ICAD Inc (ICAD) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 iCAD, Inc.

financial results conference call.

My name is Lisa and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to Mr.

Kevin McGrath from Cameron Associates.

Please proceed sir.

Thanks.

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 made during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

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

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

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

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

Without further delay, I would like to turn the call over to Ken Ferry, President and CEO of iCAD.

Thanks, Kevin.

Good morning, everyone and welcome to iCAD's Q2 earnings conference call.

Joining me at our corporate office this morning are Stacey Stevens, Senior Vice President of Marketing and Strategy; Jeff Barnes, Senior Vice President of Sales; and Darlene Deptula-Hicks, our CFO, who you'll hear from in a moment.

In the second quarter of 2007, we continued to demonstrate the strong progress we are making at iCAD.

This represents my fourth full quarter as CEO and I'm pleased that we've delivered strong, top line and bottom line results in each of these quarters on a comparative basis.

This quarter, we achieved record digital CAD revenue and backlog.

We also believe that in the U.S., greater than 90% of the digital mammography system sales include the purchase of CAD on an ongoing basis.

That is a strong testimonial from customers as to the clinical and workflow benefits derived from CAD.

Particularly important, as the Fenton study, published in the New England Journal of Medicine, caused quite a stir with customers and this was early in the quarter.

While film-based product revenues were slightly down in the quarter, we had significant growth from TotalLook, which digitizes the film library and enables comparative reading of prior year's exams with the current one.

Sales of TotalLook more than doubled and represented greater than 50% of all film-based revenues.

Film-based CAD sales were quite soft in the quarter and down significantly from Q2 of 2006.

While the market is maturing, we feel our order timing and channel effectiveness contributed to the weak performance in the quarter.

As we go forward, greater than 75% of mammography sites are still using film-based technology.

Even if 15% convert to digital each year, it still leaves a significant number that are at least two to four years away from converting to digital technology.

We are targeting marketing programs and channel focus on this segment and expect stronger performance in this quarter.

As we are now guiding to an even stronger second half, I'd like to provide some comments on what we will need to do to deliver on the numbers.

First, we must maximize digital product sales on a global basis.

We have a strong shipment forecast from GE, as they have substantial backlog and are increasing shipments sequentially each quarter.

We also see more international business from them in Europe and expect orders from them in Japan, shortly as well.

Siemens is entering the fourth quarter of its fiscal year and we expect strong momentum from them this quarter as a result.

We've also seen a nice pick-up from Siemens in Europe.

We must continue to win business directly with Hologic customers, where our value proposition and relationships allow us to do so.

We must exploit new opportunities with additional partners, such as Agfa.

On the film-side of the business, we must maximize the sale of TotalLook as part of the end-to-end digital transformation, as well as harvest more CAD orders as a result of the numerous marketing programs and channel programs that are in place today.

While Fuji is not factored in to our second half performance at this point, let me conclude my opening comments with a status update of our efforts with the FDA.

On our last call, I said that we met with the FDA on April 20th and expected feedback by mid-May.

We did receive a letter in this timeframe with a request for clarifications and additional data.

We responded to the letter in mid-June, and had another meeting with them in mid-July.

At this meeting, we were able to make further progress.

However, some outstanding issues are still in play.

We're working on the additional issues and response, which we plan to send to them by tomorrow, this Friday.

We hope to receive feedback from the FDA later this month and, at that time, we should be able to provide a more accurate status of our latest amendment.

We will get Fuji approval.

However, we're not certain as to when at this time.

With that, let me turn things over to Darlene, who can give you more detail on our quarter's financials.

Thank you, Ken and good morning everyone.

We're pleased to share with you this morning our second quarter and six month financial results, as well as provide financial guidance for the second half of this fiscal year.

Let me begin by providing some of the highlights of the second quarter, which include record digital CAD revenue; 58% total revenue growth over the prior year second quarter; almost 50% total revenue growth over the prior year six-month period; continued strong 80% growth margins.

We're also pleased to report that our net loss was reduced $866,000 for the quarter, down from $2.6 million the prior year quarter.

And a zero net cash burn for the quarter, with only a $200,000 net cash burn for the six month period.

With that said, let me provide you more specific insight on the financials.

We had a solid second quarter, with revenue of $6.1 million, which represents an increase of $2.2 million or 58% over the prior year second quarter revenue of $3.9 million.

Notably, our digital CAD revenue for the second quarter increased by 131% to $4 million from $1.7 million in the second quarter of 2006.

