ICAD Inc (ICAD) 2007 Q1 法說會逐字稿

Good day ladies and gentleman and welcome to the first quarter 2007 iCAD financial results conference call.

My name is [Twalicia] and I will be your coordinator for today.

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

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

(Operator instructions).

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

I would now like to turn the call over to your host for today, Mr.

Kevin McGrath with Cameron and Associates.

Please proceed, sir.

Thanks and good morning everyone.

Before I turn the call over to Ken Ferry, President and CEO of iCAD, I need to inform you that 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, increase competition, customer concentration and other risks detailed in the company's filings with a Securities in Exchange commission.

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

Readers are cautioned not to place undo reliance on those forward looking statements, which speak only as of the date that the statement was made.

The company is under no obligation to provide any updates to any information contained in this release.

With that said, and without further delay, I would like to turn the call over to Ken Ferry, President and CEO of iCAD, Inc.

Thanks, Kevin.

Good morning everyone and welcome to iCAD's Q1 2007 earnings conference call.

Joining me in our corporate office this morning are Jonathan Go, our Senior Vice President for Research and Development, Stacey Stevens, our Senior Vice President for Marketing and Strategy and Darlene Deptula Hicks, our CFO who you'll hear from in just a moment.

The first quarter of 2007 can clearly be categorized as one of significant continued progress toward our goal to become a high growth, profitable company.

Toward this goal in Q1 we demonstrated quarter on quarter growth in all major business lines; Digital CAD, film based products and service.

In addition, we sustained strong gross margins, while performing at the lower end of the operating expense range that we communicated during the 2006 Q4 earnings call.

And as a result of this favorable progress with these key variables in our income statement, we substantially reduced our net loss for the quarter as well.

To continue this momentum toward my earlier stated goal, we must execute successfully in a number of key strategic areas going forward.

First, to maximize digital CAD performance with a strong U.S.

market, we need to continue to expand our partner base.

This will include new DR and CR companies as they get FDA clearance with the most pressing one today being Fuji.

Specific to Fuji, we met with the FDA in Washington on April 20th.

In the meeting we were able to clarify a number of issues and the FDA promised an update on our recently submitted amendment in an approximate three week time frame.

We hope to receive approval soon since Fuji is gaining significant market acceptance with customers expecting CAD as a key component of a CR mammo solution.

Second, we need to gain additional traction in non US.

markets where digital mammography is being rapidly adopted.

We recently attended the European Congress of Radiology in Vienna.

In discussions with radiologists and our partners it was clear that DR and CR solutions were experiencing significant increased demand.

ICAD, through our established relationships with GE, Siemens and [Giato], is well positioned to take advantage of the growing demand for CAD bundled with DR and CR's solutions in Europe.

We've expanded our partner portfolio further with the signing of the sector agreement.

This will increase our reach to European countries including Scandinavia.

Third, we recently announced the approval of second look digital with GE in Japan.

This approval culminates more than three years of regulatory effort and with an import license in hand we have only next weeks sales and service training event in Tokyo as the final deliverable before shipments can begin.

Last but not least, we are aggressively pursuing a global growth strategy focused on a wider portfolio of CAD solutions in conjunction with application software that enables optimal radiology work flow.

We will evaluate all meaningful organic and inorganic means to provide the radiologist with the most comprehensive set of CAD and workflow tools that assist with the detection of more cancers earlier.

This effort will offer additional important benefits to patients and their families.

Now, I'd like to turn over to Darlene who will provide much more detail on our Q1 operating results.

Thanks, Ken and good morning everyone.

We're pleased to share with you this morning our first quarter financial results.

Our first quarter performance demonstrates the continued strong demand for digital CAD mammography as well as the progress we are making in several other key financial areas as well.

Just to give you a quick snapshot, we realized 41% revenue growth over the prior year first quarter with 76% growth in our digital CAD business in that same period.

We continue to maintain our strong 80% gross margin.

We had total operating expenses of $5.4 million for the quarter, which is $1 million lower than the fourth quarter expenses and is at the low end of the range of our recent guidance of $5.3 million to $5.7 million per quarter for '07.

We're also pleased to report that our net loss was reduced to $544,000 for this quarter and that we closed a net loss gap by $1.1 million over the prior year quarter.

Our net cash burn for the quarter was less than $200,000.

We achieved all this while also increasing our accounts receivable, decreasing our inventory and decreasing our accounts payable.

Let me provide you more specific insight on the financials.

We had a strong start to a year with revenue of $6.1 million, which represents and increase of $1.8 million or 41% over the prior year first quarter revenue of $4.4 million.

Again, this growth is primarily driven by continued strong demand for our digital CAD technology although we are pleased to report that we grew all three product groups in our business this quarter.

Notably, our digital revenue for the first quarter increased by 76% to $3.5 million from $2 million in the first quarter of '06.

During the first quarter we realized significant growth in

Digital revenue primarily from our key OEM Partners, GE healthcare and Siemens.

This growth was offset by an anticipated decline in revenue from Hologic as a result of their acquisition of our former competitor R2.

