the next couple quarters or against those comps, especially do you think we get back to a little bit of growth before any kind of normalization of the market, maybe six to 12 months out?

[Timothy Guertin:]

I think that the North American sales team has got some heavy lifting to do, even in the next two quarters. If not, it is true that we saw the first nasty signs of trouble a year ago, and that gives us a comp to work from but now we are still looking at capital budgets that were set last year. So I think things can improve in the US and I think that True Beam will help, and I think that some capital budgets are going to graduate, but for the rest of the year, I’m not expecting miracles in the North American market and I think our sales team has got heavy lifting to do as I indicated. So, I’m very proud of all of our sales teams, but clearly I think that our international sales team has stepped up to the bar in a very difficult time in the US, and come through with some very strong business. We did what we told you we would do. When North America got into trouble, we turned our attention and we invested heavily in our international sales business, and we are continuing to do that. In the long run, there are six billion people outside the US and 300 million people inside the US, and if they live longer outside the US, the vast majority of our business is going to start to come from outside the US, and that’s what we have to expect. So over the long run, this seems reasonable to me that we are going to continue to see most of our growth in dollar terms. Those are heavily underserved market. The US market is reasonably well served, so whenever there is a recession, you are going to see people here, see that as a time to not move forward. That being said, there is a very large number of people in the US who have old machines and who want to compete for patients, and who want to argue to patients that they are giving the very latest technologically. If you look at adds for hospitals, you will see them a lot of times now, they’ll have a picture of an attractive physician and right next to the physician there would be some sort of fancy machine or other, and we want our fancy machine to be standing right next to them in those pictures. So they brag about what we do. That’s good for us when they do that. So, I think technology is important in the ways hospitals behave. So, there’s lots of reasons for optimism in the North American market, but I wouldn’t just say that because quarter three a year ago, there was a cliff that quarter three this year is going to be great, because I think there’s still a lot of work to do in the North American market.

[Jeffrey Johnson:]

Just on True Beam; if 15 orders in the quarter as you said, most of those are unused system, so it can mean maybe 10-12 new system orders or something like that. Somewhere in the neighborhood that probably implies approximately a 10% take rate or so which sounds pretty healthy for me for the first month or two out the door here. So is that a take rate that we could use going forward on new system orders.

[Timothy Guertin:]

Yes, from your lips to God’s ears. Obviously, we were pleased. I hope that the take rate goes up, but you have to remember there are early adopters and a little bit of this is early adopter behavior and so we will have to see. One point on our chart does not make a trend, I’m going to wait until next quarter to draw that line for you, but I certainly was gratified to see it. I have to say its pretty darn good for not having introduced a product formally until after the end of the quarter.

[Jeffrey Johnson:]

I agree; and then Elisha a final question I guess just on foreign currency. In your guidance of 6% to 7% revenue growth for the year, that’s up about a point or so versus prior guidance; how has your currency assumption changed in that guidance?

[Elisha Finney:]

Well Jeff, I mean clearly in the first half we were helped by a weaker US dollar. As of today if I look versus the year ago period its kind of reversed itself. So its around a $1.32 today versus I think a $1.36 in the year ago third quarter. So when we look forward and get guidance on the top line, we are looking at the most current FX rates and then putting a band around that, since we don’t know with certainty of course where its going to land, so that’s why the 6% to 7% range that we gave on the top line.

[Jeffrey Johnson:]

Understood there Elisha. I guess what I’m looking for is last quarter 6% guidance versus this quarter 6% to 7%; you are obviously feeling better from an operational standpoint on revenue, but the currently headwind is probably also going to be a little bit bigger in the second half than maybe quarter ago you were thinking. So I’m just trying to get my hands around; is this somewhere in the neighborhood of 1.5% raised to top line guidance when you neutralize currency, that’s just kind of what I’m looking for there.

[Elisha Finney:]

Yes really, I mean because of the beat in the second quarter, you tack it on to the year. We are assuming a little bit of headwind on the FX. We had a tailwind in the first half, and it gets you into that range. So, I don’t have anything more specific for you on that. We are looking at all sorts of things on moving delivery dates, etc., when we set that number.

