ICAD Inc (ICAD) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the iCAD, Inc., fourth quarter and full year 2006 financial results conference call. My name is Sharrell, and I will be your facilitator for today. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded for replay purposes.

I would now like to turn your presentation over to Kevin McGrath of Cameron Associates. You may proceed, sir.

Thank you, and good morning. Certain statements contained in 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 & 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.

With that said, I would now like to turn the call over to Ken Ferry, CEO of iCAD.

Thanks, Kevin, and good morning, everyone, and welcome to iCAD's Q4 2006 earnings conference call. With me at our corporate office this morning are Darlene Deptula-Hicks, our CFO, Stacey Stevens, our Senior VP of Marketing and Strategy, and Jonathan Go, our Senior VP for R&D.

So, with the introductions completed, the fourth quarter 2006 can clearly be categorized as one of significant continued progress, as we achieved record revenue and backlog levels. The rapid adoption of digital imaging technology for mammography, favorable competitive market dynamics, and a focused plan to solidify analog and digital CAD as a standard tool for all breast imaging environments contributed substantially to this success. To this end we achieved significant growth in digital product sales, with strategic partners such as GE and Siemens, and shipped and installed our first Fuji CR CAD system in Singapore.

We also revitalized our indirect channel partner program, which resulted in our highest revenue quarter of 2006 for our analog film-based products. As anticipated we experienced a decline in business with Hologic, resulting from the acquisition of R2 Technology during the latter part of 2006. We have previously stated that our goal is to substantially increase market share in the digital mammo CAD market as it rapidly grows. We believe the sale of our products accounted for greater than 40% of the total digital mammo CAD unit sales in the United States during the fourth quarter of 2006.

We are working toward increasing our market share further which we hope to achieve through expected increased product shipments by our current full field digital partners, combined with additional product sales, assuming our receipt of FDA clearance of our digital CAD for computed radiography partner Fuji. We're in active partnership dialogue with other major companies offering CR mammo solutions. These companies will enable iCAD to increase its global presence in market share in addition to our current U.S. momentum.

Also, as customers go digital end-to-end, marrying the digitization of prior exams in the film-based library we have seen rapid growth of our TotalLook product. This product, beyond digitizing prior exams, has advanced applications to enable comparative reading of prior with current exams. As a result, this product is being purchased with increased frequency as part of a comprehensive digital mammography solution. And as I have mentioned earlier, we have revitalized our indirect channel program with dedicated field resources, additional distributors experienced in our space, and proper products and programs to increase demand for analog solutions.

Now a few comments about progress on the bottom line. We are pleased with the continued gross margin improvement which can be attributed to a higher mix of digital products and more efficient use of inventory. And while the below the margin line operating expenses were higher than Q3 as planned, we see one-time branding expenses, our largest trade show of Radiological Society of North America, which always occurs in Q4, board compensation and executive bonuses in which the entire amount was expensed in the fourth quarter, and an increase in share-based compensation expense as major contributors to this increase. More details from Darlene on this in a few moments.

Our goal, of course, is to achieve profitability, which will be primarily subject to our ability to achieve increased demand and market share for all CAD solutions. To this end, I am most pleased with our progress in this most recently completed quarter. Now with all of this said, I'd like to turn things over to Darlene who will give you more color on our financial results.

Thank you, Ken, and good morning, everyone. As Ken mentioned in his earlier remarks we had a fantastic quarter, including realizing record revenue while building record backlog.

Let me provide you a little bit more insight on the financials. Fourth quarter revenue hit a new high of $6.4 million, an increase of $1.4 million, or 28%, over the third quarter of 2006 revenue of $5 million. Fourth quarter revenue also increased by 5% or $300,000 as compared to $6.1 million in the fourth quarter of '05. Our digital revenue for the fourth quarter increased 36% or $940,000 to $3.5 million, from $2.6 million in the fourth quarter of '05. Digital revenue also increased sequentially by $462,000, or 15% from the third quarter of '06.

During the fourth quarter we realized significant growth in digital revenue from our key OEM partners, GE Healthcare and Siemens Medical. This growth was offset by an anticipated decline in revenue from Hologic as a result of their acquisition of our former competitor, R2 Technology. During the fourth quarter we also shipped our first Fuji CAD system to Singapore, and are pleased to report it's up and running with excellent performance. Our analog business had its strongest quarter of the year in the fourth quarter with sales of $2.1 million, and $829,000 or 66% sequential increase over the third quarter of '06.

This fourth quarter analog growth was fueled by demand for a TotalLook, a leading solution for the digitization of film-based prior exam for comparative readings with current exams, which enables end-to-end digital work flow, as well as a demand for our film-based CAD solution. Analog sales declined in the fourth quarter of '06, over the fourth quarter of '05 by $913,000, or 30%, to $2.1 million as compared to $3 million. This was due primarily to the rapid adoption of digital technology, combined with previously weak channel coverage of the film-based market. While the transition to digital technology had a significant positive impact on performance, the corrective actions taken in the third and fourth quarters have begun to improve our analog business.

Our service and supply revenue increased 51% in the fourth quarter 2006 to $815,000, as compared to $539,000 in the fourth quarter of '05. Service revenue also increased sequentially by $110,000, or 16% from the third quarter of '06. This increase is due primarily to focused efforts to increase our service value to our customers, resulting in an increase in service contract penetration. While full-year revenue of $19.7 million was essential flat with the previous full year of $19.8 million, let me point out in that the first six months of the year the company realized only $8.2 million in revenue.

The second half revenue of $11.5 million represents a 39% increase over the first half of the year. This strong finish was accomplished as we continue to execute on our go to market strategy, stay extremely focused on this digital CAD opportunity and revitalize our indirect-channel program for our analog product.