Our film based product revenue for the first quarter increased by 3% to $1.8 million from $1.76 million in the first quarter of '06.

This growth was led by sales of our total look product which is used for digitizing film based prior exams for comparative reading with current exams.

We are pleased to report that this is the first period in at least five quarters that film based product revenue has achieved growth in a quarter to quarter comparison.

Our service and supply revenue also increased by 35% in the first quarter of '07 to $877,000 as compared to $650,000 in the first quarter of '06.

This increase is due primarily to focus efforts to increase our Service value to our customers, resulting in an increase in service contract penetration.

We continue to receive high user satisfaction ratings from organizations like MD Byline on our customer service and support.

For the first quarter we realized international revenue of $530,000 as compared to $1 million for all of 2006.

The majority of our international revenue to date has been primarily sales in Europe.

As Ken mentioned earlier, we are expanding our reach and marketing programs in both Europe and Japan which represents a significant opportunity for us that would previously untapped by the company.

Ending backlog for the company of $2.1 million was considerably higher than the $493,000 ending backlog of 12 months ago.

Gross margins continue to remain very strong and for the first quarter increased slightly to 80.3% from 79% in the prior year first quarter.

Operating expenses for the first quarter of '07 were $5.4 million which includes stock base compensation expense of $277,000.

This represents an increase of $333,000 or 7% from the $5.1 million in the first quarter of '06 which included stock base compensation expense of only $8,000.

As we discussed in last quarter's conference call, the fourth quarter of '06 level of operating expenses was unusually high due in large part to a number of one time or seasonal expenses or programs implemented during the fourth quarter and that going forward we believe that our normalized quarterly operating expenses will be in the range of $5.3 million to $5.7 million per quarter.

As you can see we were at the low end of this range for the first quarter.

Notably, our net loss for the quarter including equity based compensation expense of $277,000 was $554,000 or $0.02 per share as compared with the net loss of $1.6 million or $0.04 per share in the first quarter of '06 which had minimal equity based compensation expense of $8,000.

We continue to close the gap on earning losses with our increasing revenue, maintaining our high gross margins and the ability to scale revenue without scaling operating expenses at or near the same rate.

At March 31st our headcount included 91 full and part time employees.

This is a slight decrease in headcount of three from the 94 we had at year end.

During the first quarter, we relocated several key functions including our service call center from our Ohio facility to our New Hampshire main offices to better serve our customers and employees.

We expect to fill several more non management positions particularly in our research and development group.

Now turning to the balance sheet, we have made significant progress this quarter on many of our key financial measures.

At March 31st, we had cash and cash equivalents of $3.4 million as compared to $3.6 million at December 31st.

This resulted in a net cash burn for the first quarter of less than $200,000.

This cash burn consisted of approximately $610,000 used in operating activity and for the purchases of property, plant and equipment and $375,000 used for the final payment on the notes payable, all of which was offset by $793,000 of cash provided primarily from the exercise of stock options.

Additionally, we've now completely repaid the three year note on our acquisition of CADx, which equated to $375,000 per quarter or $1.5 million cash per year.

Our accounts receivable balance at quarter end increased to $3.9 million compared to $3.7 million at December 31st.

We also reduced our inventory this quarter by more than $400,000 and reduced our Accounts payable by approximately $500,000.

All key measures are heading in the right direction as we continue to make significant progress.

With that, let me turn it back to the operator to open it for Q&A.

Thank you.

(Operator instructions).

Our first question comes from the line of Stephen Dunn with Dawson James.

Please proceed.

Good morning everyone and congratulations on a very strong quarter.

I guess the first question I have relates to the New England Journal of Medicine article on the original CAD technology and their findings.

We had not found a radiologist that agreed with that study and we have not seen any decrease in purchasing decisions.

Have you heard anything anecdotally out in the field?

First of all, what I would say, Steve, is that it has to be put in context.

It's one study of about 25 or more that have been done, most all of which have had consensus around a fact that CAD finds more cancers earlier.

I think that you can go through all the details and the flaws we believe exists in the study, but to be direct with your question, we've not seen a real significant impact if any at all on business.

I was at the Society for Breast Imaging in Hollywood, FL about three weeks ago and that's obviously a group of very heavy expert mammography individuals that very, very much look at all the studies.

It was brought up in a matter of fact way.

It was certainly brought up because it was a recent study, but I think the general consensus was either was an interesting study in human dynamics and how they use the technology, but at the end of the day the radiologist felt that CAD clearly helps and it's really up to the radiologist to make diagnosis, not the CAD.

I think they have the right balance perspective.

Our field has an increase discussions with customers as a result, but we've not seen any material impact if any on business.

Okay.

Just a second question.

Can you give a little color around the discussions you've had with the FDA regarding the Fuji applications?

We met with the FDA on April 20th.

I was obviously in the meeting.

What we tried to do was make them better understand how we use the Fuji data set for our submission.

There was a lot of confusion about what cases we use, what cases we didn't use as part of the total greater than 200 case data set that Fuji submitted.

We had a very lively discussion and clarification around that.

We talked an awful lot about the performance against what we think is a representative screening population.

