ICAD Inc (ICAD) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2005 iCAD Inc. earning conference call.

My name is Angela and I will be your coordinator for today.

At this time all participants are in a listen only mode.

We will be conducting a question and answer session towards the end of this conference.

If at any time during the call you require assistance please press star followed by zero and a coordinator will happy to assist you.

As a reminder this conference is being recorded for replay purposes.

And now I'd like to turn the presentation over to your host for today's call, Kevin McGrath, Investor Relations with Cameron Associates.

Please precede sir.

Thanks and good morning everyone.

Before I turn the call over to Scott Parr, CEO of iCAD, I need to inform you that certain statements made during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Such factors include, but are not limited to the risks of uncertainty of patent protection, the impact of supply and manufacturing constraints or difficulties, product market acceptance, possible technological obsolescence, increased competition, customer concentration and other risks detailed with the Company's filings with the Securities and Exchange Commission.

The words believe, demonstrate, intend, expect, estimate, anticipate, likely and similar expressions identify forward-looking statements.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

The Company is under no obligation to provide any updates to any information contained in this conference call.

Now without further delay I will turn the call over to Scott Parr CEO of iCAD.

Ladies and gentlemen, good morning.

Our first quarter results were good.

We achieved our most profitable quarter ever with gross margins of 79% on just over $6 million in sales.

During the first quarter we completed an important if somewhat disruptive transition in products, updating our film product line with the introduction of our new Second Look 700 and Second Look 300 products.

Both products became commercially available near the end of the first quarter.

Sales for the quarter would have even higher if these products had been available earlier for marketing, demonstration and evaluation purposes.

With the full availability of these products in the second quarter we expect sales to achieve record levels in the current second period of 2005.

In the first quarter of 2005 we also started an expansion of sales channels.

Hologic began selling our iCAD digital CAD solutions and we took a fair portion of their business in the first quarter.

In the second quarter after a fair amount of ground work in the first 3 months of the year we will begin selling our Second Look 200 under the private label of Secure Look through the Hologic sales force.

Fusion sales partners began working with us in the first quarter.

We expect they will provide an impact and a contribution in the second quarter and we expect an additional benefit in impact from the commencement of sales of digital computer-aided detection solutions for the Siemens digital mammography system.

In short, we see a good quarter already having commenced.

We achieved an important milestone in the first quarter, an FDA filing for our first computer-aided detection product to assist in lung cancer detection.

Our OEM sales channels are already waiting for this product and we believe they will contribute to sales in the 2006 and following periods.

Our placement of Second Look systems using our ClickCAD fee-per-procedure program continues to grow from quarter-to-quarter.

In the first quarter of 2005 for the first time we saw a material contribution from the purchase of renewal ClickKeys for use in previously installed ClickCAD systems.

Gross margin increased to 79% in the first quarter, 79%.

Our competitors can only dream of the performance that we're currently achieving, as a result of discipline, cost control and the integration of development, design and manufacture.

We believe that these levels are maintainable and as digital sales come to represent a more significant portion of our sales mix, even increasable.

Profits in the first quarter were over $700,000 pretax.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, were substantially higher than that.

Cash flow, one of the important measures for us, excluding retirement of debt as we've brought down lines of credit that had been previously been owed by the Company was near breakeven.

Part of our success in the first quarter and in the year 2004 before it has clearly been at the expense of our principal competitor R2 Technology.

Unable to respond to our simple, effective business plan of high quality, great value, great support and disciplined cost control, they now appear to be attempting to achieve through claims of patent infringement what they cannot achieve in the marketplace.

While disappointing this is not entirely unexpected.

As we indicated in a release last night R2 has written us to say that they take the position our Second Look product infringes 3 R2 patents.

Each of these patents, a continuation in part of patents R2 licensed to us already in September 2003.

We've asked for detail on what R2 believes and claims and they have to date declined to provide it.

We do not believe that any valid claim has been expressed by R2.

We do, however, believe that iCAD has a variety of broad and strong patents, some of them acquired with our acquisition of Qualia and Cadax Medical systems in December of 2003 and some of them are more recent inventions that can fundamentally threaten R2's business and serve as an offset to any claims they may make.

Under the terms of our settlement agreement with R2 in 2003, claims of this kind must be made through binding arbitration.

We will not face the long distractions and enormous legal bills that we did the first time we engaged with R2 in questions of patent infringement and assertion.

One of our channel partners, people who we informed yesterday of the issues between iCAD and R2, suggested we treat R2's action as a compliment.

Another described R2's situation this way, if you can't beat the, sue them.

Before we go onto questions I want to note other recent milestone.

On April 1st Aetna insurance reversed its longstanding opposition to computer-aided detection and began reimbursing for computer-aided detection as an adjunct to mammography.

As many of you may know from a release that we presented earlier in the week, the clinical bulletin released by Aetna had extraordinarily powerful words.

They described computer-aided detection as a medical necessity.

This is critical for the almost 7,500 clinics and women's healthcare practices, many of them smaller providers who do not yet have computer-aided detection tools.

Many of these we believe are appropriate customers for our Second Look 300, 200 and ClickCAD systems and for these potential buyers the time to acquire a computer-aided detection solution is increasingly now.

