ICAD Inc (ICAD) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Second Quarter 2006 iCAD, Inc.

Conference Call.

My name is Tanya and I’ll be your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of today’s conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Kevin McGrath of Cameron Associates.

Please, proceed.

Thanks, Tanya and good morning everyone.

Before I turn the call over to Ken Ferry, 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 in 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 those 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 Ken Ferry, CEO of iCAD.

Thanks, Kevin and good morning everyone and thanks for calling in today.

The second quarter of ’06 can be categorized as one of major transition for iCAD and our marketplace.

First, as a company, in April, we were victorious in our defense against claims and patent infringement brought against us more than a year ago by our principal competitor.

Arbitrators rejected each and every claim of infringement made against us.

Second, we announced the decision to take the Company in a new direction from a leadership standpoint with the announcement that I would assume the president and CEO position on May 15.

Shortly thereafter, we also announced Jeff Barnes as senior vice president of sales and Stacey Stevens as senior vice president of marketing and strategy.

These announcements are critical to the transformation of the Company to an innovative market leader in computer-aided detection.

Third, Hologic announced its intention to acquire our principal competitor, R2 Technologies, a move that has dramatically changed the competitive landscape.

This transaction recently closed and has created significant opportunity for iCAD going forward with Hologic’s principal competitors.

Additionally, our customers significantly accelerated the transition from film-based analog mammography systems to full-field digital technology.

This event, combined with Fuji’s recent FDA clearance for the use of computed radiography for mammography screening will only increase this transition further as we move more and more and see the benefits of digital technology.

So, with all of this said as a backdrop, iCAD reported sales of $3.9 million for the quarter ended June 30, compared to $4.2 million in the prior year quarter.

This represents a 9% decrease year over year.

This decline can largely be attributed to the continued decline in our film-based analog CAD business.

This product line saw a $1.1 million decline or 44% year on year and while the transition to digital had a significant impact on this performance, we are still taking numerous corrective actions to improve results going forward.

Conversely, our digital CAD business increased by 43% over Q2 of ’05, reflecting the substantial increase in demand.

This trend is extremely encouraging as the growth of full-field digital units is expected to continue to show rapid growth in the adoption of CAD with these units becomes a near standard.

Also, reflecting the continued strong customer reception of Total Look, our integrated hardware and software solution for the digitization integration of film-based studies for comparative reading on digital mammography work stations, sales increased 77% over Q1 and volume for this product has more than doubled since it’s inception in the fourth quarter of ’05.

Lastly, our service revenues more than doubled over Q2 of ’05.

Focused efforts to bring more service value to our customer base has resulted in a significant increase in contract penetration.

Gross margin was 78% for the quarter, compared to 76% in the prior year.

Net loss was just over $2.6 million or $0.07 per share.

This compares with a net loss of just under $1.1 million or $0.03 per share in the second quarter of ’05.

Severance and recruiting costs for the quarter represented nearly half or 1.2 million of this loss.

The new SEC treatment of stock options accounted for an additional 286k.

Net of these adjustments, our loss was just over 1 million.

For the six months ended June 30, revenues were 8.2 million, compared to 10.2 for the same period last year.

The analog business declined by 3.36 million compared to the first half of ’05 while the digital business increased 1.1 million or 44% for the same time period.

Gross margin for the first six months of the year improved to 79%, versus 78% for the prior year’s first six months.

Net loss for the first six months of ’06 was 4.2 million or $0.11 per share, compared to a net loss of 503k or $0.01 per share in the prior year’s first six months.

With the financial summary, I’d now like to provide a progress report on actions we’ve taken since the new management team has come aboard to position iCAD to be the market leader for computer-aided detection solutions in healthcare.

First, from a sales standpoint, we have completely revamped our direct sales model so as to have a highly-experienced healthcare sales professional in each of the 16 largest cities in the United States.

These individuals will develop and support OEM sales with companies such as GE, Siemens and Fuji to sell directly to large accounts as their primary priority.

As of today, I’m pleased to say that we’ve filled five of the open positions with start dates in August and we hope to fill two more of these positions by the end of July, filling seven of the open positions in a relatively short period of time.

We’ve also created a position of indirect channel sales management and filled that position this month as well.

This individual will develop a channel partner program that will recruit, train, certify and support all of the companies that will sell outside of our direct coverage areas.

We will also provide focused lead generation programs to increase their penetration and productivity as well.

In addition, we’re adding focus with corporate accounts.

We launched a group buy with Premier in June.

It will run through September and it is exclusive to iCAD.

We’re working closely with Amerinet to generate and qualify leads from their membership base.

We are in the RFP contract phase with Broadlane and hope to be named a successful contract vendor in the second half of this year.

We’re also seeing good progress with [Met Assets], a contract that started on May of ’06.