What I would say is that the climate in the FDA for all vendors trying to put CAD board is that they're under more rigor and scrutiny.

There seems to be quite a bit of opinion as it relates to the size of data bases, the types of cancers and the mix that you should be performing against, the sizes of those particular evident cancers, the scoring methodologies that you use, and so on and so forth.

What we basically did was 10 days in advance of our meeting, we took the letter we got, the deficiency letter on March 20th, and we submitted an entire amendment 10 days before we went to the meeting.

So they basically had a response to the letter 10 days in advance and we think we made some progress, although I do believe it's more complex than we'd like it to be.

And what we would expect is that they promised us within three weeks, which would be the end of this week plus or minus, to give us some feedback on their reaction to our amendment.

And so we're very hopeful that we'll make significant progress.

I've asked the senior leadership within the device division that was present at the meeting to help us find some balanced middle ground so that we can get this done.

We submitted it in July.

We've not changed the hardware.

We've not changed the software.

We've not change the labeling.

We've not changed manufacturing process and the product is released with GE, Siemens and Hologic, all of which got released in less than six months and here we are 10+ months later going around in circles over analysis that we think are just not productive as it relates to the primary benefit of these products which is to find more cancers earlier.

So we hope to get an update and we hope to get progress over the next week or so.

We're hopeful that we will have the Fuji approval soon.

One thing I can say is that Fuji is seeing significant traction in the market with their customers.

The customers are accepting the product.

They are taking more orders.

They're installing more systems.

The issue of CAD is getting more and more urgent with their customers.

They want CAD because it's a hand in glove component of digital mammography work flow.

There's a lot of pent up frustration, we will just do the very best we can in the most constructive manner to address the FDA issue as quickly as possible.

Thanks.

That was really helpful.

Congrats again on the quarter.

Thanks, Steve.

Our next question comes from the line of Emily Johnson with WR Hambrecht.

Please proceed.

Hi guys.

Congrats on the quarter.

Can you please tell me about the estimated cut off what the attach rates are for CAD and digital systems in both Europe and Japan?

In Europe and Japan, I would start with Europe.

We think that the CAD attachment rate is probably about 30%, maybe 35%.

What's interesting is I'm sure you were on Hologic's call last week.

I believe if my recollection is collect about 40% of their international shipments had CAD on it.

That would certainly be a growing number, particularly as we see this growth in both DR and CR technology in Europe.

I don't have the attachment rates off the top of my head in Japan, but what I would say is that GE has a substantial market position in Japan.

What they have at least estimated to us in round numbers is they would expect maybe somewhere in the range of 10 to 12 systems per quarter In Japan for CAD and that that would be obviously a platform for growth as well.

So that's just an estimate based on their prior volumes with their prior supplier.

So we're pretty optimistic about that given that our international revenues as Darlene had spoken about earlier were very much European centric in the past.

Okay.

Can you talk about what your sales were to Hologic and if those declined during sequentially over the quarter.

Hologic sales in the quarter dropped by about $170,000 from Q4 to Q1.

With that said, the good news if you will, is we've said all along that the decline in business with Hologic would be more than offset by increases with all of the other partner companies.

When you look at our quarter on quarter digital comparison we actually grew almost $1.5 million over Q1 of last year in digital.

The majority of that, of course, was GE but Siemens has had some very, very strong traction in their performance as well.

And if I go back and look at Q1, Siemens alone increase in volume over Q4 was twice the decline if you will, it was twice as much growth as the amount of decline we had with Hologic sequentially.

That's just using Siemens as an example, we're not comparing GE.

What I've said all along is that losing Hologic's business will be substantially more favorably offset by the incremental business we would get by being the prime supplier to GE, Siemens and the other partners that we see coming into the market over the next 12 months.

Does [Spectra] add anything right now?

They only have U.S.

sales, is that right?

They're only outside of United States.

We are actively working with validating our algorithm with them so we're not actively in the market yet with [Sectra].

We would hope to be before the year is over.

Okay.

Finally, can you just comment a little bit about how GE's competitive market share has faired in this past quarter and whether or not you're starting to see a bigger uptrend from the year before when they had the supply constraints?

GE basically had a very, very strong finish to '06 and they shipped a record number of units in the fourth quarter which certainly played the major role in our biggest digital revenue quarter to date.

They had anticipated that they would ship a comparable number of units in the first quarter of this year, similar number as Q4 in the second quarter would then increase substantial number of units in the third and fourth quarter.

Emily, I describe it as a gradual sequential increase in units has been their goal.

We believe they came out slightly short of what they did in Q4 and Q1.

My estimate would be 5% to 10% less units.

We found that January in particular was an extremely quiet month after they had a very, very strong December.

Not a big surprise in the imaging space.

February picked up nicely.

In the month of March we actually did more digital units with GE in March than we did in December, but with that said they came up just slightly lower in Q1 than they did in Q4 which is my assumption that their unit shipments were down just slightly.

With that said, they're not wavering on their full year forecast of units so we would anticipate making up that small shortfall over the next several quarters.

What have you seen sort of heading into this quarter?