Year-over-year digital revenue growth was fueled primarily by the increased demand for our digital CAD product, as our customers accelerate their transition from film-based analog mammography to full field digital technology. Because of this market shift to full field digital technology adoption, our digital revenue for 2006 increased by 63% to $10.3 million from $6.3 million in 2005. This year-over-year gain in digital growth was offset by a $5.2 million or 44% decline in analog revenue to $6.5 million in '06 from $11.7 million in '05. Our service and supply revenue increased 64% in 2006 to $2.9 million, as compared to $1.8 million in 2005.

Again this year-over-year and quarter over quarter increase is due primarily to focused efforts to increase our service value to our customers and the resulting increase in service contract penetration.

For the full year 2006, 95% of our revenue was domestic, and 5% was international, which was primarily sales to Europe. We are also pleased to report that we're able to build product backlog in the fourth quarter of $2.6 million, which represents an increase of 226% over the corresponding backlog of $789,000 at December 31, '05, and an increase of 83% sequentially over the September 30th backlog of $1.4 million.

Gross margin for the fourth quarter increased to 7. -- 79.2% from 76.8% in the prior year quarter, and for 2006 full year, increased to 78.2% from 76.5% in the prior year. These increases in gross margin are primarily attributable to higher gross margins realized on our digital product. Operating expenses for the fourth quarter of 2006 of $6.4 million decreased by $146,000, or 2.2% from $6.5 million in the fourth quarter of '05.

Operating expenses increased sequentially by $1.5 million, or 31% from $4.9 million in the third quarter of '06 to $6.4 million in the fourth quarter of '06. This sequential increase in operating expenses from third to fourth quarter is due primarily to several key items. Those being the one-time rebranding expenses of approximately $338,000, the adoption in the fourth quarter of a board compensation plan where previously one did not exist, plus an accrual for 2006 management bonuses, which were determined by the board of directors in January this year. These two compensation items combined totaled $551,000, of which the entire amount was expensed in the fourth quarter.

Going forward, and to the extent to be determined these expenses would typically be expensed in the more even bases over the course of the year. We also had an increase in equity-based compensation expense of $346,000 over the third quarter, primarily due to the completion of the hiring of the executive management team in the fourth quarter. We expect in 2007 to see as much as a 30% decrease in equity-based compensation costs for the full year.

Other significant fourth quarter operating expenses include: costs associated with our largest trade show, the RSNA, which was held just after Thanksgiving. We expect to contain and smooth out operating expenses going forward, and believe that our normalized quarterly operating expenses will be in the range of $5.3 million to $5.7 million. Operating expenses for the full year 2006 were $21.9 million, as compared with $19.9 million for the 12 months of '05, or a 10% increase.

This increase was the result of increased engineering and product development costs related to enhancements of our breast cancer detection algorithm, the expansion of our efforts in the development of CT applications, particularly in the area of colonic polyp detection, severance and recruiting costs, increased sales and marketing expenses, forward fees, bonus expense, and equity-based compensation expense, all of which were offset by a reduction in legal costs.

And as you may recall the company incurred significant legal costs in 2005 principally associated with the company's patent arbitration proceedings with R2, which was settled in April last year. Net loss for the quarter including equity-based compensation expense of $567,000 was $1.4 million, or $0.04 per share, as compared with net loss of $1.8 million or $0.05 per share in the fourth quarter of 2005, which did not include any equity-based compensation expense. Net loss increased sequentially by $286,000, or 26% from the third quarter of 2006, due primarily to those increases in quarterly operating expenses just discussed. At December 31, 2006, our head count included 94 full and part-time employees. This was a decrease in head count of one from the 95 full and part-time employees of December 31, 2005.

While we have made significant changes in senior management and the sales organization and have increased head count in marketing, overall there has not been an increase in total head count. We expect to fill several more nonmanagement positions, particularly customer-facing positions in research and development engineers during 2006.

Now turning to the balance sheet. At December 31st, we had cash and cash equivalents of $3.6 million, as compared to $4.6 million at December 31st, '05. Accounts receivable at year end were $3.7 million, as compared to $4.0 million at December 31st, '05. This reduction in AR is primarily due to improved DSO.

Inventory at December 31st was $3 million, as compared to $2.5 million at December 31st, 2005, and $3.8 million at September 30th. As our digital inventory turns out high, our mature analog product inventory and supporting spare parts have been experiencing lower turns. We have created programs to ensure more efficient use of inventory in the future and have begun to see the early results in the fourth quarter.

At this point I would like to thank you for participating in our call, and I will pass it back to the Operator to open it for questions. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] First question comes from the line of Stephen Dunn of Dawson James. You may proceed.

Guys, good morning. And congratulations, Ken and Darlene, on a great quarter.

Thanks, Steve.

Couple questions here. I think I caught it -- Darlene said 2006 guidance was $5.3 million to $5.7 million in expenses per quarter?

Correct.

Okay, so if we take -- extrapolate Q4, which was extremely strong, if we extrapolate that out would it be fair to say towards the latter half of this calendar year that you would turn profitable?

I think that's a good question, Steve, and I think that what that really entails is whether the demand continues to accelerate at the pace we have seen. Obviously when you are growing sequentially from Q3 to Q4 by almost 30%, if that trend would continue, yes, that's certainly very likely.

But it is very much dependent on a robust growth trend, combined with our ability to maintain our strong margins up in the 80% range, as well as to control expenses in that mid $5 million. But, certainly, our goal is to be a profitable company soon, and we're making very calculated, balanced efforts to ensure we grow, but grow responsibly such that we can be profitable in the not too distant future.