With that said in sales, I’ll now move on to marketing.

We are investing significantly in three major areas.

First, is re-branding and repositioning of iCAD as a company.

We’ve hired a well-respected marketing and advertising agency, Philip Johnson & Associates, that specializes in healthcare and are skilled at re-branding efforts.

They are the agency of record as an example for Boston Scientific.

Together with Philip Johnson & Associates, we will create a clear, compelling, differentiated value proposition for the Company going forward.

Number two, we’re completely reinvigorating our co-marketing with our OEM partners such as GE, Siemens and Fuji to maximize the impact in a joint, go-to-market strategy.

We’re in the process of watching sales programs with GE, Siemens and Fuji as I speak.

We also, number three, are developing strong, downstream marketing programs to create and identify demand for CAD solutions.

This will be accomplished, in part, as the result of two very talented new hires that have just recently joined our marketing organization and last, before I close, I’d like to speak a bit about our OEM partners, specifically, GE, Siemens and Fuji.

We’ve recently had several face-to-face meetings with senior management from each of these companies but we have agreed to work together on two major fronts going forward.

First and foremost, developing joint technology road maps that will allow us to maximize the performance of our algorithm for their mammography systems.

We’ve agreed to collaboratively work with GE and Siemens in the area of tomosynthesis or three-dimensional imaging, as well as connectivity and advanced applications.

In addition, we have worked on putting together highly coordinated, go-to-market strategies so that we can go arm in arm to customers on a global basis with integrated solutions to meet and exceed their needs in mammography.

With all of that said, I am very pleased to say that the new iCAD leadership team and approach, in a rapidly-changing digital market, in conjunction with a vastly different competitive landscape has created a whole new level of collaboration with these strategic partners.

Now, I’ll open it up for questions and I’ll turn it back to the operator.

Thank you.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Stephen Dunn from Dawson James.

Please, proceed.

Thanks for taking my call, Ken.

A little question here on the digital sales.

They were down, from my calculations, down just slightly from Q1 into Q2.

Is there any particular reason or just one of those things?

I think that - as I spoke about, Steve, in my opening comments, all the dynamics changing in the market have put “what I would describe as somewhat of a temporary pause” to sum up the business activity.

You know, we still have the litigation overhang.

We clearly had announcement of a new management team and then last but not least, clearly, when Hologic announced their intention to acquire R2, I think quite a few customers stepped back for a short period of time to really understand and try to digest that - what that meant to them as they attempted to make purchase decisions.

So, I think if we go back and compare it to the quarter in ’05, we had very, very significant growth but you are correct.

We had modest decline, quarter sequentially, from Q1.

What changes, if anything, have you done out in the sales force - or I don’t know if this is better, you know, for Jeff or Stacey or what plans do you have out there?

Yeah, what I mentioned earlier is that we have created 16 direct sales positions in 16 major cities in the United States.

We already had some people already on our sales force in those locations and others we did not.

So, what we’ve done is we have very aggressively recruited sales personnel to fill the major city territories that were uncovered.

So, I’m pleased to say that we have filled five of those openings as of today.

I believe by the end of July, we will have seven of those openings filled and in all likelihood, by the end of August timeframe, we will have a full compliment, all 16 territories filled with highly-skilled, highly-professional, healthcare sales executives that have extensive experience in healthcare.

Many of them in the imaging space.

Some of them in the CAD space and if I were to add that to our existing team, we will be really, really well positioned both from a competency and from a geographic location to support the OEMs in this major transition to digital technology.

So, as a GE or a Siemens knocks on our door with a sales opportunity, we will be close by with a very highly-competent individual, something that might sound basic but something we needed to do much, much more effectively to take advantage of this tremendous opportunity with the convergence to digital.

Now, with that said, Steve, we’re also putting a significant emphasis on indirect sales channel partners and to do that correctly, you need focused people that strictly recruit, train and develop those partners so that they can very productively go to the customer base that we do not want to send a direct sales person to, so we’re putting a lot of structure around the indirect channel program, we’re going to be recruiting as well as working more effectively with our existing channel partners, so that we ultimately have a pervasive, go-to-market strategy that has maximum reach at the most affordable cost to get as much volume as possible.

Just two more quick questions.

There was a slight inventory build.

Is that from the film-based and are we - if so, are we adjusting manufacturing to clear it out?

Yeah, I would say, first and foremost, this shift that has been so dramatic, I mean more dramatic than any would have thought, has given us excess inventory in the analog, film-based areas.

We have developed marketing programs to target those customers that we still think this would offer tremendous value to.

Secondly, we’re looking at some inventory that could be converted into parts inventory, that could support our install base, whether it be by a contract or a per-incident requirement for our service personnel and hope to make significant improvement in inventory levels between now and the end of the year.