Given the MQSA trends which were very, very strong in April, do you think that's being spread across the industry?

I think there's no question; at the moment Hologic is getting a disproportionate number.

I do think that as GE can produce more products, I think they can get much more directly competitive.

At the moment, they're producing a lot more product at this time last year but they still have a six month backlog.

So to go toe to toe with Hologic that does have higher capacity is somewhat problematic in the short term.

Siemens is growing significantly, at least from the standpoint of our business with them.

They had a record first quarter with us.

I mean substantially ahead of what they did last year in the first quarter.

They even did substantially more business with us in the first quarter than they did in the fourth quarter just completed.

So the Siemens' business is gaining traction.

They don't have the supply issues that GE has so they're gaining momentum and I think that once Fuji's momentum is really established and obviously with CAD as well, I think that Hologic will be in a much more competitive circumstance and I think some of the market share in the unit volumes may start to shift in a more favorable direction to our partners and ourselves.

But with the MQSA data being so robust, it just feels like very fertile environment for everybody given the significant sequential unit volumes that are going on in the market today.

When you get your Fuji CR CAD approved, is there an estimate right now there for how many CR units are currently installed in the U.S.?

What do you assume your attach rate is going to be on the CR?

We know how many units Fuji has sold and what their installation base is.

Its information you'd really have to ask Fuji.

We are not in a position to disclose their numbers.

What I will say is I met with them at the Society for breast imaging.

Their business level since the first of the year is up significantly from where it was from August '06 on when they first came into the market.

They believe that 80% to 90% of their customers will require CAD and there is significant number of orders that they are anxious to place as soon as we get FDA clearance.

So we think this will have a significant impact on business for us once we have FDA clearance given the pent up demand, but again Emily, you'd have to ask Fuji for those specific numbers.

We wouldn't be a good partner if we were to be giving that information out.

And your OEM to Fuji is similar to the others in terms of what you charge them?

Our price point is somewhat similar because it is very much the identical product that we sell in the FFDM space.

We also want to have as level a playing field with our OEM so we're not creating differential pricing with the various companies.

The only additional wrinkle with Fuji is we take the installation responsibility for the CAD where companies like GE and Siemens actually do insulation on our behalf.

Okay.

Great.

Thank you very much.

Our next question comes from the line of Corey Tobin with William Blair.

Please proceed.

Good morning.

Just looking for quick update if you could on the relationship with Agfa and Kodak and where business stands with those two entities?

Thanks.

We've been in a very long contractual process with Agfa and I guess the best way to describe it is that some final wording around a press release is the most material thing we have left to do before finalizing the contract.

We've already sold and shipped a full field digital system with Agfa in Europe so we've already done an installation together.

It's gone very, very well.

The Agfa agreement is imminent.

Kodak, we are in what I will call the early data collection phase so that we can get a relative number of CR mammo cases to make certain and tune our algorithm for use on Kodak's consol.

Kodak has just estimated that with their final PMA module having gone in November of '06, that by the May/June timeframe they we're hoping for FDA clearance for CR mammo in the states.

We have not had an update from them as to whether they are expecting that any day.

We certainly hope they get it and what we would hope is some time in the latter part of this summer we would be submitting to the FDA our PMA supplement for Kodak.

So obviously for us, Corey, it's important for us to have a very strong position in CR mammo on a global basis with Fuji, with Agfa and with Kodak which really will command the lion's share of that business and I'm confident from our discussions that we will be the supplier of choice as it relates to CAD for all three of these companies.

But certainly in the United States and where all make sense on an international basis as well.

I'm sorry, Ken, just to reiterate.

The timing for Kodak you said you'd submit late summer, was it?

If we could have it, given the current dynamics with Fuji, Corey, I'm a little reluctant to put a time frame.

I'd like to get the Fuji agreement approved, if you will, the Fuji supplement before speculating on Kodak.

But I would say if they are in the market by the May/June timeframe, I would certainly hope that we could get through this Fuji supplement and learn what we need to learn and be able to have a CAD product for Kodak before the end of the calendar year.

Great.

Thank you.

Now our next question comes from the line of Dalton Chandler with Needham & Co.

Please proceed.

Good morning.

I just wanted ask about Fuji and the demand in the U.S.

Do you get the sense that prospective customers are waiting for the approval and they're sort of a backlog building, if you will, or are people just going ahead and placing the orders on the face that you'll get the approval?

That's a good question, Dalton.

What I would say today is probably 75%, 80% as an estimate are placing their orders anyway and waiting for CAD to come as an upgrade.

We've heard an estimate of about 20% of the customers interested in buying CR mammo are holding back purchases until CAD is available because they see CAD as synonymous with digital mammography workflow and they don't want to change a work flow even if it was one they were doing in the analog world digitizing the priors as well as the current cases to get a digital format for CAD.

We do think that their pent up demand will get stronger as CAD is available Day One given some of the resistance to do this in a two step process.

Okay.

And then, just on the opportunity in Japan.

Do you have a sense of what GE's market share is in Japan and are you seeking approval there with other vendors?

We're not 100% certain what GE's market share is.