Okay. Next question. Is -- your analog business was a little stronger than I expected, which was good. I was wondering if on the $2.6 million backlog, if you could characterize that between digital and film?

Yes. Hang on one second. Probably have that data. Okay.

Yes, basically, if you take a look at the backlog, it's about $700,000 in analog products exiting the quarter and almost $1.9 million in digital. Now, the digital backlog growth is about 100% over Q3, and the analog backlog growth is about 50% over Q3. What I would say is that the majority of the analog growth is TotalLook. TotalLook growth has been significant. It grew 100% backlogwise from Q3 to Q4.

And when I take a look at the digital backlog significant increase with GE, we actually surprisingly had a significant increase with Hologic customers from a backlog standpoint, and these are almost exclusively direct orders with Hologic customers that prefer our CAD. And a very steep increase with Siemens as well.

So the transition -- it sounds like on the analog side the backorders relate to the TotalLook conversion 8 transition to digital market?

That is, I would say, the bigger driver, but what I would also say, Steve, is we've done a lot of work to revitalize our indirect channel program, and our distributors are out there selling our analog CAD products at a much higher clip than they had prior. So if you go back to the first three-quarters of '06, a number of units of analog CAD sold in Q4 were higher than any of the first three-quarters, so we're seeing a pickup in analog CAD as well.

And I think a lot of that has to do with we've put dedicated resources in place to support the indirect channel companies in the field. We've put a lot of focused marketing programs in place, and we have adjusted our transfer costs to them as well, so that the margin as they transact is a healthy one motivating them to sell more product. So, we still think there's a lively opportunity in the analog CAD space.

However, we need to be careful about our investments and not blanket that market, but really surgically go after it. And I think that we're confident that our analog total business for '07 has realistic chance of growing over '06, in part because of this rapid adoption of TotalLook, but also because we're getting more traction with analog CAD systems.

That's actually unexpectedly good news. I would like to talk about any status update on the Fuji?

We expect to hear in writing this week as to the status of our submission. We amended our submission back in November -- actually on November 11th, and it has been 3.5 months of what I would describe as incomplete dialogue between ourselves and the FDA. We have had an increased dialogue over the last month.

I personally have had several conversations with Dave Segerson, who is the Deputy Division Chief at the FDA, regarding our submission, and they have promised as recent as last Friday to communicate in writing as to the status of our submission this week. We anticipate there is a deficiency that they would like to us respond to. At this point, without that letter in our hands we're not able to say specifically what we think that might be, other than to speculate as well as really could not put a time frame on our response. But we are anxiously awaiting the letter.

I will say from our direct dialogue with our partners and Fuji their CR mammo product is really gaining traction in the market. The number of installations that they have achieved since the RSNA has gone up substantially, as well as their backlog, and those customers are anxious in most cases to add CAD to that solution once it's cleared by the FDA. So we will have a much better handle when we get the letter this week and we will put all the appropriate resources on this because this is a significant business opportunity for us, once we get clearance.

Is the deficiency related to you would have to do, I gather, more data, or do you feel it's just they're going to want more data you already have?

That's a good question. Obviously if they ask for data we already have we can turn that around in a day or two. If they are looking for new data to be generated that could be a different time frame. But what I will say is there seems to be somewhat of a shift in philosophy at the FDA as it relates to all CAD submissions for mammo.

So as we understand it, it's not an iCAD issue, but it's some new individuals involved in the process that may have not been as involved in the prior digital submission that have a different point of view and a different expectation as to what you should -- submission should entail. And we believe, since it's been 3.5 months of what I would describe as more informal versus formal dialogue that they have been wrangling with issues internally, which has made it more difficult for us to respond.

My understanding is that they needed to go to their internal policy board to get the language in alignment, relative to what they're going to ask to us do, relative to our November submission, and that tells me that there's been different points of view and it had to be escalated to create one voice from the FDA. Our hope is that we certainly can respond very quickly and with that, we would see a significant business opportunity ahead of us.

And this is still under a 510k?

This is a PMA. We're not in a 510k world yet as it related to CR mammo. That will come, we believe, this year. And some other vendors will wait to take advantage of it.

So, as an example Kodak we believe filed the final module of their PMA for CR mammo in November '06, hoping that within a six-month window, meaning end of Q2, they would have a product commercially on the market. Other companies that we've talked to, such as Agfa have taken more of a wait-and-see route, and once they understand what the 510k submission would entail may choose to go that route versus the PMA. Obviously they would be the best to speak on their behalf, but that is kind of the chatter, if you will, in the marketplace.

But technically today, we're not aware that there has been a guideline communicated for the 510k submission, and hence the only route we're aware of is the PMA process.

I'd like to go over to Europe here. You added Laurence Veron over in Europe from R2. Was wondering what your strategy going forward is in Europe.

Well, one thing about Europe is they will certainly, particularly in western Europe, adopt leading-edge digital technology at about the same pace they do in the United States. But obviously as you look at that market you do not have reimbursement, you don't have the risk of litigation and liability for the radiologist and you have a double reading protocol, which means two radiologists must read the film before making a diagnosis, and as they say, old habits are difficult to change.

With that said, there is a significant uptake in digital mammography demand. There are emerging screening protocols in the more, let's say, mature countries, and we are very fortunate to have a very strong relationship with GE and Siemens, who have a very strong footprint outside the United States. Unlike Hologic, who we believe from their communications have about an 80% to 85% of their volume coming from the United States, I would say the international mix for people like GE and Siemens is more skewed towards the international market, and that footprint and that channel structure that they have bodes very well for us.