Okay and then final question, any status update on the colon polyp software development?

Yes, we’re doing, I think, well in making progress there.

We are increasing our investment in the area of colonic polyp detection.

We have licensed an algorithm from a research partner and that, in conjunction with our own development work, we believe will help us to accelerate development of a commercial algorithm and while I don’t have a firm timeframe, what I would say is our enthusiasm, our priority and our efforts there grow in confidence each day.

This will be a very viable business for us to be in sometime in the not too distant future.

Okay, great.

Thank you.

I’ll jump back in the queue.

Thanks, Steve.

Your next question comes from the line of Jeb Terry from Aberdeen Investments.

Please, proceed.

Good morning, Ken.

Could you add some color on the size and timing of the CR opportunity with Fuji?

Well, Fuji has their clearance from the FDA and as I understand it, their goal is to be installing their first system in the late July/August timeframe.

So, I believe that they intend to be in the market in the August timeframe with a reasonable ramp-up of installations and upgrades to their install base.

We were at their national meeting last week.

We did a training session with them on our CAD.

We are in the final, final stages of finalizing our contractual relationship.

The go-to-market packages or solutions that would have CAD as part of the solution have been defined and I am confident that we will have a firm contract in probably several weeks’ time with them and we’ll be in the market selling with them in the August/September timeframe.

In your prior comments, you mentioned that the adoption of CAD in digital has become a near standard.

Would that apply as well to CR?

I don’t know that we believe out of the blocks that it will be one-to-one but I would say that the penetration rate will far exceed the current industry penetration.

Now, some have thrown around numbers like 80% of the customers where others would say, potentially, that 90%+ will buy CAD with full-field digital.

I do think that clearly, the whole value of the detection capability, the enhanced workflow, I mean, workflow may not be quite as elegant in CR as it is in DR but it’s still far better than in the analog film-based world and CAD plays a major role in enhancing that workflow.

So, I’m confident that we will see a high percentage of CR implementations with CAD.

Keep in mind, in some regard, they do believe they’re competing with full-field digital as the segmentation continues to move around somewhat before it is more final and a more mature market.

So, I believe the adoption of CAD will be high but it will probably take some time to ramp up.

And could the same thing be said for Total Look?

Well, clearly, Total Look can certainly play a major role in the digitization process of all these priors.

In our volume increases - I mentioned in my opening comments - the demand has increased 2X since the product was released in the fourth quarter of ’05 and clearly, there is this transition to digital both from the full-field mammography systems purchase standpoint but also the challenge of digitizing this major film library so all forward-looking screening exams would have a digital format to look backwards.

So, we clearly see the opportunity to embed Total Look in this migration for the priors and then obviously, very nicely in conjunction with the digital systems that will capture the current images and then have the ability on the workstation to look back.

So, we certainly see it as a very viable product in this technology transition.

And one last question, if I may.

The service revenue increase, does that embody click CAD or other services or a combination?

It really is focusing on the install base and providing value in our service contracts and really going out in what I call a much more aggressive and focused fashion in communicating that value to the customer and then getting more of our customer base to sign on for service agreements.

Also, there’s more of an opportunity, as we move into the digital world with various OEMs, to also structure more service business there as well.

So, as we get much closer with our OEM partners, we’re looking for ways to add more value in service as part of that partnership.

But right at this point in time, the major thrust of our growth in service is largely attributable to strong value and stronger penetration of our install base from a contractual standpoint.

I see.

Thanks, I’ll step back in the queue.

Thanks, Jeb.

Your next question comes from the line of Corey Tobin from William Blair & Company.

Please, proceed.

Hi, good morning.

Let me start with a couple of housekeeping things, if I could.

The - I’m assuming that the majority of the $1.2 million in the search expenses, as well as the options, are in G&A expense line items.

Is that correct?

Yes.

Okay and then just a question with regard to - I mean, given that there’s such a dynamic between the different product lines - analog versus digital in the service line, have you given any thought to potentially breaking that out on the - in the press release so that we can get a better feeling for how each segment’s trending?

We break it out in the Q, Corey, but it’s a good suggestion.

We’ll certainly take the input.

I think, as this business is going through rapid transition, those numbers do become more meaningful, so I take it as good, constructive input.

Thank you.

That’d be great.

That’d be helpful.

Can we - can you just give us a feeling for when you think some of the programs that you discussed with GE, Fuji and Siemens will really begin to contribute?

I mean, is there something we should think about as being a contributor here in Q3 or is this more sort of a first-half of ’06 - ’07, rather, type initiative?

I believe the programs in, what I would say, anywhere from as soon as one week to maybe a maximum of four weeks will be finalized and implemented.

We are very, very close with all of these OEM relationships with the programs.