With the recent decisions by Aetna and earlier statements by other insurance companies characterizing CAD as a standard of care for larger radiology practices we are rapidly approaching the time where failure to use CAD may actually come to be considered poor medical practice and expose the radiologists to liability.

We believe that this creates additional demands for our products and in particular from a segment of the market that iCAD is uniquely positioned to satisfy.

I would be happy to entertain your questions now.

[Operator Instructions] Your first question comes from the line of Stephen Dunn with Doss and James Securities.

Please proceed.

Good morning, Scott.

Thanks for taking my call.

I have three questions.

On the sales did I understand correctly that you felt that the Second Look, well maybe not the Second Look 700, but the 300 cannibalized some of the 200 sales in Q1?

I think there is an extraordinary amount of interest in a network-able version of the 200 and that's really what the 300 is.

We actually sold more 300s than 200s in the first quarter, even though the 300 wasn't available for demonstration or sale and didn't ship until literally the last week of the quarter.

So, I guess cannibalization-- what I mean by cannibalization in this case is in other words customers holding off ordering 200s and putting in orders for the 300s instead.

Yes.

I believe that's the case and I think that's to be encouraged.

One of the things we really like about the 300 product, which I think will be our largest selling product this year, is that it's an affordable product on the one hand but it's a great transitional product for people who foresee some migration to digital mammography in the future.

Okay.

I noticed you took a 70K charge for income tax expense.

Last time I looked you had like 38 million NOL, could you give some color on that?

My CFO indicates that there are alternative minimum tax requirements that apply in some respects to corporations in New Hampshire and I believe that that is the provision for AMT in 2005.

What do we expect to see going forward?

Is this about the same or what basis is that being accrued percentage wise?

I believe it is relative to the earnings that are reported for the quarter.

On the Kodak, now in November Kodak got their 510K approval from the FDA for their mammography software.

Have you seen anything out in the market since then?

No.

Kodak has not been a material factor in the market and we don't see competition from them.

Well, I'm going to squeeze in a fourth question here.

Now wait.

You said only three.

Just on the patent here.

I guess your next step now is to obviously go into a mini discovery phase to figure out what R2 is actually asserting for each of the mentioned patents.

How long do you figure to give that to work it's way through before you would, I guess adopt a more offensive role in asserting your patent estate?

I think that it would be inappropriate to telegraph.

We do have a representative of R2 on this call and I would like to avoid providing any-- more clear indication of the strategy or the schedule that we might follow in the actions that are available to us.

If you would forgive me that?

I will answer perhaps the first part of your question.

You're correct.

There is an accelerated discovery period.

There is a period provided for arbitration, all of which can be modified at the discretion of the arbitrators to the extent they believe that it is appropriate to achieve the correct outcome.

I think it's a good process for us and it's one that clearly will begin with a better detailing of what assertions R2 may believe they can make.

Thank you, Scott.

Joe Rudy with Saxon Securities.

I've got a few questions, a bunch of questions actually and I just hope that the girl doesn't cut me off this time.

First one, I want to address the news that you guys released last night in reference to R2.

Do you have any insight to-- and I'm glad they're actually on the phone as well, but if anything, your competitor listening to your call is actually a good thing.

I think so.

Do you have any insight to their financial condition or their business going forward based upon maybe some business that iCAD has been taking from them over the last few quarters?

They are, as you know, a private company, so there is no current financial information that's publicly available or available to us.

When we looked at the marketplace 18 months ago R2 was the dominant player in virtually every segment of the market.

Today there are really only 2 segments where I don't believe we are the leader.

The first of those is the area of sales to group purchasing organizations, many of which are relatively conservative and have long lead times in identifying a product of choice and supplying that product to their membership and the other has been the group of digital mammography manufacturers where R2's product was developed and secured FDA approval first.

With respect to GPOs [ph] in the first quarter we've begun an initiative to bring iCAD more effectively into that market and with respect to digital manufacturers in the first quarter we earned a significant portion of Hologic's business that had formerly gone to R2 and we believe we will be able to perform in a manner that earns more of it.

We're also poised as the iCAD product for use with the Siemens digital mammography system, has cleared FDA approval process to begin offering that through the Siemens channels and I believe we will take a material piece of that business as well.

So there have clearly been responses from our competitor, some of them I think prudent and responsible and appropriate ones as they have sought to identify areas in which their particular competitive advantages give them a reasonable business opportunity.

As to the most recent decision to look to a potential assertion of patent infringement, we clearly believe that's inappropriate and disappointing to us.

Okay.

Two question to follow up with that.

The short position over the last month has increased percentage wise by about 50 something 60%.

I would assume that the cause of that would be potentially this news that just hit last night.

Would you agree?

I think that suggests that there was any anticipation of this and I-- certainly there was every measure of surprise on iCAD's part when we received the first notice of this on April 18th, so I-- and I'm just-- there was no indication that I was aware of in any respect that this might be pending.

Okay.

As far as if this does go forward since you guys have been down this road once before, the cost of litigation, what kind of impact do you see that having on the Company?

Litigation will affect our G&A expense.

That's the bad news, but that's inevitable and in some respects in the medical device industry that's inevitable from time to time.