With that said, we clearly needed someone on the ground in Europe that knew the business to support our partners. Laurence comes obviously from an R2 background as well as an extensive imaging background. She was actually recommended to us by GE's marketing organization in Europe. GE's headquarters for mammography happens to sit near Paris, and Laurence lives near Paris, so a just perfect fit for us, because we really see a significant opportunity as more digital systems are purchased in Europe to significantly increase our business in Europe and make our international mix a higher percent than it is today.

Alright. Last question here. I'd like a little color on the virtual colonoscopy CAD software, especially the technology from NIH.

Yes. We announced on Monday our agreement with NIH, which actually was consummated last summer. And basically, we have worked with our own algorithm development, which was going on prior to that licensing, and really have taken the best capability from the NIH algorithm, have rewritten the code into more of a commercial format, in conjunction with added -- the expertise we already had in place in colon, with the expectation that we will be in clinical trials sometime in the second quarter of this year.

If the clinical trial process goes well and the protocol and the resources are all being put in place as I speak, we would still hope to have a commercial product ready some time early in 2008. But we're excited about the opportunity. We think that the market for virtual colonography with CAD is going to be a strong one, and I think that if you look at the expertise and the length of time that NIH has been working in this area, combined with our core competence in pad and recognition in algorithm development, we feel really, really well positioned to take advantage of this market opportunity.

Alright, again great job on the quarter, guys.

Thank you, Steve.

-- from the line of Emily Johnson of WR Hambrecht. You may proceed.

Hi. Thanks, guys. Great quarter. Congrats. Just quick question, because most of my questions are answered, but wanted to know if you could give us any kind of color around your -- around your -- into the OEM relationships, what exactly is going on with GE? How --

Sounds like they had a pretty strong quarter digitally as did most of other players in the space, but what is really driving their success and what's going to push them forward in 2007 as they try and get market share from Hologic, and that's sort of keeping your boat floating. And really where is the revenue power coming from for the rest -- for the remainder of this year? It would be good if you could just kind of give us a little color around that.

Okay. We had a very strong fourth quarter with GE, and even though our third quarter with GE was substantially up from the second quarter, we actually saw approximately a 15% unit increase sequentially in sales with GE over Q3. I think to some extent, Emily, this is all about a competitive marketplace where there's no incentive that makes sense for you to want to buy CAD from the company you directly compete with for the full field digital mammography equipment.

And I think that a sentiment that started to shift in the third quarter quite prominently shifted even further so that our share of, say, GE and Siemens business has gone from our estimate of maybe 65% to north of 90% of their CAD business in the fourth quarter. I think obviously the competitive environment helped to create that, but also we have stepped up as a management team and as a company and have really demonstrated to them that we will deliver on our commitment.

I think if we are executing, delivering on our commitments, both from a technology road map in conjunction with -- from a field standpoint, they have every reason and motivation to work near exclusively with us. With that said, we are working on an extra lease of our algorithm, which we describe as 8.0. That will follow the 7.2 version that's in the market today. And we are working very closely with GE, as well as Siemens and others to ensure that the increased capabilities that we add in the next release reflect their priorities as well.

So we've got healthy dialogue going on between the R&D functions. We will be at the European College of Radiology in Vienna beginning this Friday. We have meetings set up there with GE, with Siemens and a variety of other partners, and as we target a release toward the end of this year, or the early part of '08 of the next algorithm for mammo CAD, it will reflect what our partners' priority requirements are, in conjunction with the deep knowledge we have with CAD and what customers are telling us as well they would like us to have next.

So I think that those are the dynamics around our dramatic increase in business with the companies that compete directly with Hologic. And then to address your second question, which is about revenue, we certainly, as we have said before, and I think it's been said by many, we're in the early stage of digital technology adoption and mammography. Of the 14,000 systems approximately across the U.S., most estimates are that only just over 2,000 systems at this point have gone digital.

So this continued adoption of full field digital mammography systems, in conjunction with computed radiography and the near one-to-one application of CAD, we think is probably the biggest opportunity for revenue generation going forward. With that said, not all these sites, obviously the 12,000 or so that are still in the film-based world are going to go forward in one year. So there clearly are going to be sites that are in the analog space that could be at the back end of this digital transformation, meaning they could be three to five years out before they go digital.

And we are trying to target analog-based CAD solutions for those customers, because we think the benefits of detection, the benefits of work flow improvement, the benefits of reimbursement and less risk of litigation is still a very compelling value proposition, as CAD is seen more and more as a standard of care in mammography screening. So we think we can grow our analog business in part, because it was neglected from a channel standpoint prior. So that is something we're certainly counting on.

Two other areas I will mention. One is service. We have done a nice job growing the service business by increasing value to the customer, and we think there's more opportunity to increase value to the customers with service offerings, largely in the contractual space. And last, but not least, we hope to be selling in 2008, upgrades to our algorithm, as opposed to releasing a new version and making it available to any customer that feels a need for it.

And we think as we build match bigger installed base of customers into the thousands, going back each year in a 12 to 18 month cycle, with significant new features wrapped around our algorithm, we will have something that we can certainly charge for and start the build an annuity business in our installed base, and not solely be relying on new purchases to drive our revenue.

I guess what I'm trying to get to is now that you are 90% of GE, or north of 90% of GE and Siemens business, a lot of your success is going to be driven by their taking mark share. Are you -- do you feel good based upon what feelers you have out there about this -- their measure of success in that area?

What I would first say is that many have made this comment over the last year, that GE, beginning last summer, came out with a new wider detective plate named Essential, a and they have been ramping manufacturing since it came out last summer with steady improvement. They are now starting to reach a point where they feel they can manufacture a satisfactory number to meet the backlog in demand of their customers. We think that the pent up demand combined with their ability to manufacture more product in itself could create a burst of opportunity in the market.