This growth continues to demonstrate that CAD has become the standard of care for digital mammography.

Our film-based product revenue for the second quarter, as Ken mentioned, decreased slightly by 8% to $1.3 million from $1.4 million in the second quarter of 2006.

While this is a mature product line, we are realizing strong demand for our TotalLook products, which is utilized for digitizing film-based prior mammography exams for comparative reading with current exams.

Our service and supply revenue also increased by 13% in the second quarter to $841,000, as compared to $745,000 in Q2 of 2006.

As we continue to focus efforts to increase our service value to our customers, resulting in an increase in service contract penetration.

Ending backlog for the quarter of $1.5 million was $627,000 higher than the ending backlog of $941,000 twelve months ago.

Gross margins continue to remain very strong and for the second quarter increased to 80% from 78.4% in the prior year second quarter.

We are also pleased to report that with a 58% increase in revenue this quarter, our quarterly operating expenses of $5.6 million were flat compared with prior year second quarter operating expenses, also $5.6 million.

Notably, our net loss for the quarter, including equity-based compensation expense of $216,000, was $866,000 or $0.02 per share, as compared with the net loss of $2.6 million or $0.07 per share in the second quarter of 2006, which included equity-based compensation expense of $539,000.

We continue to close the gap on earning losses with our increasing revenue, strong growth margin and the ability to scale revenue without scaling operating expenses at or near the same rate.

We had a strong first half of the year, with an almost 50% increase in total revenue to $12.3 million as compared to $8.2 million in the prior year first half.

Of that, international sales increased 65% over the first half of 2006, due primarily to focused international marketing efforts.

Additionally, on approximately 50% revenue growth in the first half of the year, we had only a 4% increase in operating expenses.

Our bottom line is continuing to show improvement, with a reduction of $2.8 million in net loss for the first half to $1.4 million or $0.04 a share, as compared to a net loss of $4.2 million or $0.11 per share in the prior year, six months.

At June 30th, our headcount included 98 full and part-time employees.

This is an increase in headcount of four from our 94 at December 31st year-end.

This headcount increase is primarily reflected in our sales and marketing hires.

Now, turning to the balance sheet.

We continue to make progress on our balance sheet.

A cash balance at June 30th of $3.4 million was flat with the March 31st cash balance.

Resulting in a zero net cash burn for the quarter and a net cash burn of only $200,000 for the first half of the year.

We've also reduced inventory in the first half of the year by $723,000.

Now, let's turn to financial guidance.

For the second half of 2007, we anticipate revenue in the range of $13.7 million to $14.7 million; equating to a full year revenue estimate of $26 million to $27 million.

This guidance does not include any potential revenue from the sale of SecondLook Digital or TotalLook products to Fuji in the U.S.

We expect to maintain margins in the 80% range and also anticipate that operating expenses will continue to range between $5.3 million and $5.7 million per quarter, as previously guided.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Dalton Chandler with Needham and Company, please proceed.

Hey, good morning.

Was wondering if you could give us the revenue split between U.S.

and International for the quarter?

Revenue internationally, Dalton, was about $750,000 for the first half of the year.

Okay.

Do you have the quarterly number?

The quarterly was about $260,000.

Okay.

I take it from your comments that, you think that is where the major opportunity lies going forward, on the international side?

On international Dalton, I think there's two angles to it.

One, of course, is Europe.

What we're seeing is that GE and Siemens have direct sales forces in Europe.

Unlike Hologic that uses distributors, so as a result, they have a much more commanding market share in Europe than Hologic who has the inverse benefit in the United States.

So, we see traction with both GE and Siemens in Europe, and we've also invested a lot of time with GE in terms of training of their sales force, spending a lot of time with their downstream marketing people.

We're seeing the pick-up of business as a result of that.

Now, Siemens, then competes more frequently with GE in Europe and since GE is leading with our CAD, we have the benefit now of Siemens leading with our CAD as well.

So that that issue is more neutralized and then, ultimately, the camera is really where the sale is made.

We're encouraged about business in Europe and it's also a function, of course, of increased shipments of digital mammography equipment.

In addition to that, we do have approval with GE in Japan.

When we did our training in Japan in the June-July time frame, the Japanese team told us it would probably be the third quarter before we would start to see orders in Japan.

We're excited, because GE is the market leader in Japan by far.

Again, Hologic uses, I believe, Toshiba as a distribution company there.