The good new is that the scale of costs that we incurred in our litigation in 2003 and 2002 were really enormous because we were involved in open court litigation, in two courts, both in Delaware and in New Hampshire and a broad process of discovery in which counsel for the two parties were entirely uncooperative with one another.

The process that we're going to be using as we resolve the issue that currently appears to exist with R2 is a much more efficient one and a really one in which costs should be substantially should be more controllable and less acute.

Okay.

The other point of course is that when we were involved in this before it was literally a life threatening issue and the Company was not in a position to be able afford this without securing other financing.

Today the Company is healthy and this is a cost of doing business that we begrudge but we can afford.

Okay.

This is a question I believe I know the answer to, but what's your background, Scott.

That's a loaded question, Joe.

As you perhaps know, I sometimes characterize myself as a recovering lawyer.

Having been trained in government and in law and practiced as a lawyer for a short period before becoming more involved in entrepreneurial businesses.

I understand, but having experience in the law, with a law background.

What's your personal opinion on their claims?

The best message that I can give you is one that's commonly stated.

The lawyer who tries to be-- the client who tries to be his own lawyer has a fool for a client.

Okay.

Let's move on to something more important.

The application for lung cancer, as you know that's been one of my favorites.

You guys put in the application.

Do you have an exact date on when you put in the application back in March?

I think we just beat the ticker on March 30th or March 31st, but right at the end of the month.

Okay.

And can you go through once again the approval, you know the application process in which, you know the 510K approval process by which you put it in?

The application process is one, which may be completed in as little as 90 days from the date of application.

We are using a relatively new program available from the FDA, which they've implemented to assist in more rapid processing of applications.

They have designated and delegated certain authorities and responsibilities to Underwriters Laboratory and we have a good working relationship with UL and actually I believe we have a good relationship with the FDA, which helps us as we work through any questions that may arise during the analysis and review process.

Okay.

Well we've been in almost now then for about 30 days or so.

Has there been any feedback or questioning that had to be answered?

Not to my knowledge.

Okay.

And I assume that the application's all put through electronically now to expedite everything, and questions and answers are all done electronically?

I have to confess Joe.

I don't know the answer to that question about the method.

Okay.

There was a rumor and this would actually go into the news that you released this past Monday with Aetna.

There was a rumor that was out in the market back in January.

I'm sure you recall that there was going to be potentially a change in reimbursement by insurance companies.

Has there been any disruption or change in reimbursement?

Well, I'm not certain of the rumor that you're referring to.

I think many of us believe that the simple macro economics of health care reimbursement will lead to an examination of coverage and at the Federal and at the State and at the level of private insurers we'll end up with a more stringent review of where funds are being allocated to what might be considered discretionary procedures and there was some publication of information that the broad use of body scans and of computer tomography would be an area in which, preauthorization would come to be increasingly required to try to avoid any abuses or over utilization in that area.

I think that's inevitable and the economics really warrant and appropriately that people be cautious about where funds are invested for healthcare infrastructure and for healthcare procedures.

When we turn to computer-aided detection for mammography there is such a clear macro economic benefit.

Ignoring for a moment the issues of compassion and patient care, the numbers are so supportive of finding a cancer early and dealing with it in a less expensive way, by way of contrast with a late stage cancer that could lead to a death after extraordinary investment in medical resources.

This is an area that has seemed to be pretty well defended, both by the underlying economic principals of this procedure and by the political constituency that women's healthcare advocates form and utilize pretty effectively.

Okay.

Well, since you just also mentioned the importance of finding a cancer early I want to just talk about that a second with lung cancer.

As we all know lung cancer is very hard to detect.

Can you expand on the importance of CADs with lung cancer and the improvement that we would have in detecting lung cancer early?

Not in quantitative terms.

I think that's inappropriate until we're through the process of FDA approval and even additional development and research as that product will continue to improve as the mammography products did.

The issue in mammography is a bit different than the issue in lung cancer.

In mammography what we're most concerned about is oversight of particular categories of cases that we're very effective in finding.

In lung cancer the issues are somewhat more complex because there's so much information about artifacts and features within the lung that what the doctor needs from some perspectives is a guide that helps sort out what is significant from what is not significant that really begins to provide a tool to make the doctor both more proficient and more productive in the analyzing particular categories of, but in this case lung nodule.

The process is a complicated one and the efficacy of computer-aided detection in terms both of making the doctor more sensitive and making the doctor more productive is going to be-- the challenge is going to be communicating that clearly to the potential market.

Okay.

Now if I could jump ahead just a minute, Joe, and perhaps you would ask this and perhaps not, but I'll use your question as a springboard.

When we look to the next level of product, to the products that assist the physician in the identification and treatment of colon cancer there's really a very interesting additional benefit of computer-aided detection because it helps make virtual colonoscopy more usable and more effective and really the two together form a significantly more viable alternative to actual physical optical colonoscopy, with a tube and a camera physically inserted in a patient and I think that gives it both immediate leverage and a real value to the physicians who would like to be able to use computer tomographic studies an virtual colonoscopy as a preferred way of doing colorectal screening.

You know we've been excited about this product and continue to focus on being able to accelerate its development and its release.

[Operator Instructions] Denny Waynestrait with Stonegate Securities.

Thank you.

Thank you very much.

I will limit myself to two questions, two real quick questions.