Some of this is being driven by their own desire to very aggressively market their own technology for full-field digital.

Clearly, GE, at this point, is very anxious with their most recent release called Essential, to really go to the install base and go to the competitive market given the dramatic amount of growth in units that’s going on.

So, we’re trying to work in parallel to sync up the programs with - programs in many cases, they had planned to do on their own but feel very strongly that CAD needs to now be a key component and with this new competitive landscape, CAD from iCAD.

So, I believe we’ll see the programs in the market within, say, 30 days.

In terms of traction, obviously, customers have to digest them.

Often, they have to either make a preference choice, inventors, or they have to petition for funds.

So, I think you will see some progress with these programs, maybe not that significantly in the third quarter but certainly, I think traction will really kick in, in the fourth quarter and sustain itself, depending on the length of the program.

Excellent.

Great and then one last point of clarification on an earlier answer, if I could.

You mentioned that some customers had stepped back here, they digested [all] the events in the industry and I guess, specifically, at iCAD as well.

At this point though, has that reversed and have we seen them come back with the marketplace or is there still a pause created in the marketplace, given the R2/Hologic's deal?

Well, what I would say is that the demand in the final month of the quarter was significantly higher and our volume was significantly higher, obviously, than the first month.

And obviously, you could say, well, most quarters, that’s seasonality.

You know, people kick into gear and get things done at the end of the quarter much more so than the front end but what I will say is that I saw a very, very nice trend, month by month in the quarter with GE and in the final month of the quarter, the business volume was significantly higher than it was in the first two months and I think that’s just an example of the digestion of the information going on, whether it be the transformation to digital, whether it be this acquisition of R2 and I believe it is an indication that things are settling out and that going forward, now that people understand who’s aligned with whom and what the ultimate value proposition is, I do think we will see demand increase.

When you just look at the significant number of unit sales of digital mammography, as I listen to the Hologic call and the fact that they’ve increased their unit guidance for three consecutive months, recognizing that high percentage of those systems will go out with CAD, it just basically makes sense that the market will increase pretty significantly.

With that said, we are in the summer months and I think with every business that I’ve been associated, in healthcare, no matter what you do, after a very strong first half, business due to the July/August phenomenon is challenging in the third quarter and you tend to make up a lot of that in Q4.

So, it wouldn’t surprise me if that had a dampening effect but I think I would look at it more as a flywheel scenario than a reality in the market, again, based on the significant number of units of full-field digital, I know that GE has a very ambitious plan with Essential for the second half of the year and I’m optimistic that the program that we’re working together with them is going to have a significant impact on volume.

It’s just a little bit difficult today to say exactly when that [will occur].

Excellent.

Thank you.

I’ll jump back in the queue.

Your next question comes from the line of George Whiteside from SWS Financial Services.

Please, proceed.

I think I heard an answer but I would like some clarification on the statement of there being a dramatic change in the competitive landscape with the acquisition of R2 by Hologic.

Is my interpretation that that acquisition resulted in your being put in an advantageous position or a disadvantageous position?

A very advantageous position, George.

As you look at that transaction which closed, I think several weeks ago, you now have a situation where Hologic equals R2 and companies like GE, Siemens, Fuji and others see this as an obvious direct competitor and that obviously includes R2.

So, the interest in working in a preferred relationship with us, near exclusive, but not totally but near exclusive, has increased dramatically.

So, rather than being in a challenging competitive situation versus R2, to get the attention of these big mammography equipment providers, we have seen just a completely new very positive, open reception to a much more strategic and field collaboration with these companies and we have committed to them that our highest priority in the business is working with them at a strategic and tactical field level so that they have no reason to work with anyone but iCAD in this space, particularly with this enormous growth in digital mammography.

So, I feel very, very confident that they understand they’re in a competitive position.

Having listened to the Hologic call, it was fairly obvious to me that attempting to sell CAD as Hologic to their direct competitors is a complex, at best, situation and one that I believe these companies see as causing risk as it relates to the sale of mammography equipment.

There’s lots of rumors flying around but our latest understanding is that with the integration of R2, that Hologic has basically reduced the R2 sales force from 26 to 28 people, down to 6 to 8 specialists that will largely just support the Hologic women’s health specialist.

We have received calls, resumes from a number of R2 sales people that would love to join iCAD and clearly, if you adopt that type of a sales model, it really, for the most part, takes them out of this more neutral business at a time when the company, such as a GE or a Siemens, fully understand that R2 equals Hologic and is a competitor and we are trying to capitalize and take advantage and be the best partner possible to these companies to ensure that we can meet all their CAD needs, both technologically and from a field standpoint and become their near exclusive partner in this high-growth market.