So, GE's got an advantage with a direct sales force.

Also, the government is in the process of subsidizing the purchase of 45 CAD systems paying 50%.

We think those orders will come in over the course of a year.

They're not going to be one immediate purchase, but GE feels they're very well positioned to get that business.

So, you look back to last year, our international volume was about $1 million and our goal this year is to double that.

I think that having someone on the ground in Paris, who was a former sales and marketing manager for the former R2, very experienced individual on our behalf, is helping us quite a bit as well.

So, we anticipate stronger international growth.

Obviously, most of our energies though are here in the United States, because we're still early in the game in this transformation to digital.

As the latest data shows, only about 22% of the units, to date, have gone digital.

So, there's a real opportunity for dynamic growth here.

We think for probably a good three year period.

Okay.

The pick-up that you're anticipating in the second half of the year is that coming mostly from the international side or is that across the board?

It's across the board.

I think it starts with GE.

GE, as I talked about on our first quarter call, had a lighter first quarter in shipments than they had originally forecast.

They came within a rounding error of hitting their second quarter forecast and they had a double digit increase in shipments sequentially.

They have a similar plan in Q3 and an even more aggressive plan in Q4.

Secondly, GE believes that with a very healthy backlog and increased capacity, that they can hit these numbers.

The other thing they're doing is they're building a new factory in New York, which will be online next summer; which will give them even more capacity from a mammography equipment standpoint.

I think their view is that there's three or four years of high growth in this space and even getting new capacity on next summer, still leaves them several years of high growth opportunity out there.

So, our plan in the second half begins with a forecast from GE that is substantially higher.

Siemens is in its fourth quarter as I speak and we've got off to a very strong start this quarter with Siemens, as they're pushing obviously to finish their fiscal year strong.

We do have some business steady state with Hologic customers that prefer our CAD and buy it directly from us.

I also think we can do better in the film-based state of the business as well.

A lot of it is timing of orders.

We've already received in the month of July more analog CAD orders than we got all of last quarter.

So, we really do feel we have momentum across all of the product lines.

Primarily in the States, but we certainly would expect a pick up compared to what we did in Europe as well in the second half.

So, do I understand you right, that GE is looking for double digit sequential shipment growth for the balance of the year?

That's correct.

Then, is that because, you mentioned they're building a new manufacturing facility, have they been capacity constrained?

They have been capacity constrained.

I think early on when they brought out the new wire detector last summer, they were yield constrained.

They think they have fixed all their yield issues and they've increased their capacity as well.

So, obviously, more capacity plus better yield equals more shipments and that's what they're doing.

But, I do think that with six month lead time, it's not a competitive position that they want to be in in the market and it doesn't allow them to aggressively pursue their competitors installed base.

My speculation is that they're building this new factory so they can increase capacity further and be in a position to take a much more aggressive run at the market.

Particularly in the United States, where I think they're capacity constraint has allowed Hologic a lot more running room than they might otherwise have had.

Okay.

As far as Siemens goes, you're really looking for a pick-up more in Europe than domestically?

Probably both.

I mean they've got some good traction in the United States and increased the size of their women's health sales force over the last year.

Our business with them has picked up nicely.

With that said, we are seeing a lot more European business from them than we did in the past.

We think part of that is building the relationship with them, of course, but also that they're competing against GE more than anybody else in Europe and GE is leading with our CAD.

Obviously, it bodes well for them to do the same and then compete on the benefits of their digital camera versus GE's.

Okay.

One last question, any update on where you think your various partners stand with regard to tomosynthesis?

Well, I think that GE and Siemens are working on it as a very high priority.

In terms of the timing, it's hard for me to say.

I think that, interesting as you listen to the market, Hologic has probably been more open about their plans and their timing.

I think GE and Siemens are probably in a similar time frame, but they've been extremely cautious about any forward-looking statements.

So, I can only say that we're actively working with both to adapt our CAD to their tomosynthesis platforms.

I think that the combination of clinical trials and the complexities of the FDA will drive the timing into the market.

Given the climate in the FDA, I would be the last person to speculate when they will be in the market.

Okay, thanks very much.

Thanks, Dalton.

Your next question comes from the line of Stephen Dunn with Dawson James, please proceed.

Good morning guys and congratulations on a strong Q2.

Thanks, Steve.

A little housekeeping question and a follow-up, for Q3 it looks like you worked down a significant portion of your backlog and you also have some seasonality to your business, based on your distributors and budget timing and things.