I guess now that I know that you keep your new products in house under in house manufacturing for the first year and I'm assuming that the 300 is still in house?

Is that correct?

The 300 is in part in house and in part at our contract manufacturing facility in Connecticut and we actually-- I'm glad you asked the question because we're involved today in a review of our manufacturing practice and a somewhat more sophisticated utilization of contract manufacturers.

At this point what we anticipate is that iCAD will take on in our own facility the manufacture of the camera assemblies, which are the more complex and the more sophisticated parts of our products, and in some respects because those are very expensive and have been a high part of our contract manufacturing costs structure reduce our overall build cost by taking on the highest value added piece of it and then committing that back into the manufacturing stream.

That's a kind of exciting thing and it's-- the hints of that are actually reflected in some of the margin results we had in the first quarter of '05 because with the release of the Second Look 700 product in particular, we were able to do some cost engineering and some sharing of the manufacturing that improved our margins for that part of the product mix.

Sorry to divert a little bit, but that's a good question.

No, actually you answered my second question, so I get an extra question in here.

Yes you do.

And actually now that-- actually I just want to see -- I guess you got cut off before he could answer that last part of the question but when do you think that the colonoscopy's going to come, you're going to bring that to market?

We've indicated that would be 2006 and that is a--

The beginning, the end, just some time bearing.

Our target is earlier in the year and our, you know our real target is to be able to exceed that expectation.

Okay.

All Right and I guess my final question is on ClickCAD, do you now that the 300 has had so much response in the market, do you feel that it's going to make more sense to use the 300 as the ClickCAD instead of the 200?

No.

In fact, I think what will happen is that we will see the ClickCAD become more of an alternative to the 300 than it was to the 200 and that we will likely see 300 sales increase in unit terms, which is good cause that's a higher margin product for us than the other products that we've been selling and historic margins.

We will see ClickCAD come to represent a higher percentage of 200 sales and our efforts at how we price and position these relative to one another will aim at achieving that result.

Okay.

All right and I guess one more quick question is do you all see any-- I guess with the new manufacturing structure that your in placing by just taking in the more complex parts and outsourcing the rest of the assembly, do you foresee any type of production constraints or capacity constraints?

I don't.

Okay.

That's it for me.

Thank you for answering my questions.

Mark Markowitz with RBC.

Hi Scott.

Good morning, Mark.

I just had a couple quick questions.

I noticed your profit margins seemed especially high.

Are-- talk about 79%.

Have things gone way up or what's happened?

Well it's, you know it's one of those nice benefits of having the efforts of several previous quarters converge.

There are several factors that contribute to the higher than historic margins.

First of all, with the release of the Second Look 700 and its replacement in effect of the higher volume products we had offered previously we have a new product that has a higher value in the market, commands a comparable price and costs us less to build and deliver and that was a decent piece of our business in the first quarter, so that helped us in being able to achieve higher margins.

The 200 product, 300 product, both good margins.

In the first quarter we also began to become more effective in selling upgrades and options to the film based product line.

Software options that improve the integration of the Second Look 300 and 700, for example, to hospital management information systems and patient information systems and other systems, other software upgrades that help connect the computer-aided detection system to the picture archiving or the image archiving, what's called a PAK system within the hospital and we also were relatively successful in selling additional review stations, so that radiologists could look at CAD results on a flat panel display at a point different from where the results were being processed.

Those are very nice margin products for us and the sales force-- we've been training the force to be more effective in the way that we meet customer requirements with-- identify where those additional products can be of use and then meet them and I think we saw some nice success in that in the first quarter.

Okay.

Let me do a different question.

You had this result from Aetna, which I guess spreads to the entire insurance community now.

Well, if I could interrupt.

Aetna was really the holdout, so that I can't think of another third party insurer that was not reimbursing for CAD after the decision by CIGNA in the fourth quarter to-- but CIGNA had been reimbursing reviewed and to determine whether they would stop reimbursing and came to a clinical decision that CAD was a standard of care in large radiology practices, so that they reinforced their reimbursement policy.

Aetna very, very large, as you know insurance company, very well regarded for good and reasonable basis.

They have been a very prudent policy maker looking to manage the costs of medical care by being conservative in the way that they extend coverage to additional procedures and as a kind of a standard, for Aetna not to reimburse CAD stands in the way of it being a required procedure.

For Aetna to come to a conclusion as eloquently as they did talking about it as a medical necessity, as an adjunct to mammography, I think and many of us at iCAD share the view, this is the beginning of a groundswell that can carry us through the large number of smaller clinics that have been resistant to acquiring computer-aided detection solutions because for them not to acquire them now may come to expose them to legal risk.

So, with this result are you guys internally refocusing what your potential unit sales might be this year?

Certainly we flex with the market and the overall result of our strategy over the last several quarter has to develop and provide products that are increasingly functional but still affordable, so that smaller practices can enjoy some of the same benefits computer-aided detection as larger practices and so that the benefit is really accessible to women everywhere without regard to where they live or what the affluence of their community may be.

We positioned with the expectation that smaller clinics like larger clinics would understand the benefit of computer-aided detection and would embrace our products.

What Aetna's blessing provides I think is an additional tool to help us communicate to those customers and educate them as to why the immediacy of a decision to offer CAD is more critical than they might have previously felt.