That sounds very encouraging and it’s just reasonable to assume that GE and Siemens, etc. don’t want to do anything that would enhance the strength of a direct competitor and therefore, they would prefer to do business with iCAD.

Yes.

Thank you.

Yes.

Thanks, George.

Your next question comes from the line of Joe Rudy from [Saks] Security.

Please, proceed.

Hey, Ken, I just want to also follow up on a couple things.

Colon cancer, do we have an estimated time on when we’re going to be going to the FDA for approval?

Originally, it was supposed to be last quarter.

Then, it was supposed to be this quarter.

Do you have a timeframe?

I think I would say that our goal is sometime in ’07.

Okay.

I honestly do not have, in our current business plan, for any, in ’07, any significant revenue expectation for this program.

It would be, quite frankly, optimistic to say Q4 but I think it could easily be Q1 of ’08.

We are excited--.

--Of ’07, you mean.

In ’08.

I think, Joe, we, quite frankly, do not know yet whether we could do a 510k or a PMA will be required and if we have to do a PMA, as you’d imagine, that will be a pretty substantial effort with clinical trials and so forth, so I would say our goal is to be ready in the early part of ’08 with colonic polyp detection product.

I can’t say specifically who we created a licensing agreement with but that relationship is accelerating our algorithm development and combined with the prior work we’ve done, we believe we’re moving at a nice pace but I really wouldn’t expect a commercial product till very late ’07 or early ’08.

Okay, just backtracking for a little bit.

Lung cancer still a dead issue at this point?

Yes, we’re not really doing anything active at all there and I don’t, in my current thinking, really don’t see it as a core part of our business plan.

Okay, any numbers on any increase in business from Amerinet from the first quarter to the second quarter and any numbers on what the contribution was from Health Trust?

Yeah, I don’t have exact numbers, to be honest with you.

What I would say is that Amerinet has been extremely cordial and friendly in working with us to qualify and generate leads.

I don’t have specific numbers on them or Health Trust.

I think we are making good progress with a number of the corporate account groups but I’d also add to that, given the structure that these groups are, given my prior experience, what you tend to get often in this type of a sale is what I’ll describe it as is a productive hunting license, as opposed to a compliance commitment.

So, I think that this will open doors for us to get more business more productively but we still need to put, very frankly, highly-competent salespeople in front of those customers to establish brand preference in the transaction and I think we’re in that transformation and I would hope, going forward, we will have an opportunity with some of the investor-owned groups where they can drive compliance to get something more in an exclusive fashion but we don’t have anything firm to report at this point.

Okay.

Can you give us any guidance, as far as - and you know, I think you were eluding to it previously but I just want to clarify - can you give us any guidance on when we’re going to see, you know, potentially, overall growth?

You know, your numbers, overall, going back in the right direction.

Are we looking at potentially the third quarter?

Is the third quarter, you know, a write-off at this point and we’re looking, you know, for that in the fourth quarter?

I really can’t give specific guidance or numbers.

What I would say is that we’re putting what I call a very strong foundation in place for growth.

I would hope that we will show obvious progress in ’07 but I really can’t be more specific than that.

Okay.

Anything on as far as road show or getting in front of the institutions or is that something you’re going to just let the numbers speak for themselves and whoever, you know, whoever you attract, you attract, at that point?

We’re very interested in that sort of activity and with, you know, Kevin McGrath from Cameron, with our new agency, Philip Johnson, we are trying to formulate that strategy.

Stacey Stevens, that runs marketing and strategy, has made that a very high priority.

We firmly believe that the full-field digital and the computer radiography opportunity will allow this CAD market to grow significantly and I mean very significantly over the next two-to-four years.

In conjunction with that, the competitive landscape change provides us with tremendous opportunity and last but not least, I have brought in what I believe is an outstanding new leadership team and we’ve continued to add to that team and I believe that we will create what I describe as a functional operational excellence over time and I think that the foundation of that story needs to be communicated in the appropriate setting.

So, we are very interested in the opportunities to communicate that story and hopefully, in the near term, certainly show people the results.

Okay, have we set a date for the shareholder meeting?

I believe it’s going to be September 7 in New York City.

Is that a firm date or is that still--?

--It’s a firm date.

That’s a firm date - September 7.

Also, is the, you know, I know this has been spoken about previously.

Are we making, you know, an effort to make the company more transparent, and you know, have more newsworthy information out there in the market?

Absolutely and I think that, again, Stacey’s working up a plan with Kevin, as well as with Philip Johnson and I think, without question, I believe we have, as I mentioned, a very strong market opportunity, a very strong competitive opportunity and I think we have very competitive technology and I see every reason why we need to communicate that.

I’ll give you just one example, Joe, as an aside, of what we did, almost want to say, just to test the waters in a creative way.