With that said, once you have higher supply, you can get much more aggressive going after the business. Obviously if all of the units you can manufacture are already spoken for, and there's a four or five month lead time for new equipment, it's hard to go out and be very aggressive against your principal competitors. I would sense that they would begin to go more to an offensive strategy.

We've also seen Siemens with a much more focused and targeted effort in mammography become a bigger player, certainly taking advantage of increased demand, but also keep in mind that the CR market has not even begun for us. And I think that over time the ability to supply CAD to Fuji, possibly to Agfa, Kodak, other major players in the CR space will add to our portfolio of partners so that we're not so dependent on one or two and can see nice growth with five or six digital players supplying full field and computed radiography technology.

Okay, great. And just finally can you talk about the market opportunity for CAD for CTC, and where you think that is right now in terms of the product going forward?

Yes. I think that's a good question. Obviously, there's a major trial that has been going on since 2006 in a side-by-side comparison, if you will, between the optical invasive colonoscopy procedure combined with virtual. And this you could liken to some extent to what [Demist] looked at digital and analog mammography. And obviously if the less invasive imaging procedure by our CT is proven to be comparable or more effective, it's going to really open the door to this market.

Now what we're hearing is this large study of several thousand patients has been completed, but the results may not be available until some time in the summer of '07, and that could easily be a moving target. We think once substantial clinical data is provided, there could be a significant opportunity immediately for virtual colonography.

However, with that said, you've got to follow the money. Reimbursement is an extremely important component of all imaging procedures and it's unclear how quickly if at all reimbursement will be provided for screening for virtual colonography. So you've got clinical component, you've got the economic component and to be honest, until those come together it would be hard for us to project what sort of volumes we think could be achieved.

What we do hear anecdotally is that the increase of the virtual procedure is clearly happening and in many cases patients are more than happy to pay for it themselves if their local insurance provider does not. So as this perfect storm between the clinical evidence and the economic evidence comes together we hope to have a commercial product as that whole finding is made available to the public. And unlike mammo, where CAD came later, we'd really like to see CAD for colon available as the procedure becomes more of a standard of care, so that it can get integrated into the radiologist's work flow from day one versus trying to change that later as we had to do in the mammo space.

So we are going full speed ahead, but to be honest with you, it's hard for us to really estimate the size of the market at this point.

Okay. Great. Thanks.

Thanks, Emily.

Next question comes from the line of Dalton Chandler of Needham & Company. You may proceed.

Good morning. Kenneth, at the start of the call you made some comments about -- I think it was unit market share in North America, and I just missed numbers you gave. Would you mind repeating that?

Sure. We think that in the United States, in CAD units -- units are defined as either a CAD server with a license, which comes with it, or additional licenses as you connect that server to multiple full field digital machines, we think we captured north of 40% of all of those units that were sold and installed in the prior quarter. We believe that we actually crossed the 40% unit market share barrier in the third quarter and probably achieved somewhere around the low 40%, and we may have achieved as high as 45% of the digital unit CAD placements in the fourth quarter of this year.

Now with that said, Dalton, I will caution you that it's not a perfect science. However, so that you understand my logic, Hologic obviously communicates the number of shipments, so as an example, in the prior quarter we all know they shipped 228 Selenia, of which 80%, or 182 units, went to the United States, 46% went international. They communicated that of the 182 units in the states, 141, I believe, or 74%, had CAD.

Obviously the delta between how much CAD they shipped and how many CAD units we sold directly to Hologic customers, which is obviously not included in their number, is a number that I believe gets the CAD penetration on their console well into the mid to high 80% range.

So I know how many units I've sold to Hologic customers. If I combine that with how many I know I sold to GE and Siemens and others, the only component that we have to estimate is how much of the old R2 CAD might have been sold to a GE or a Siemens' customer based on preference of the product based on prior use and so forth. We anecdotally if you will talk to our partners and get their estimates of that number, and then add that into our model.

So it's not a perfect science, but we think it's pretty close, and that gives us the confidence of the type of traction we're gaining in the market.

Okay. Could you comment on, within digital revenue how much of that was generated by a sale with a new unit versus a sale to an existing unit in the aftermarket?

That's a good question. Almost all of the sales are new units. We have not yet, and we plan to, have an aggressive campaign to go out to that 10% to 20% of the digital installed base that has not bought CAD, and understand that we now have a better value proposition to upgrade them. We are working on that plan, but have not launched it yet.

But right now I'd say 99% of the transactions are all part of this large bolus of increase of full field digital shipments from the major manufacturers.

Okay. Could you comment on what the plans are once you get the Fuji approval to go back to their installed base?

We are working closely with Fuji and they are actually sharing with us all of their orders as well as their shipments and their planned shipments so what we have tried to do is to have our sales people, preferably with their Fuji partner, visit every one of those customers that have technically received only a budgetary quote, because they can't receive a legal quote from us until we have clearance. And are positioning CAD in a manner that we think, once we have the clearance, we know every one of the installs, we know all of the individuals in those accounts, and we know what's in their backlog and what ultimately is going to be shipped, enabling us to, we hope in the most productive manner, book as many orders as we can and we're ready to ship and install on -- literally on several days to a week's notice.

We are very anxious to get moving, and by continuing to work closely with Fuji, given that their motivation to work with us is as high as our other partners, such as GE and Siemens, we think we can get to those customers immediately with legal quotes, and obviously as they decide to purchase we can begin scheduling installations with about a week's lead time.

Okay. Are you able to provide us with a sense of the size of that opportunity, the unit size?

That's a good question. And I think there's a lot of people out there asking that question and some think it's the next great breakthrough and others would probably say that it's going to be a relatively quiet impact. What I will tell you anecdotally is when we talk to people at Fuji, and we have talked to people at Kodak, we have asked for forecasts, which obviously would be confidential information.