I can only say that they gave us an estimate on forecast of about 10 or 12 systems a quarter.

Which obviously is pretty significant amount of business for a company our size.

We are not seeking any other approvals at this point, given that three plus year window that we took to get this approval.

Obviously, the likely candidates if we did go forward would be the Japanese suppliers most likely.

Not to say that that's been ruled out, but at this point it's primarily to go forward with GE and learn as much as we can.

Our Fuji relationship is very much U.S.

centric.

Fuji as an example has their own CAD products that they sell in Japan and it appears to be acceptable to the market so that would make it more problematic for us to provide CAD in Japan for Fuji.

I wouldn't rule it out with other companies, but given the magnitude of the investment we're going to see how the GE performance goes first.

Okay.

The 10 to 12 units GE is giving you, those are new units, right?

Those would be new CAD systems with their full field digital.

Can you also sell into their existing install base?

Sure.

Absolutely.

We are very actively working with them.

We will be in Tokyo next week to do a complete sales, marketing and service training event.

That's when we'll really be able to get hands on with the local team to really understand what the share is, what the competitive market dynamics are, what the ability to sell new verses installed base would be.

All that information is part of an exercise we're going to do in person next week.

I think, just in some respects culturally it can be challenging by e mail to really get a lot of that information as clear as when we have a healthy discussion in person.

Okay.

Thanks very much.

And our next question comes from the line of Jeff Matthews with [Rand] partners.

Please proceed.

Hi.

Thanks very much.

Ken, I just wondered two things.

I notice inventory was down fairly substantially year over year.

How clean is the inventory of the old film based hardware?

Jeff, let me take that.

This is Darlene.

I think we still have an amount of excess inventory, if you will.

We're working that down with various analog programs and so forth.

It clearly doesn't turn at the same rate as our digital inventory, and as you can see our analog revenue was up quarter over quarter, which is a new phenomenon to the company.

I think it can be categorized more as slower moving and it's just going to take a little time to burn that down and we offset that with the fast turns on our digital side.

But it's all going in the right direction.

Right.

Do you think you'll need to take any write offs down the road?

There's the possibility of that.

I wouldn't say at this point we're planning on anything.

We're looking at our inventory.

If we were to obsolete some components and change out parts, there's always that risk.

I would say there's nothing we're planning on at the moment, but there's always a small possibility of that.

One of the reasons, Jeff, we're still working our way through that is that our notion as it relates to film based CAD is that it really needs to turn into a service as opposed to a capital purchase.

We've had a quick CAD program with our very low end product, the 200, in that space.

It's been pretty successful.

What we want to be able to provide is with our film based product, SecondLook 300, which is a more higher end feature product, we want to be able to offer its a similar kind of per use model and a rental program and we're getting a lot of interest as we just released a number of programs to try and move the product into more of a call it a film based CAD service.

We had a sales meeting last week.

We had a training event in Florida with our entire sales force and they're pretty excited about this because the challenge that we're getting of course with a certain segment of customers are we're going to go digital within several years, why should we buy a film based product today.

Well, there's two angles on that.

One would be, of course, if we offer it as a service, then they could obviously pay us on a monthly or quarterly basis so it's a pay as you go, get used to CAD, see all the benefits of CAD plus reimbursement and then make a transition to digital easier.

The second thing we've actually done is we've created the means to take the CAD product in the film based world to 300.

It can actually be upgraded to our product TotalLook and TotalLook is not a CAD product, and its product that digitizes priors to do comparative reading we you want to look at older mammograms with current.

That's a very hot product that sits in our analog Product line if you will.

The ability to buy a CAD product and then upgrade it to a TotalLook which then addresses the film based library when your cameras goes digital is in a fairly new program because we just created the ability to upgrade a product in a cost effective way in the field.

So with those dynamics in play, we think we're going to see additional interest in film based CAD, but then the effect of demand verses inventory is kind of too soon to really predict where it ends up.

Okay.

Then if I might ask another question about the service side and your service revenues were up pretty strongly and I know that's been a focus for you, Ken.

Can you say anything about the adoption of a sales force toward selling more service?

What we're trying to do, Jeff, is to get them to be quoting service up front particularly with film based solutions.

On the digital side, the majority of the digital transactions go through our OEM partners, so when we do sell direct on the digital side which is probably only about 25% of the time, we are quoting digital service up front.

Most of our service is being quoted up front where it had not in the past and we have a very effective inside Sales Program for a service project contract renewal.

We've done very well in capture on the film based products and as we grow the digital direct business as appropriate we'll certainly open up more of a market for ourselves there.

One of the things we think over time which we'll make our service offering more attractive is when we start offering enhanced capabilities beyond traditional break fix.

As we come forward in '08 and bring out a major new version of our algorithm, we're likely to have service offerings that would include new capabilities as well as service offerings that would be more traditional break fix.

Obviously, the ability to capture more revenue because when we do bring something new to the market, customers in a certain contract category would get those as part of the term could make the service agreements more attractive from an average selling price for us and also to the customer because they're kind of guaranteeing their future, staying at the State of the art as we bring out new capabilities.