Thanks Scott.

I just had one last question.

Are you making any further progress on making inroads into government or military health installations?

It's part of what we categorize as a GPO or a large practice account and I mentioned earlier in the call I felt that was an area that we'd been deficient and I think I mentioned that before actually.

What we've done is we've now hired a firm, a small group that acts as a sales representative for us, and in the first quarter they've already been effective in introducing us into the category of accounts that includes government and military.

I think we'll see some good results from that over the year.

Are you guys considering at some point in the near future to start to give guidance?

I think at some point we have to recognize that's of help to investors and to analysts.

I think at this point it is still premature, Mark, and I'd be reluctant to set a date as to when that might commence.

Okay.

All right, well thank you.

Scott Warner, a Private Investor.

Hello.

Good morning Scott.

How are you today?

Okay.

First, would you comment on the revenue and the fact that it was marginally down, you know like 85,000 or something and that probably has to do I'm guessing with the percent digital, which was 27% in the fourth quarter?

I think it has more to do with the transition that we went through in updating our film based product line and when we sat back and looked at the future a couple of quarters ago there was really one quarter that we saw as being at risk and that was the first quarter, the March quarter because we understood that we were going to be shifting products, which is always dangerous and we also recognized that we were going to be adding and shifting the balance of channels that would be selling those products.

It's kind of like dancing on rug while you weave it.

In the way in which the first quarter proceeded-- I mean largely as a result of some extraordinary contributions by folks on both our production side and our sales side I think we did very well.

Looking ahead, that's created the foundation that we believe is going to much greater sales in the current second quarter and set the path for a year in which we do a materially greater level of sales than we did in 2004.

Okay.

What as you said in the last conference call, 27% was the digital then and you looked forward like 33, 35% end of year, what did you do revenue wise digital in the original equipment this last quarter?

Digital in the first quarter was 22%, so it was down, which I am told reflects some of the seasonality of that business in the hands of our OEMs.

We have not varied the expectation of digital sales being a higher percentage in 2005 than they were in 2004.

I think that especially as we see the increased contribution from Hologic and then we certainly hope and believe from Siemens and then from IMS Giato [ph], there's a lot of nice layering that will be going on where we expect to see benefit very recognizably this year.

Now you touched upon the transition of the film based products.

Where would you say iCAD was, as far as in house sales people and the external sales organizations that you have retained?

Where are they as to being fully trained, both inside and the outside folks?

Well, the inside folks are fully trained.

Okay.

And they're good.

They're very good.

The outside folks, it really is a matter of looking at each channel one at a time.

There's room for improvement in part as we go back in and we go back in and work with channels that have been contributors.

We did a lot to really help with the sales, I won't say proficiency but sales education, the product information available to the Source One group in the first quarter, even better put in the periods before that and Source One had a great-- they had a great quarter for us.

We are working with Fusion.

We are working with Hologic.

Those are both in training.

We've started training of Siemens.

We continually work with the GE team to be able to provide both, product and market knowledge, so I think that the way to look at is to say that the core is our own sales force, which serves over the long-term not just as a sales tool, but as a source of training for all of the distributed sales forces they work with, that we go through an initial launch training and that that's under way for certain of our channels and past for others and then we keep training everyday because that's one of the ways we keep increasing closed rates and yield rates from every point of sale we have.

Okay.

Thank you and then one last thing, you talk in detail you know how the legal costs will not be anything like the 350 or 400,000 a quarter we had back with R2 folks previously.

What do you estimate would be the legal cost per quarter and how many quarters do you think that will go until the arbitration process comes into play?

I'm not prepared to make that estimate yet, Scott.

Okay.

Thank you very much, Scott.

Michael Gregory with Iroquois [ph] Capital

Hi, Scott.

It's encouraging to hear you speak of second quarter revenues at a record level.

Can you comment on what percentage of that sequential increase will be attributable to the OEM relationships through Hologics and Siemens and further can you comment on what percentage of fiscal year '05 revenues you would expect to be derived from such OEM relationships?

Good questions, in '05 overall we've previously talked about that part of our business being on the order of a third and I don't see that as being out of line at this point.

In the second quarter I see sales of digital products increasing in absolute terms, but I also think we're going to see a very good contribution from the 300 and the 700 and the film based sales channels that contribute at levels in excess of the first quarter.

So I guess my weak response would be that we expect digital sales in the second quarter will be up from the first quarter, but we expect that the film based sales, especially in the 300 category will be up more.

In that the Hologics relationship incorporates both, film and digital.

It doesn't necessarily address what percentage of that incremental contribution will come from the OEM relationships.

Perhaps you're not comfortable in answering that, but would you expect the second quarter contribution to reflect that one-third of top line expectations for fiscal year '05?

No.

I wouldn't expect it to be one-third in the second quarter.

Okay.

Thank you.

Angela, do we have any other questions?

[Operator Instructions] George Whiteside, SWS Financial.

Morning, Scott, and congratulations on the expansion in margins in the quarter.

That is certainly encouraging and you've certainly handily answered one of my questions, which was the comparison of the fourth quarter of last year with the first quarter, so we don't need to redo that.

You've made several comments bout Hologic and back in January they had estimated that 20% of their business was going to be in digital mammography.