However, when I have posed the question, do you think that a leading provider of CR mammo, and certainly Fuji and Kodak are examples, do you believe a leading provider could do up to 500 units per year, both companies anecdotally have come back to me and said we don't after problem with your number. And that's the best I can give you.

Okay. Last question. You, either for the quarter or year or both, the digital revenue growth rate, could you tell us what that would have been if you excluded the Hologic impact?

For the quarter. Let's see. If we looked at -- if we looked at it, say, Dalton, Q3 '06 to Q3 '04, is that a good --

you mean Q4 '06 over Q4 '05?

Let's look at it quarter over quarter.

Okay.

In '06 versus -- if we were to drop out Hologic, we'd be at about $3 million for the fourth quarter, approximately, and about $2.1 million in the third quarter, approximately. Excluding Hologic.

Okay. So that's close to a 50% growth rate versus the 15% that you reported here including Hologic. Is that -- am I doing the math right?

Let me try to answer your question a little differently because I don't know if we have the data right at tip of our tongue here. What I've said all along is that the growth in the digital market which is significant, and the higher percentage of business we now get from people like GE and Siemens would substantially offset the decrease that we would see with Hologic.

So I'll give you a specific example in that regard. Our business with Hologic in the third quarter peaked at just over $900,000. Okay. That business dropped by about $400,000 in Q4 to about $.5 million, which I think is a safe bet to say may be a steady state amount of business with them.

So obviously we still grew the business by $.5 million. So if you look at that dynamic our growth was probably about 50% with GE, our growth with Siemens was probably about 50% sequentially, and then we had this offset obviously with Hologic. So I hope that helps. I don't know that we have the exact data.

That does. Thanks very much.

Thank you.

Next question comes from the line of Corey Tobin of William Blair. You may proceed.

Hi. Good morning. One quick question for you on the backlog. You mentioned record backlog a couple times in the press release and on the call. I was just curious, when you think about backlog what do you believe the ideal target is in terms of increasing the backlog versus near-term revenue?

Do you guys have an internal target as to where you want that backlog to be versus expected revenue in the next nine months, or is it more just a function of keep the manufacturing capacity up as high as possible and the backlog falls out where it is? Thanks.

That's a good question, Corey. Just to try to answer it the challenge we have is the lead time on full field digital machines is very long, as you know, right. Hologic is signaling 150 days, and I think GE is signaling somewhere around 120 days.

Now obviously people move priorities around to not lose business. So the challenge is we have is a substantial backlog. However, some of those orders are not going to ship for 90 or 120 days.

With that said, we get a significant number of orders in the final month of a quarter that they want shipped in the quarter. So it's a very fluid dynamic, so for us to try to pin a particular backlog, I would to have say that when the manufacturers have what I call a more normal response to the market, meaning a 60 or 90 day window for shipment, it will be a lot easier for us to peg what sort of a backlog we would like to have.

With that said, we are able to ship digital systems, which are largely servers and software and licenses on relatively short notice, and we have done a pretty good job estimating what the kind of sell-through demand would be in units each quarter, so we're able to minimize the effect on inventory of this, let's call it volatile demand. But I think at this point in time it's difficult for us to create a model that would say specifically, this is the backlog level we'd like to have. We have seen significant volume come in and go out in the final month of each quarter in the digital space, and a lot of those are not the orders that are sitting in our backlog that might after 90 or 120 day lead time.

So it's a challenging scenario. What we've basically done is we've built a relationship, as an example, with GE where we talk to their operations people every month, and they give us a forecast of demand in units, and we apply our own models to determine how much we need to prepare in inventory to ship. But obviously the more backlog the better. Our ability to ship and install is typically only out several weeks at the most, and so we're obviously looking to build as much as possible, because we can either deliver to our OEMs for installation, or we can use our own service force and install directly with the customer [inaudible], usually within the same month that they need something done.

Understood. Great. Thanks.

Thank you.

Next question comes from the line of Steven Mazer. You may proceed.

Hi, Ken. Steve Mazer. Most of my questions have been answered. Let me just concentrate on the overseas market. It seems to me that with the footprint that both GE and Siemens has there, coupled with the great addition you guys made with Ms. Veron and her experience, that 95% domestic, 5% overseas hopefully is going to change slightly on the overseas side. Do you have any ideas or projections of what you're shooting for in the coming years?

Well, what I would say, Steve, since we're trying to be careful about forward-looking information, is that we think there is a significant opportunity for growth. And I say significant where the international business, particularly in the developed countries in Europe, could become a much higher percent of our overall business.

And so I can't share a specific forecast, but I think that a very healthy double-digit increase year on year is what we expect, and we think Laurence's background and experience puts us in position where we don't have that typical learning curve lead time where you would have in many of these circumstances. So she's on board, she's already out there working the customer base, as well as our partners. We will be with her in Vienna beginning this Friday through the long weekend for the European Congress of Radiology, and I am bullish, is the best way to describe the answer on growth in Europe.

I think that in the past having an international sales manager living in New Hampshire and working out of this office was not a recipe for success. And I think if you combine relocation of the position to the right geography with this individual's qualification, to be very frank, there's only upside for us.

I certainly agree with that with her background and the doors that she already has opened out in Europe it seems to me like it's a ready-made opportunity. Good work and keep it up. Thanks very much.

Thank you.

Next question comes from the line of Scott Warner. You may proceed.

Hi, Ken. First, for you, then I have two little ones for Darlene. On the Fuji where you already discussed what we can expect there, 500 per year and the other folks, what do they have placed already, plus what orders in the U.S.A. that we might expect to get a good percentage of?