Okay.

Great.

Thanks very much.

Our next question comes from the line of Larry Pfizer with first south Eastern Securities.

Please proceed.

Ken and the team, nice job.

We really appreciate it out in the field.

Can you give us some color on where we might be on virtual colonoscopy at this stage of the game and whether or not you still feel that's a real market for us to attack?

Sure.

First of all, there was a major study that was completed called the Akron study; about 2700 patients that got the virtual procedure in parallel with the optical invasive procedure.

The number crunching and the data analysis is ongoing and the hope is that the study will be published with some specific findings by the end of the summer.

If it is, our hope is that it will show that the virtual procedure is equivalent at a minimum in its effectiveness to the optical procedure.

So I think, Larry, number one we're really looking forward to that information.

Secondly, what you'll find in general and it's more anecdotal is that a radiologist will tell you that the demand for the virtual procedure is increasing even with patients' paying out of their pocket Which is an interesting phenomenon.

As it relates to our situation, we're very, very confident that over time this will become the screening standard.

Obviously, efficacy, lobbying for reimbursement for screening is all very important next steps that have to support that point of view.

We are ready to go to clinical trial with our algorithm.

We've made tremendous progress.

As people know we licensed an algorithm from NIH.

They have been working on it for nine years.

We added a lot of additional coding that we have been working on for several years which really accelerated this product's ability to get into a clinical environment.

We have been in what I call a very constructive debate with the FDA on what the scope and magnitude of the data collection, data analysis will need to be in our clinical studies to basically submit a 510K sometime later this year.

We're meeting with one member of the FDA this week at the radiology show going on in Orlando to further clarify the requirements of the clinical trial.

Once we have this final, we are in the process of lining up the sites, the radiologists, all of the logistics to begin to put our CAD to work in the virtual environment with the hope that by somewhere in the Q3/Q4 timeframe we'll be ready to submit a 510K for virtual colonography CAD to the FDA and with that hoping again we'll have a product in the first half of next year.

We have a contract with Vital Images.

We've had it for some time.

We have a Contract with [Tara Recon] and we have a contract with [Viatronics].

Our goal of course is to use a similar model that we use in mammo where we would OEM that capability to the 3 D rendering software companies that would have a very elegant application to support the viewing that you need to do of the colon in a 3 D fashion as relates to colon cancer screening.

Our hope would be that between our dialogue with the FDA, clinical trials and then work with our 3 D visualization partners we'll have a very attractive product offering with at least three significant partners in the first half of next year.

Do you see Hologic continuing to do nothing in that area?

My understanding, and I'm certainly not an expert on Hologic, but my understanding is they are a women's health company.

As a result of being a women's health company I'm not certain that this would fall into their priorities.

When you look at their composition in the market its mammography and its osteoporosis and so forth.

I don't know where they'll go from there.

I would look at the colon and CAD as more a reflection for us as being a broader CAD company and offering a portfolio of products as opposed to offering just one product to a great degree as we do today.

We plan to appeal to the radiologist with the broadest portfolio of CAD products where it makes sense.

Obviously, helping them to detect more cancers earlier across a much broader spectrum of platforms; Things like CT and MRI as an example that go well beyond just traditional mammography.

That would be the business we want to be in and be the partner of choice versus a radiologist having to buy multiple boutique CAD products from specialty companies.

Got it.

Thank you very much can, Ken.

Congrats again.

(Operator instructions).

Our next question comes from the line of Joe Rudy with Saxony Securities.

Please proceed.

Good morning, guys.

I've got a couple of quick questions.

First, clearly as we've all been expecting Digital has been the big increase here, but we have been speaking about it for several quarters that there would be a significant bounce back in the film side.

Are we at the top end of that business or are we expecting continued growth on the film side?

Well, our film based products are a combination of CAD and TotalLook for comparative reading.

What I would say, Joe, is the encouraging trend is that the TotalLook product is growing significantly.

As customers are going digital with the cameras, they face the dilemma of a film based library and when you want to do comparative reading its essential that you digitize the priors and do it in as a productive manner as you do to take the new mammogram.

So what we're seeing on the analog product is a very robust market for TotalLook.

often those purchases are attached to a full field digital camera order as they go through a simultaneous process of new exams and digital format combined with digitizing priors, whether it's just for those patients coming in in the near future or going back two years and digitizing every prior for every current patient.

As it relates to analog CAD, it is a mature space, but we do believe that there are at least several thousand customers that are not going to go digital until the back end of this transformation, but still would be good candidates for an analog film based CAD solution.

So, what I'm encouraged by is this company in Q1, Q2 and Q3 of last year had sequential declines in overall analog revenues.

Our biggest quarter in analog revenues was Q4, not a big surprise.

The quarter we just completed was higher in analog revenue than the first, second or third quarter of last year.

So sequentially, we've put significant increase in that space.

I think we have seen solid performance of analog CAD pretty consistent with the majority of last year and most of our growth is coming from TotalLook but with moving analog CAD into more of a service versus a capital purchase, we think there is still opportunity out there and we also think it's a lot less contested space because Hologic obviously doesn't have interest in the analog space given how strong their Digital Demand is.