Stacey was approached by American Airlines and American Airlines has, as you may know, Sky Radio and Sky Radio is something that lots of businesspeople listen to when they’re on an American Airlines flight.

So, they were doing a piece on CEOs and different businesses and different business models.

Several weeks ago, I recorded what was a six-minute audio, Q-and-A with an announcer from American Airlines Sky Radio putting emphasis on the importance of mammography screening, about the importance of addressing breast cancer and how digital technology in CAD, specially iCAD’s Second Look Solutions could play a significant role in the detection side as it relates to breast cancer.

That six-minute audio will be on, I believe, 39,000 American Airlines flights in the month of October and obviously, from the financial community standpoint, we would expect to get a good audience listening to that Q-and-A and while that isn’t certainly the prime audience for our messaging, it’s just an example that there is low-hanging fruit opportunities for us to communicate our value proposition to many constituents and if you happen to be on American Airlines in the month of October, please give it a listen.

Okay.

Can you give us a status on where we stand - this is my last question - with the China contract?

China contract is going slow.

We shipped 20 systems at the end of the December in ’05.

The uptake has been slow and we are planning an August/September trip to go meet with the various officials to better understand how we can train and how we can help them become better advocates in China for CAD, so that this contract will, quite frankly, get more traction that it has so far.

Okay, that’s it, Ken.

Thanks.

Thanks, Joe.

Your next question comes from the line of Scott Warner, a private investor.

Please, proceed.

Welcome aboard.

A couple of questions.

Are you there?

Yes.

Okay.

First, on the Premier, have you had - maybe I missed it but - are there any firm orders in hand, since you announced this?

Well, it just went into play in the month of June.

Yeah, I know.

I just thought maybe--.

--To be honest, there may be one or two orders but I can’t tell you that we’ve got a firm number--.

--Okay, just as I was hoping, it might have been taking off, running up.

It runs from June through September.

It is an exclusive promotion so I think it’s a good question.

We’ll need to get an update on a monthly basis.

Yeah, okay.

Second, just going off a previous question about, you know, marketing and all that.

You know, in New York City, where I live, they have a breast cancer run in the fall sometime and I’ve mentioned this to iCAD a couple years ago but I don’t know.

I think it’d be a - I don’t know if it’s worth your time.

You have to cost it out to have a booth or anything like that here, whether the PR business is, you know, whether the PR is worth what you put into it.

I don’t know but I just mentioned that in passing.

No, that’s very good input, Scott.

We actually did sign up to do exactly what you’re saying, in Boston.

We’ll be coming in the fall, I think, in September.

Yeah, okay.

Okay.

Hi, this is Stacey Stevens.

We are - have signed up to be a corporate sponsor for the Susan G. Coleman Breast Cancer Foundation Race for the Cure which is taking place September 10 in Boston and it’s a great opportunity for us.

The Boston race is one of the most highly-attended races.

We will have a very visible presence and showing there, a tent.

We’ll be getting a lot of media coverage there and we intend to work with the Susan G. Coleman Foundation very closely, moving forward as the missions of our, you know, of what we do is very similar and it’s likely that we will participate in other races around the country as well.

Okay.

Thank you.

Next, on the - we know that, you know, your Fuji contract is in the works and you expect that in several weeks, I think you said.

Is that about right?

Yes.

Okay.

When would you figure that iCAD might see some actual orders and then sales as a result of that signing up?

We have to get an FDA approval of our product, which you said was, I think, several weeks off or something.

Have I got that right?

I’m not sure.

Well, the FDA approval, we hope we will have by the end of August.

We put it in, in July.

So, anyway, that would be - seem to be about the same time that you might have finished a contract signing with Fuji.

When do you think we’ll start seeing some impact that might help our revenue and our - and then the bottom line, obviously?

It’s a good question, Scott.

What I would hope is in September.

In September.

We have, at least in our discussions with Fuji, said, A) We need a contract between the companies.

It, of course, isn’t done but it’s very close.

Secondly, we need FDA approval and obviously, they need to be in a shipping position.

Our goal - and again, the dates can move around.

It’s not a perfect science, but our goal is that by the end of the August to be ready to go and what they have given us is a preliminary projection of how many systems and upgrades they would ship on a monthly basis as they ramp up, as they carefully assess your own competency to install and implement these - they want to make sure they do it right - and a projection of a CAD business that would be attached to each of these upgrades or installations.

So, what I would say is that we’re hopeful that, beginning in September, we will be doing business and we’ll have to see that these critical final steps get executed correctly for that to happen but I would say I’m optimistic.

Ken, I don’t know if you’d give anything away to the competition who listens in on this but is there any rough growth - revenue of the unit that we sell to them to get them profit margin but the growth revenue of the unit that would go with Fuji equipment?