Yes, I mean to be very honest and fair to them, Scott, you'd have to ask Fuji. What I would say to you though is that my estimate would be they have doubled the number of installation since the RSNA, and they have doubled the near-term installation plan, and that I think is a good signal for both of us.

I was just trying to see what lump sum we could go after that's already there besides what you expect on an annual basis. Then I will go to Darlene with two little questions. Darlene?

Yes.

Hi. First, could you -- on the diluted shares I was interested to see that the previous quarter was 42 million something, this time it's only back down to 37 million, same as basic. How do you -- what do you have to say on that?

Actually, I'm not sure where the 42 million shares came from.

I saw it in the last -- three months ago, or whatever, the third quarter figures, I thought.

We have at December 31st, almost 37 million shares in the float.

That's what I saw.

Right. Okay. 37 million shares in the float. Now, what that does not include, though, are stock options and some warrants and some other things like that, convertible promissory notes. So on a truly fully diluted basis we have about 48.9 million.

Okay. It was 42 million previous quarter so now fully diluted would be 48 million.

Yes. 48.9 million.

You didn't show that, so that's one question. Okay. Second, revisiting what you talked about, the one-time charges in the quarter, the $551,000 board comp and business thing. How much of that did you say would -- the rest of it would be pro rata over each quarter hereafter? That kind of compensation?

Yes, typically you would see expenses associated with bonus and board compensation, kind of ratably over the course of the year. This company previously did not have a board compensation plan, and so we implemented that in the fourth quarter and paid those folks for the full year in the fourth quarter. So they weren't spread over the year.

Is the amount -- excuse me, go ahead.

Well, the combined amounts were $551,000.

Yes. Is that out to be -- is that a rough estimate, or as the company builds in size is that going to be increasing also?

Well, no. The plan -- and you can actually go in and look at the plan document on an 8K filed in fourth quarter, but those fees for 2006 and 2007 for board comp and options are fixed for those two years. You can see that going forward. The only variable component would be they do have a fee based on meeting. So to the extent there's more or less meetings, but that's not significant.

The other side of that is this management team started sort of the middle of the year through the last six months of the year, and so at January board meeting the compensation committee and board voted on management bonus plan for '06, as well as '07 going forward.

So again normally you would see those expenses sort of ratably over the course of a year. They were all sort of jumbled up in the last quarter, but going forward they will be -- they will be paid out based on us achieving certain milestones and objectives, and to the extent we do or don't that should dictate what the final number is.

And the $346,000 increased share-based compensation, how would that be going forward? That's a hiring thing supposedly. Therefore, that's history?

That's a noncash item, so that's the cost under FAS 123(R) of expensing stock option expense, and the reason that sort of jumps in the fourth quarter was because, quite frankly I came on in mid September, so there's a big bulk of expense there, then Jonathan Go came on in the fourth quarter. And I think what I said in my discussion is that I expect it will actually see up to 30% decrease in these noncash expenses in 2007.

Okay. Fine. Thank you. That's it.

Next question comes from the line of Joe Rudy of Saxony Securities. You may proceed.

Good job, guys, on the quarter.

Thanks, Joe.

I got a couple things just to go over, and I missed the first few minutes of the call due to some other conference that were going on. But a couple months ago you guys had laid out guidance for the -- basically for the entire CAD business, and don't quote me on the particulars on the exact numbers, but we'll be some where in the ballpark, but somewhere around about 2,000 units being sold for digital, somewhere around 3,000 to 5,000 was the number for CR. Are we -- am I in the ballpark here with my recollection?

I think the management presentation that we have done have put a model together, Joe that you're referring to. I think the way the model worked was, if you take Hologic's latest guidance, which I think is about 1,000 units, and you assume they're getting 50% of the business or maybe a little more, might be a little less, you add the delta, one could certainly see about 2,000 full field systems go down over the course of the 12-month period, which represents 15% of the installed base.

And I think what we estimated, based on feedback from the CR players, maybe 300 to 500 units of CR, which is where those 2,500 units came from. With that said the CR number was also under the assumption that we would have an opportunity to be selling for a full year in that space, and I think that that's probably one that's a little harder to estimate based on timing.

Well, even if you prorate it for a half a year or whatever, as the case may be, and obviously there will be a very large spike initially, and that will settle out over the -- after the initial approval gets done. But with Hologic I know you're there -- adoption rate for CAD was somewhere over 80% but they did basically give some insight that that adoption rate will go higher, and somewhere north of 90% and a one-to-one adoption rate is not something that is unrealistic either.

So with that, with iCAD getting some where between 40% and 50% of that market, if you -- if I do the numbers, and tell me where I'm coming up with something different from what someone else has, that gives iCAD a potential of just on the digital side and with CR, of doing about $60 million a year this year in revenue. That's without analog, that's without service revenue, and that's without international business.

Well, I think the way I would describe it is, keep in mind that the end user pricing is typically delivered by the OEM, meaning GE or Siemens. So we are not going to see the full value of that transaction.

Okay. But you do have direct sales as well.

Yes. Well just let me finish. What I'm getting at is, using your example, 2,000 transactions at an average selling price of $50,000 to $60,000 is $100 million to $120 million, let's call it retail, to the customer. We would certainly participate in more of about half of that cycle, because the majority of our sales still go through the OEM, that obviously has to add a mark-up to make their margin.

So, there's no question that the opportunity is significant and a lot of it has to do with timing, because in that model, is still a fairly significant assumption for CR mammo and the CAD that would go with it. But certainly, if you look at our progress in sequential quarters it reflects the direction you're talking about.