Right, which opens up a huge potential for you guys.

Can you give us any guidance on the full year outlook?

Other than operating expenses, Joe, we've still not done that yet.

Top line guidance we're talking about?

no, we haven't done top line guidance.

What about for the second quarter?

Can we give at least can we assume that we're going to be sequentially higher?

I think if you think about the imaging space, second quarter and fourth quarter tends to be the strongest quarters.

Q1 tends to be soft.

I was just looking at some numbers today and Phillip's and GE's medical businesses and sequentially from Q4 to Q1, Phillips' business in medical went down 30% in revenue; GE's went down 25%.

Obviously, there's a tremendous amount of activity that happens in Q4 that does not spill over to Q1.

Q2 tends to be a strong quarter.

In our case, we have no reason not to be confident that it will be a strong quarter.

What could make it a really, really strong quarter would be if we were to get the Fuji clearance with a reasonable enough time to meet customer demand that exists.

We are, kind of I guess the phrase is "cautiously optimistic," Joe, without being firm on guidance.

Once we get a clearer picture, particularly with Fuji, and we really understand the units shipped by our OEM partners which we think might take just one more quarter, then we're probably by the third quarter at least as a goal would like to be able to give you top line guidance as well.

Okay.

Do you know as far as the penetration out on the west coast if we've been successful being able to get into that market?

I know a few quarters ago being R2's market was really the West Coast that we've been unable to really penetrate that market.

Have we had any success?

Yes, we have.

We've had a sales rep now for about eight or nine months in Seattle covering Seattle/Portland.

Background was actually to sell CAD for a company in this space based on MR technology in the past.

We're seeing traction in the northwest.

We're seeing it in the Bay area where we have a former GE mammography salesperson that has been with us since last summer.

We now have two people in Southern California; one that's been with us several years, almost at least a year and a half, and we're seeing significant traction with her efforts in the South.

And last but not least, we just placed a sales rep in the Denver/Salt Lake space.

We're confident that that investment will pay off.

We also just put two service people on the West Coast as well.

We now have service people much closer to customers based on the west coast.

We're certainly making the people investments on the ground near customers which is where the action needs to be and we are seeing steady progress.

With that said, obviously, the eastern part of the United States where our sweet spot has been as a company for some time and that's still where we get the lion's share of our business.

Okay.

Last question, Darlene, do you know how much the backlog was up from fourth quarter to first quarter?

It was down actually slightly about $400,000.

Okay.

I thought we were under $2 million in the fourth quarter.

No, we were down slightly.

Good job guys.

Our next question comes as a follow up question from Jeff Matthews with [Rand] partners.

Please proceed.

Hi.

Thanks.

Ken, you've been running the show for I guess about a year now.

Is that right?

Yes.

May 15.

I just wondered if you could kind of look back and tell us what has transpired differently than you thought it might.

What were the positive surprises and what were the negative surprise of both the company itself and the environment?

I can start the market.

What attracted me in the beginning was this digital transformation in mammography from film based to digital systems and the fact that a very small percentage of this 14,000 camera installed base had gone digital.

I would say, Jeff, in a positive sense that more rapid transformation to digital that I even expected in the beginning has been a very pleasant surprise.

Secondly, the adoption of CAD as a standard of care in at least 85%, 86% of the systems, maybe as high as 90% over the course of this year was also a pleasant surprise given that only about one third of the film based systems in the installed base were using CAD.

I think that the demand on the digital side in the marketplace was encouraging to me.

The third and last market data point I would make would be the fact that Hologic acquired R2 and that was a great coup for us because even with Hologic getting a little better than 50% of the business, our opportunity was to get 90+% of the business from everybody else in a growing market and I think we've demonstrated over the sequential quarters given where we were in the first and second quarter that we've been able to really take advantage of that.

I came here and the company had had declining revenue in '05 versus '04; it declined again in the first half of '06.

The company was on about a $16 million run rate when I got here in May of last year.

Obviously, we've now put together sequentially two $6 million plus quarters.

I think our performance contrasted to the market opportunity has gone as well or better than I could have expected.

In addition to that, I think we have attracted a lot of very strong people.

We also quite frankly had to take the difficult approach to weed out some people that really didn't fit with what we felt was the future of the company.

I think we've got a very strong talented team.

It's not a lot bigger than we've got here, but it's a lot better than we got here.

I guess that would be what I would say the positives would be.

I think the surprises are small companies that don't have what I would describe as the proper ERP Systems and infrastructure, processes that you're used to maybe within a larger company.

A lot of things done somewhat hand to mouth.

I think that as you start to grow and you increase the run rate by 50% or 60%, you start to expose a lot of the processes and a lot of the lack of system capabilities that would really allow you to scale and grow in a much more productive way.

So I think we are still going through a transition so that as the company gets two to three times as big as when we got here we are still going to have to make investments in infrastructure.

We're still going to have to change processes so that we're not proportionally adding resources as we're adding volume.

I think we still have a fair amount of work to do in that space.