Yeah, I mean, we have certainly established pricing with them that I think is both competitive in the market and very attractive to us.

I know it’s been publicly stated that these units - that the Fuji unit itself is maybe a $300,000 or $400,000 versus $1.5 million at full digital, so our part, obviously, is much smaller.

Would you want to give us a quantify, a rough figure of what they - what the growth revenue would be to us when we sell our units - sell this to Fuji?

Go along with Fuji?

I really am just not able to give what I describe as OEM pricing but I would say is this - is that where I’m most excited is the sheer number of units, based on what I’ve heard from my meeting.

I was at GE last week, a week ago, today.

We had a four-hour meeting in Waukesha with the general manager from mammography, as well as the general manager for all of GE X-ray and if I combine that with the information that Hologic just put on the street, what I would say is that the number of units that would be sold for full-field digital, the number of units, whether they’re new or upgrades for computed radiography could be dramatically higher over the next 12 months.

Just looking at Hologic’s guidance of 700 Selenias in ’07.

They increased their guidance dramatically each month since April.

Taking that into consideration with what GE shared with us, as well as what Fuji has shared, the number of units from a transaction standpoint could grow dramatically as a percent of the addressable market and we feel really well positioned, from a pricing standpoint, to the OEM such that they will have a competitively-priced solution and in the absolute unit volume, could pay dividends for both of us over time.

Okay.

Would you just give us an idea in, say, in the first quarter ’07 of what percent do you think the computed radiology business for iCAD is relative to full-digital equipment?

I mean, you know--.

--That’s a good question, Scott.

I don’t think I could answer that.

What I could say is that it clearly will be at a time when Fuji will have, you know, a good four-to-five months of experience under their belt.

They will have worked through their pent-up demand in their install base because as you know, their customer base has been waiting and anticipating this for some time and secondly, I would expect us to have not just a full compliment of salespeople on the street but a very highly-trained, highly-focused set of salespeople with the right sort of programs and support.

So, I can’t give you numbers but I’ll just say this, we will be in primetime in the first quarter for that market opportunity and with the right people to support to take full advantage of what’s out there.

Would - can I just throw out a figure just out of my head?

I have no idea but would 50%,45% be in the rough, ballpark, possible?

I honestly don’t know.

It’s a good question.

What I will say is you can see from our Q2 results that our digital mix is growing dramatically and obviously, the analog mix is going in the opposite direction.

I would expect digital sales to continue to be a much, much--.

--No, I meant this part.

The computed radiology part of the digital.

Yeah, that’s - it’s an interesting question.

I really - I don’t know.

Okay.

I think that without question, the number of full-field digital units will be significantly higher than CR where I think the traction point, Scott, will come in is going to be when Agfa also enters the market for CR.

Agfa is a big player.

They’re, I think, projecting probably the second half of ’07 and the traction, as we are working with them already, we’re meeting with them in Belgium the week of August 21, along with our friends from GE near Paris.

We’re getting a better feel as we meet with them and to work our go-to-market strategy but it is hard today to give you a firm answer.

Okay and the last is a sales force-type question.

Should I give that to you?

Sure.

Yeah.

I’ve seen all the numbers, you know, the five new direct hires and two coming on in July or August.

How many direct hires will we have by the end of August, direct sales force versus what we had prior to your arrival?

Right.

Well, let me start with the prior to my arrival.

Prior to my arrival, we had a headcount of 16.

I know Scott Clark communicated that several quarters ago, the doubling of the sales force from 8 to 16 people.

However, in doubling the sales force, what was brought on board were a number of very bright, very young, very inexperienced salespeople, if they had sales experience at all to supplement the eight core reps that we had.

What we truthfully need to have is 16 very senior, very savvy, very experienced salespeople, know how to sell directly to large accounts, know how to support our OEMs and ultimately, up until recently, also, we’re supporting distributors.

So, we needed a much stronger, much more competent team.

I am confident, with the transition that we’re going through, that we will, by the end of August, have all 16 strong, competent people hired.

Whether they’ll all be on board is a different question because people are phasing out of their current assignments.

To be frank, the R2 people are, in some cases, tied up till September 30 with incentive and retention but my expectation is that we’ll have all these people identified and on board and it will really be, let’s say, October, that they will be fully trained and beginning to become productive.

Okay, last quarter affected this.

All right, now let’s get to the cost aspect.

What kind of drain will all of these new personnel who can’t be producing income right away, what kind of drain cost are we talking about?

If this quarter - I’m looking at my notes.

Market sales, 1.8, 1.9 million.

What do you see therefore in the third - let’s see.

In the fourth quarter, what are we looking at as the way of - what is this going to be in the way of a cost for us?