Okay. Can you give some insight to -- and this may have been discussed in the beginning of the call that I may have missed, to the China contract?

There's been no traction with the China contract. I don't have any update other than to say that the inventory sits there, we have not had the sell through that we had expected, nor the adoption of CAD in the manner that we had hoped for. So we are certainly engaged in that particular opportunity, but to be frank, our big opportunities ahead of us right now start in the United States, segway into Europe and ultimately we will get into Asia in time, through our OEM partners. Example being, we installed our first Fuji system in Singapore.

So we are in Asia, but we're taking a different tack. We're not trying to sell analog systems in bulk, but to sell digital systems with our OEM partners that. And that feels like a better approach at this point and we'll reevaluate the analog opportunity over time.

Okay. Is there -- just to rewind to the previous question, based upon what I'm looking at here, obviously it looks like there's a much bigger potential for iCAD for this year than what some of the other firms are looking out for iCAD. What's basically standing in your way, Ken, of far exceeding all these expectations, which I think are rather low from some of the other firms?

I would say it's really starts with full field digital partners. How many units they actually ship. We know that GE has demand for more than they are able to produce today, but they're making nice progress on increased production. So that's an example of where increased production in itself with a healthy backlog, as much as we talk about Hologic backlog, trust me, GE's is very healthy as well, that would be really where I would start for our opportunity.

The second thing would be CR. We think CR mammo is going to present a significant opportunity in the digital space and the more the merrier. Not just Fuji. We can't wait to see company Kodak there. We'd like to see Agfa there. Konica. And our ability to get through the FDA a cleared product with the CR players has, secondly, a very significant impact on volume and timing.

And then the last piece would be, a lot of new sales people. As much wise like to think we hit the ground running with every territory, realistically there still is a timing issue, and it can take some body six months to get up to speed, and we have got some senior people that are very productive, and we have got some people that are still growing relative to learning their customer base, building relationships, such that we can continue to get a higher percentage of the CAD transactions that go down in the market.

And lastly what I'd say is we're still building our brand. There's a lot of customers out there from many years that R2 was present and the significant amount of spending they did, that have certain interest in a -- biased toward that technology, sake of just creatures of habit. And I think we are making significant progress as I said in my opening comments on market share, but continued increases in share certainly will come with time as we build the brand in a leadership position.

So those are the things all have to come together, Joe, for us to really capture this opportunity and a lot of it's in our control, but there is a certain amount that is not.

Okay. But based upon the answer you just gave it seems like the biggest thing is sales -- is the sales team.

I think it starts where I started with the shipments of our OEM partners. If I'm getting --

Those are clearly there, I mean.

That in itself will increase our business a lot faster than a sales person who gets familiar with their territory. Again, CR is an opportunity with a 500 or 600 unit market out there, when you look at the adoption of CAD and look at us getting the lion's share of that, because these companies still see Hologic as a competitor, that in itself is all up side to what our current run rate dictates because we have only shipped one CR mammo CAD product, and that was to Singapore, to date. So there's no CR in our numbers. But the growth rate, as you know, has been rather significant.

Right. Looking at the cash position, what is the company currently doing to increase the cash position to move forward as whether it's an additional -- what's going to be additional fees filing fees to get a colon application in, or just to fund growth? Are we going to be nursing the nipple of a [Bob] again or are we going to a bank, or are we doing a financing in the markets? What are we looking at as far as options?

Well, we ended the quarter, as Darlene said with about $3.6 million in cash, we burned through a little over $1 million the prior quarter, and we obviously have a line with [Bob Howard] that allows us about $2.8 million if we were to need it. So when you look at our near-term situation, we don't have an urgent circumstance around cash, and we're just going to continue to evaluate our scenarios. Part of this has to do with our longer term plan, which could grow this company significantly. And the options we'll consider there would be through inorganic means.

So the question really is what's a good time as it relates to raising cash related to really a bigger play to build a bigger company. And we have all of our strategy work in progress, so I can't give you a specific time or a date, but what I do believe is we will grow this company through both organic and inorganic means. When you do things inorganically it probably has more of an implication on cash generation than does it when you're doing things organically.

So when we reach that crossover point in the strategy then we'll evaluate all our options as it relates to some sort of strategic move. That's the best I can tell you at this point.

Our cash position with the hope of improved business performance isn't in a predicament where we need cash, but we'd rather do it as part of an offensive strategy, some time later this year or early next year.

I would also add to that and echo, as business improves that clearly generates more cash for us and we just made the last payment on a debt component that typically burnt about $1.3 million in cash per year. So that's $1.3 million that we will have in the next 12 months going forward. So --

That was part of the Cadex acquisition back in 2003.

Okay. Can we also look to -- I know this a -- doesn't seem like something that is pressing, but this way then we don't need to be bothering the company -- update the website in reference to certain events that are coming up and conferences that are going to be attended?

Sure. We are absolutely trying to evolve the website and every week and every month it gets better, but it's one of many of our priorities and we will certainly try to get it as fresh in the new skin as possible as soon as possible.

There appears to be no further questions at this time. I would now like to turn the call over to Ken Ferry for any further comments.

Thank you, operator. In closing, I'd first like to thank our employees for their many contributions to our progress.

Second, I'd like to reiterate what I stated during last quarter's call, and that is we're enthused about our progress, but by no means content. We will need continued progress on our execution to become the market leader in a profitable company.

To accomplish this we must say grounded as to where we are as well as keep perspective that much of the hard work is still ahead of us.

And with that, I'd like to thank all of you for joining the conference call, and we look forward to speaking with you again after the conclusion of the first quarter of 2007. Again, thank you, and good day.

Ladies and gentlemen, this concludes the presentation. You may now disconnect, and have a most pleasant day.