Last comment I would make is that the company really, really relied back in the '04/'05/early '06 timeframe on the analog market.

It was less contested.

It was easier to get to.

It's been a real challenge to get this company to be totally obsessed, if you will, with the Digital space.

We had to spend a lot of time convincing customers that we're a very viable attractive player in that space.

We think our technology in the digital side is as good or better than anyone in the marketplace, but it takes time to prove that to customers.

I think that to R2's credit, they spent a lot of money and a lot of time building a brand and there's lots of old data points out there that we still battle every day, whether it was their success or the reputation that we encountered when we got here.

I kind of look at it as moving from taking two steps forward and one back in the first several quarters to now taking three steps forward to maybe one back occasionally.

The progress is there.

It's steady.

We're very, very grounded.

We got a lot of work to do to become a very successful, growing, profitable entity.

They're still a lot of work to be done.

With that said, I'm darn confident over the next 12 to 18 months that we're going to show people continued progress toward that goal.

Okay.

That's great.

Very helpful and I appreciate.

If I could just ask one quick follow up on that.

What has happened to sales force turnover in the most recent quarter versus a year ago?

We basically, about a year ago, had 16 sales people, about five productive sales reps.

One of those five has left over that period of time, so four of the original five productive people, if you will, are still here.

We now have about 19 direct sales territories and one indirect Channel Sales Manager so we have 20 people out there.

Of the roughly 16 new people, I would say two have left by our choice.

One of the things that's a challenging dynamic is when you want to ramp up your selling quickly and take advantage of this market dynamic you've got to make hiring decisions fast.

Hiring salespeople can be very challenging because obviously the nature of the individual is they're going to be very effective at interviewing.

So often, you will get an outstanding individual.

There are going to be occasions when someone interviews exceptionally well, but performance comes up short.

What we've done, is very different than you would do in a larger company when you've got hundreds of sales people out there, like in my former life.

You have to move quickly.

You have to give people all the training, all the support you can but if you don't see the effort and the results over several quarters, we have to make changes.

We have moved quickly to make changes where we've needed to because we just can't afford to work with people for extended periods of time given the market opportunity.

So, we have weeded out a few of the new people, but we've got far more success and far more traction with our new people.

The way I liken it to, Jeff Barnes our head of Sales says, you need to have a high batting average but you don't have to hit 1000.

Okay.

Great.

Thanks.

A final question comes from the line of Scott Warner.

Please proceed.

Hi Ken.

This is for you.

In view of the reference to the CR with Fuji FDA approval process, although I hear that you keep saying out in the field, the radiologists, the folks on the ground seem to be not affected at all by that CR study on the CID going way back to R2's period, but wouldn't it makes sense because there are human beings at the FDA.

If they have a lot of testimonials or whatever you want to call them from people in the field, not just two or three but 10 or 20 from the biggest names you can find, biggest hospitals and so on; if those people said that's something you could quote how they found this useful, something dated after that negative study was released, how can that hurt us?

I think it would help make the people at FDA more comfortable liking CID.

I think that's a good point, Scott.

What I will say is there's a number of rebuttal articles that are going to be published.

I've been interviewed on multiple occasions.

Rachel Brown, who is a leading breast imager at George Washington University Med Center and a member of our board and other leaders in mammography have all been sought out by the radiology publications and there is a timing issue from when all of this hit the street to when they can slot these in their publications.

I would expect in the May/June timeframe you're going to see a lot of testimonial as it relates to the benefits of CAD.

I think there's been statements from the American College of Radiology.

I know certainly there strong endorsement from the Society of breast imaging.

I think your point is well taken.

It just takes time for these testimonials through these independent journals to get out into the press and in the public domain, I think you're going to see that and my hope would be that the FDA would as well.

At the end of the day, we can continue to go through scientific and mathematical exercises as it relates to Fuji, but we would estimate that there may be as many as 100,000 women that have had mammograms on Fuji equipment since it shipped without the benefit of CAD.

Our pitch to the FDA was that is an extremely important issue in finding the right balance or what we need to demonstrate from an efficacy and safety standpoint versus what we think are the obvious technique of this technology in a timely manner being in the market.

We're hoping that since the head of the device division was in our meeting and I pleaded with her for her help to find some balance here between those two dynamics, that that will surface in our next communication with them and we'll be able to make substantial progress.

I just remind you that when somebody is on your board or do a release it's not as effective as a third party who is not related to our company.

Right.

I think you'll see balance there in those rebuttals.

It'll certainly not just be us.

Okay.

Thank you very much.

I would now like to turn the call over to Ken Ferry for any closing remarks.

In closing, I'd like to continue to thank our employees for their many contributions toward our progress.

Along with the business momentum, we're adding to a strong talent base that will serve us well as we broaden the company's field of interest in the future.

We are enthusiastic about our progress, but remained grounded as to the challenges ahead as we reshape iCAD into a high growth, profitable enterprise.

I'd like to thank all of you for joining us today on the call and we look forward to speaking with you again after the conclusion of the second quarter.

Thank you and good day.

this now concludes your presentation.

You may now disconnect and have a wonderful day.