What I would just estimate is that in Q3, our increased spend in sales and marketing, not just sales, are probably going to be 750k and because of RSNA, in the fourth quarter, combined with higher volume than the third quarter, I would expect we might spend about 1.2 million tops.

So, we may invest about 2 million in sales and marketing spend over the course of Q3 and Q4 to accomplish all of the things that I’ve been talking about earlier.

With a mix shift to digital with a gross margin north of 80%, this, in my opinion, is a good short-term investment in a market and competitive space that I think will pay off without having to go the typical long cycles you do when you’re trying to bring new technology to the market.

Okay, great.

That’s all I have and I thank you very much, sir.

Yeah.

Thanks for calling.

You have a follow-up question from the line of Corey Tobin from William Blair & Company.

Please, proceed.

Hi.

Just one quick follow-up.

Touching upon the gross margin, given that - and I haven’t run the math exactly yet so I apologize if the answer’s just revenue mix but - with more digital product coming through the top line, I’m curious why we haven’t seen the gross margin trend a little bit higher here in the last couple of quarters.

Well, I think, Corey, unfortunately, the absolute volume mix has not shifted yet.

You know, when you combine all the areas we get revenue from, when we are getting 80%, 90% of our volume in digital and the top line is much higher than it is today, I think you will see a significant shift up in gross margin as a percent of revenue.

Right now, the absolute growth rate as a percent is very impressive.

The absolute dollars that it represents is not enough, quite frankly, to move that against our total mix in a dramatic fashion yet but I think that shift bodes well for that occurring in the not-too-distant future.

So, it’s not a function of any sort of price compression on the digital side.

It’s just a mix issue.

Well, you know, as you talk about pricing pressure, what I would say is we’ve completely revamped our pricing strategy and we are going to earn customers’ loyalty through providing value and we’re not going to price it nearly as aggressively as we have in the past, as a company, number one.

Number two, given the competitive landscape change, we’re not as compelled to need to.

So, I would hope that our pricing discipline going forward will have a favorable impact on gross margin.

Great, thank you.

This is your last question from Brooke Moore from Evergreen Associates.

Please, proceed.

Good morning, gentlemen.

Welcome aboard and all of that.

Very good conference call and candidly, most of my questions were asked and answered.

But I did have an anecdotal question if you will - I don’t know if you can answer it - regarding insurance companies, sir.

Are we seeing, in the industry at large, more pressure coming from insurance companies for hospitals and facilities to actually provide our healthcare in order for them not to run into the losses that they, you know, typically do?

Yeah, I’m not sure I understand the question, Brooke.

Well, for instance, when a radiologist misses the obvious in breast cancer, often times, there are lawsuits, medical malpractice lawsuits.

Yes.

Are we seeing some anecdotal move coming from the insurance industry that, you know, if you’re not going to provide total healthcare, that your medical insurance is going to be terribly more expensive?

Are we seeing any of that?

I’m not seeing any of that.

What I would say though is when we talk to hospitals, the first thing that comes up obviously is get it right the first time, from a detection standpoint.

The second one, obviously, is avoidance of litigation and the third thing we hear about is marketing themselves as having the latest technology in the digital space.

So, I think that it’s probably not as much coming from the insurance, the payer side as we’re seeing the compelling interest coming really from the clinical side and it really is about better detection.

It’s about getting it right the first time and significant cost avoidance.

Litigation is always a concern in the United States and then it’s about marketing themselves because the informed consumer in mammography is a great example of one of the most informed consumers in healthcare are demanding digital technology.

We don’t see, at least from our perch, if you will, we just do not see direct influence from the insurers in that regard.

Yeah, I really candidly wasn’t sure if you would be, you know, in that actual position to be seeing that.

But candidly, as a user of your technology, I personally do push for all of my friends to actually go for the best healthcare that they can because I have lost some people.

Just what you’re saying, I’ve lost some very dear friends to breast cancer because they didn’t get it right the first time and so at any rate, thank you very much and good luck with the following quarters.

Thank you, Brooke.

I would now like to turn it back over to Mr. Ken Ferry for closing remarks.

Well, thanks, everyone for joining us on the call today.

We’ve tried to articulate where we are.

We’re also tried to give you some indication of where we’re going, as a company.

We are excited about all this change.

We’re also very, very confident that we can take advantage of all this change in putting together the right foundation as a business to become a market leader in computer-aided detection.

We’re working feverishly to prove ourselves to our OEM partners every day of the week.

We’re encouraged by the feedback that we’re getting.

We’re realistic about the amount of time and effort it will take going forward and we’re trying to be very, very prudent so that every dollar spent is calculated in appropriate priority and return as well.

So, again, thank you all, very much, for joining us and we look forward to communicating more progress in the near future.

Thank you for your participation in today’s conference.

This now concludes the presentation.

You may disconnect.

Have a great day.