[Operator:]

Your next question comes from Tycho Peterson - JP Morgan.

[Abigail Darby:]

This is actually Abigail Darby in for Tycho this good afternoon. Just wanted to dig a little bit more into the trends in oncology and X-ray booking. It’s obviously a strong quarter. You made some comments in the prepared remarks about visibility there with OEM customers. Could you talk about the outlook for that business for the remainder of the year? Can we extrapolate the growth trend or is there anything unusual about 2Q, potentially some initial stocking orders that might make that the strongest quarter for the year.

[Timothy Guertin:]

Well, last year quarters two and three were kind of hellish for this business, and so I think Bob Kluge probably thinks that anything would be better than what he endured during that period, and certainly quarter two is a strong evidence that he’s something turnaround. I have to say quarter two was stronger for this business than I really would have expected, and based upon the general market conditions and so. I think I’m optimistic. I do believe there will still be some bumpiness. I don’t think the world has come back to normal here, but quarter two is a nice point to have on the graph. We are seeing strong demand for RAD panels. We are seeing newer customers. We are seeing a lot of renewed interest in dynamic panels and tubes. We are seeing some signs of recovery in North America, so all of those things are good news, but nonetheless our customers make their decisions on orders, kind of a little bit in the last minute for many of those customers, and so I’m not making a prediction, but I’m saying certainly all the winds seem favorable, but that being said, I’ve been shocked before, so we’ll have to wait and see.

[Abigail Darby:]

Thanks and then just kind of a follow-up on the True Beam commentary. You obviously made some comments on orders for the platforms. Could you talk about initial response of customers for interests and upgrades, either for gated RapidArc or the new X-tray tube from your Clinac installed base; any additional color you can provide that would be helpful.

[Timothy Guertin:]

Yes, for gated RapidArc we are just rolling that out as an upgrade and so we will have to see where that goes. The initial signs from people who we are talking to are very positive, so that’s good. It didn’t have much of an impact on the second quarter, so this would be third and fourth quarter order impact, that’s where we’ll start to see it, and of course once again people have to have the budget. Even for upgrades they have to have the budget, so they have to go somewhere and get it. So the trick is when you introduce something, for most institutions that just starts their process of going through their administration and asking for the money in order to put these things together, but nonetheless because we are seeing strong interest, I think that’s good. True Beam itself, I expect there will be some small amount of backlog. Certain customers will decide that they want to change, but I think most of that business, the vast majority of that business is going to be new business going forward, and of course we can’t take a trilogy and turn it into a True Beam, that’s not a modification we will ever be able to sell.

[Operator:]

Your final question comes from Dalton Chandler - Needham & Company.

[Dalton Chandler:]

Hi, just a quick guidance question here. If I’ve done the math right, between the third quarter and full-year guidance, it implies that your fourth quarter revenue growth is actually going to be the slowest quarter of the year and in the low single digits. Could you just comment on the thinking behind that?

[Elisha Finney:]

Sure, well Dalton again Q4 last year is really when we had relatively high sales. So the comparable got a little bit tougher. Its somewhat early for Q4. I’m looking at Q3; we have very firm delivery dates on Q3, so we are giving you the best that we know at the moment with the current FX rates, but it really is just based on the fact that oncology and X-ray are tougher comps.

[Timothy Guertin:]

We are 12 months out from the order issues in quarters three and quarter, but four for oncology from a year ago, so the units that were ordered a year ago are going to start to deliver, you have a reduction there. We have strong a comp on sales in the fourth quarter, so we are taking that into account, so for all of those reasons, we are being conservative and I think reasonably and rationally so. It would require something we haven’t seen yet to cause us to want to be more bullish than we’ve been.

[Operator:]

I would now like to turn the call over to Mr. Spencer Sias for closing remarks.

[Spencer Sias:]

Thank you for participating. For listeners who may have come in late, this call has been taped and it will be available for replay beginning at 04

[Operator:]

Ladies and gentleman, that concludes today’s conference. Thank you for your participation, you may now disconnect. Have a great day.