An update of that is that on their Web site now they're projecting for '05 30%.

Is this some of the sort of positive developments, as far as you're concerned in terms of the OEM markets or channels?

Yes.

I think that is very positive for us but I also think that we're at the point in our offering of products for digital mammography and our relationships with the key digital mammography providers where there's lots to be bullish about and this is an area where I just see a great deal of growth opportunity and I think our relationships with those OEMs are superior.

I think that we work hard to be able to demonstrate to them that their success is critical to us.

We understand our success comes through theirs and that's part of what we've been planning for for a year.

If we go back a year ago and to look in part at even the motivation behind our acquisition of Qualia and Cadex, there was a very simple model of the market that we used at that time and have remained true to and it said the keys to success are being the preferred provider for digital mammography and being the provider with affordable products for the smaller volume women's healthcare centers that are going to be utilizing film for some time to come and we're there.

Well, then that seems to be reflected in the development whereby evidently you've begun replacing some of the R2 units.

George.

I don't know of a lot of accounts that have shifted from an R2 unit to an iCAD unit or an iCAD unit to an R2 unit.

There may be some.

What we do see are people who may have one of those systems in use in a film based practice who acquire the other system when they buy digital mammography and in most cases that's a matter of people who have R2 systems in film based practices because R2 was the standard bearer when they bought the those CAD systems, who replaced them with iCAD system when they buy now from a GE Healthcare or a Hologic and soon we believe form a Siemens.

And that is certainly interesting, so you're saying that film based perhaps they had a different purchasing decision and now that they want to go and upgrade to digital, that they are perhaps now more inclined to look at iCAD units.

I think that's true but I would almost turn the question around, George.

I think 2 to 3 years ago-- well certainly 2 to 3 years ago R2 was the market leader and appropriately so.

They had a huge head start and they'd invested an enormous amount of money in public relations, in brand identity and forging relationships with key decision makers at the what would be called luminary hospital facilities.

Today more practices choose an iCAD system than choose an R2 system and that's a matter of our having defined a business strategy that was a simple one.

It was all about blocking and tackling, manage your cost of goods, manage your overhead, achieve high quality and give world quality customer service and don't vary from that and that's a very difficult strategy it has proved for our competitors to address and we're seeing the results of that now.

We're seeing it in the market where we are, in fact, succeeding and doing so in many respects at the respect at the expense of the former market leader and I think we also have to say we're seeing it now in the Board rooms as the issues of how a former market leader can assert itself are reduced to assertions and claims of potential patent infringement.

Larry Dodd, a Private Investor.

Hello, Scott.

Congratulations on those expanding sales channels.

I've got a question that relates to from the pull side instead of the push side.

In terms of the marketing efforts how much is being done from the standpoint of trying to drive demand, both say from the public in term of trying to cause women to go in and ask for CAD screening of their mammograms and also from trade PR for the purposes of trying to expose the liability issues related to the providers of mammography?

Good questions both.

The first one is easy.

We have done nothing on the pull side until this week when we retained our first public relations group with a pretty clear charter to assists us in helping women becoming more familiar with the benefits of computer-aided detection and the fact that they would be well served to look to providers that offer that solution and that-- some would argue that's overdue, but from our perspective we had to get to the point where we could afford it before we invested in it.

Your second question really has to do with how we communicate to the buyers.

It's not so much a pull strategy of the women who demand medical care saying we want CAD.

It's about the radiologists and the practice administrators deciding that CAD is a necessary and a prudent judgment for them to make and a necessary capability to invest in and we are looking at some alternative ways of presenting that.

As I'm sure you can understand, it's a delicate subject and what was the old, buy this product or the dog dies?

Not the appropriate way to deal with a professional and well-educated and mature buying group, such as the radiologists who help with these decisions.

We are looking at being able to be able to better communicate the message that CAD may no longer be a choice but a requirement and the way in which we frame that and execute that and deliver that will have a great deal to do with how quickly we can accelerate sales in 2005 I believe.

I think that's a really important initiative for us and that's one we're focused on and working hard on.

So, I think I'm gleaning from what you said, that it's in terms of this public awareness push to the women that we should expect to see some expansion of that, some more visibility?

Yes, and you know over the long term that's inexpensive marketing because if we do that correctly it's the ability to communicate your message through, you know the kind of Holy Grail I guess would be having a member of our medical advisory board on the Oprah show talking about how this is the kind of thing that that can be of benefit to all the women who are at risk of breast cancer.

That's the kind of target that we have for this effort.

Brooke Moore with Evergreen Associates.

Good morning, Scott.

Hi, Brooke.

How are you today?

I'm doing well thank you, thanks to modern technology.

I actually had a situation where I was diagnosed very early, so in a little bit different area but it does make a difference.

I'm here to tell you and most of my questions have been asked and answered.

I stayed on the line though because I wanted to congratulate you on husbanding your monies and doing exactly verbatim what you told me last November out in Chicago.

You haven't deviated and I'm proud of you for that and the whole team.

Some people think I'm boring for that, Brooke, but I appreciate your compliment.

No.

I think it's fabulous.

I think it's absolutely fabulous and I did want to stay on and congratulate you for that.

The other thing-- there was one quick question though that I have unlike other people.

If you are able to talk about this realizing whether other people are on the line or not, can you discuss at all any new hospital groups that have been added or any big names that are actually something that you can discuss this morning?

I didn't prepare for this call by going through a list of new accounts, so I'm probably not going to be able to help with that.

I guess it's a testament to some measure of progress that we're now a little bit numb to named facilities who pick-up iCAD because that's an everyday occurrence.

In terms of the groups, that's really the target of the GPO initiative that we've begun in the first quarter, so I would hope we're going to see more of that moving forward.

Okay.

Well, thank you.

Larry Ceisler with First Southern Securities.

Again, Scott, nice job.

After many years we're very, very happy with what you're doing.

This question has not been asked yet.

It does relate to the announcement regarding, both Taro Recon [ph] and Viatronics [ph].

Obviously that's lung nodules and virtual colonoscopy, can you tell us just a little bit about who these folks are and although you've said you'd rather not comment on what the potential size of these new markets might be as it relates to CAD, maybe you could just give us a rough idea of what we're looking at in working with these new folks and I'll just sit back and listen, and again thank very much, Scott?

You're very welcome.

There are lots of varying estimates about the size of the market for lung cancer detection or for colon cancer detection and I think that many of them are premature estimates of market.

We saw estimates of the market for mammography CAD in excess of $2 billion as recently as 4 or 5 years ago and yet, as products reach market they start to become more affordable to be able to penetrate those markets and the scales of the markets flex.

When we think about the scale of the market for each of our lung and colon products we look to the number of the computed tomography systems installed as a kind of an index for how many places is the work that is related to lung cancer detection and colon cancer detection going on.

And our understanding of that number is that it's on the order of 25,000 sites worldwide, very large percentage in Japan, second largest number in the United States and as a result it suggests that there are probably a lot of practitioners who could be attracted to tools that help them be more effective and more productive.

Now when we look at the kind of next cut, which is the group of companies that you've discussed, Viatronics, Taro Recon, Vital Images and there are several others in the market.

These are the companies who have developed software that takes the raw information from a computed tomography or other kinds of digital studies and re-creates what's almost a 3- dimensional interactive cartoon, so that you're able to look at the images that are being captured by CT in 3-dimension.

You're able to rotate.

You're able to move through the body or in the case of a virtual colonoscopy, move through the colon to be able to look at the places where colonic polyps may occur.

That's a much smaller market.

That's not at the 25,000 level.

It's a growing market and in the early stages of product release I suspect that's a more accurate indication of the first adopters who could look to computer-aided detection of lung cancer in particular, than everybody who's got a CT.

But I think that it migrates rather quickly from the more specialized to the more generic and the scale of the market and the time it will take to move from quick adopters to generally accepted.

In mammography we've seen that has happened with the greatest acceleration probably over the last 3 years, but R2's first system was introduced in 1998, so there was a long period of investment on their part before the market began to adopt CAD at a relatively accelerated pace.

So, essentially what you're saying is that we might look to a couple of years before we really begin to see this begin to ramp?

Well, our growth expectations for iCAD are really based on mammography, certainly for '05 and '06.

This is a market where we see great opportunity yet and it's, you know it's kind of like the comment that Brooke made about being single mined.

We're pretty focused on how we can be the best and the most successful provider of a variety of related benefits to the radiologists and mammographers who practice in this sector and by doing so not only can we provide a real benefit to women who are at risk, but we can be a very successful and profitable and will regarded company.

Thank you, Scott.

Steven Mazeur [ph], a Private Investor.

Great job on the quarter.

I think that 79% gross margin is terrific and you turned the Company around quite nicely.

I just had a couple of quick questions.

Getting back to the 510K application, assuming that the FDA gives you approval within 90 or 120 days what would be your realistic estimate for having the first sales and installations of these products coming forth?

I will begin with the fact that we are not projecting for our own internal purposes any revenue from this product in 2005.

Having said that, our OEMs are particularly interested in being able to show these products at the RS and A show, which is in November in each year and it's a reasonable point at which product introductions can take place.

I think if we are effective in our own plans that what we will see in 2005 will be product introductions that begin a sales cycle that will only incidentally result in purchases before the end of the year, but will lay the groundwork for the actual purchasing to begin early in 2006, not just for the selling to begin, and that's really the kind of internal objective that we have that seems reasonable.

That sounds like a reasonable-- so in 2006 would be your first installation of these things in the first quarter or thereabouts?

Yes.

I wouldn't be surprised to see some evaluation units or pilot units out before then, but that's the most reasonable expectation I think we should maintain.

Okay great.

The only other question or comment I have is relative to the R2 patent situation, having come up through the ranks myself over the years in computer and microprocessor based systems in the telecommunications field with proprietary software and so on, I personally have experienced similar situations where it seems there was a propensity of competitors that usually file these things and as we moved along into the legal aspects or arbitration we found there is a predominance of more smoke than fire in the issue, so from your point of view I would just encourage you to go forward and I'm glad to hear that you're a lawyer and I think this thing will work itself out.

So again, good job and keep up the good work.

Thank you, sir, but I will add, of course, a recovering lawyer.

Larry Southam with Detwiler and Miller Company.

Hi.

I think my questions have mostly been thoroughly answered now.

Going back on one old item though, you mentioned the buying groups from the large hospitals.

A year or two ago you had received an approval from Kaiser Permanente as a product for them.

Has that turned into meaningful revenues?

It has not and in part because Kaiser has been slow in its movement towards adoption of computer-aided detection technologies and in part because we have not managed or serviced the account as well as we should together with other accounts of that nature and I think this has been an area of deficiency.

I think this has left an opportunity for our competitor that we would like to be able to step into and take back.

Joe Rudy with Saxon Securities.

They cut me off again, Scott.

I've got two last questions.

Can you expand on what you guys are doing internationally?

Good question and there's a lot of stuff going on, so let me think for a moment about how best to describe it and I guess I'll start at the top.

To date our digital mammography business has been the major source of international sales for iCAD.

GE Healthcare is very active in Europe and we have been privileged to provide them with systems that are in place in a number of sites in that market.

With the launch of products for Hologic and in particular the launch of products for Siemens there will be substantially increased marketing of iCAD products for digital mammography.

In principally European markets, although Hologic is also active in parts of Asia, we believe we will be working with them in some of those markets and Siemens is really a global player.

The sales in those markets are slower in many ways because of two factors.

Mammography is not thought of universally as a screening procedure, although there is great momentum in many countries to recognize the benefits of screening and implement that as a national health priority.

For example, as you may know we called on several prominent medical advisors in Beijing recently in connection with what's called the million woman screening program that has been initiated in China as a tool to be able to catch up with what seems to be an enormously accelerating rate of breast cancer among Chinese women.

Similarly in Japan there's a recognition that breast cancer, which historically had not been one of the larger contributors to women's deaths was rising rapidly relative to other women's healthcare concerns.

So there's a tide in terms of mammography that relates to an increased interest in screening that we are working to be able to ride together with our OEMs.

The film based market internationally has been a disaster for the two companies that attempted to enter it.

Both R2 and Cadax prior to our merger had worked to sell computer-aided detection systems for film based mammography practices internationally and everybody lost their shirt.

The systems were too expensive.

Without screening there wasn't enough interest.

Without reimbursements there wasn't a good business case.

Until iCAD introduced the Second Look 200 and now 300 product, our view has been there was not a film based solution for international markets.

Today with those products in our portfolio we are beginning the process of building international distribution for affordable film based solutions, kind of thing could be very useful, for example, in rural China, the kind of thing that could be very useful in Australia where there's a lot of decentralization of populations.

So what we've done over the last probably 6 months has been to identify certain key distribution candidates, channel partners, in selected international markets, to work to bring our 200 and 300 products to those markets and to work to support the digital mammography manufacturers as they bring our digital product and that's become a pretty reasonable contributor to sales, which is going to grow over the course of the year.

Okay.

My next question on a totally different subject over the past year, institutional ownership has more than doubled, can you talk about what you have been doing and what the plan is by the Company?

Although it has doubled, it doubled as we both would agree from an insignificant number percentage wise?

It was pretty easy to double, wasn't it?

Exactly, so it's pretty easy to double again even at these levels, so can we expand on what we have been doing and what we are doing because the way I look at it with the institutional ownership between my partner and I and with our clients, we still remain probably as of the end of last year your second largest holders, so you know that's something that we're a nobody in the bigger picture okay?

Let me begin with a kind of report.

As of December 31st 8.1% of our shares were in institutional hands and an additional 1.25 were held by mutual funds, so just over 9.25% of the quarter of the Company was held in what we think of as broad institutional hands and as you point out, that's a significant increase from previous periods.

We have been working diligently to communicate the basic facts about the Company to perspective institutional buyers and we have participated in a number of investor conferences and in a number of one-on-one calls where it has been possible to get in front of important institutional buyers and explain what's happening at iCAD and our approach, Joe, has been I think to educate as we try to do in our market for products.

Here's where the Company was.

Here's where the Company is.

Here are the trends that can be observed and here are the factors in the market that would appear to support those trends and that I think has been a reasonably well received message.

I think that the number of perspective institutional buyers who watch our Company is significantly greater than the number who have already invested in the Company and I think that in terms of fostering increased institutional support we're doing the right thing and will continue to do that.

Okay.

My last question and there's been this year a significant number of shares that have hit the market from insiders, whether it be some that have worked for the Company, some that worked for prior companies that iCAD had acquired, do we foresee that any additional shares are going to be hitting the market and the total number that has already his is I think somewhere around a couple million.

So do we foresee anything you know shortly after the blackout period ends here?

I don't see anything approaching any scale.

There certainly will be some sales and there should be.

There are lots of young people who have nothing to speak of in terms of assets except what they've earned as iCAD stock and I don't begrudge them the opportunity to take some advantage of that.

But call it a purge, call it the Exodus, I mean I think as we discussed at the last conference call there were reasons that help us understand why that happened, but I believe that's behind us.

Okay.

I think that's all I have, Scott.

Just let's get lung cancer approval and squeeze these shorts out.

All right.

Have a good day.

And, sir, that concludes your question and answer session.

I'd now like to turn the call back over to Kevin McGrath for closing remarks.

On behalf of iCAD I would like to thank everyone for joining our conference call and we look forward to speaking with you again next quarter.

Thank you very much.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Everyone, have a wonderful day and thank you.

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