Should we expect a weaker Q3 and a very strong Q4 as we've seen in the past?

I think we think we will see sequential growth over Q2 in Q3.

To hit the number that we put there in the guidance for the second half Steve, we expect to have a stronger third quarter than we had in the first or second quarter, which were largely about the same and, then, an even stronger fourth quarter.

It is not seasonality (inaudible) heavily weighted towards the fourth quarter.

It is stronger in the fourth quarter than the third, which is not unusual in the healthcare space.

But, we expect to have a stronger third quarter and our strongest quarter of the year, followed by an even stronger quarter in Q4.

Backlog is important, but backlog is not everything.

This is a business that we're finding that about 70% to 75% of our business comes in and ships in the same quarter.

So, it's a pretty robust environment and, as you can imagine, a lot happens in the final month of each quarter as well.

So, it's somewhat dynamic, but we feel confident right now based on our forecasting and dialogue with our partners, that we can achieve this guidance range.

Alright.

I guess a little color, again, if there's any backwash still from the Fenton Study.

We saw CAD reimbursement get cut in Oregon and then get reinstated later on.

I was wondering if you have any comments or color on that or if you've seen it anywhere else.

Well, based on our numbers with digital CAD, it was the best quarter we've ever had.

That was the quarter that the Fenton Study was published.

So, I think if you look at it from a performance standpoint, it had no material effect or a favorable effect because it stirred up the pot.

A lot of the leading experts spoke out very clearly as advocates of CAD.

Secondly, if you take the information Hologic communicated, which was 88% of their U.S.

shipments had CAD attached to it.

Then, if you add the number of CAD sales we made directly to Hologic customers in the quarter, somewhere close to 95% of their mammography shipments went out with CAD on it.

That to me, is the ultimate testimonial.

If there's any place at all that it could have hurt us a little bit, it would have been in the analog CAD space, where we largely use distributors.

Obviously, if a distributor goes into a customer and the customer starts bringing up this study, they're just far less qualified than our direct people, to put it in the proper context.

So, it might have had a small effect on the analog CAD business, but I think that all of this publicity turned out to be favorable as it relates to the digital CAD business.

Because, the clinicians in the larger accounts that are very familiar with the all of the peer reviewed studies were able to put this in proper perspective.

So, to put a finer point on this, I guess.

One could say some of those orders, those POs were already signed and committed to when that study came out.

I guess maybe this is a Jeff or Stacey question, in the current negotiations, the current sales cycle for new or converting clients, is the Fenton study coming up to be a factor at all?

Jeff, why don't you address that.

It's not.

I think that the strong rebuttal, if you will, from the clinical community, not from iCAD as much as from the experienced mammographers in this country.

Is such that the Fenton article, really has in my mind, been put into perspective and we're really not seeing it be a road block at all.

It may have impacted somewhat as to, as Ken mentioned, the film-based business somewhat in the second quarter.

But, I think it's pretty much washed through at this point in time.

Alright, well thank you very much.

Looking forward to the next quarter.

Thank you, Stephen.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Scott Warner, private investor.

Please proceed.

Hi, guys.

General question.

I don't know who should answer it.

You mentioned international revenue was $260,000, I believe, for the quarter and yet, somewhere I saw a figure for 500 odd-thousand.

In other words, it was less this quarter than the previous quarter, am I correct?

You are correct.

It was $530,000 for Q1, $206,000 for Q2 for a total of $736,000 for the first half of the year, which was still a significant increase over the same period last year.

Forgetting last year, why should if we're doing, we have greater relationships now than quarter one, why should our revenues be down internationally?

Measurably down.

This is Jeff.

Okay, Jeff.

Q1 in Europe is always the strongest quarter in the diagnostic imaging space.

It even rivals Q4, which is obviously the strongest quarter in the U.S.

So, it was not unexpected to see a sequential decline, if you will, in Europe in the second quarter.

That's where the majority obviously, the vast majority of our international revenue comes from.

Not totally unexpected, a lot of the work we're doing in Europe, a lot of the market development activities will bear fruit as we move forward.

All right.

So, while you're talking Jeff, on Japan, I know we didn't have any revenue previous quarter.

Was there some Japanese revenue this quarter that we're -- that you're reporting?

No, there was not.

As Ken mentioned earlier, we're expecting and hoping to see revenue from Japan through GE in Q3.

Generally speaking though, the total revenue of Q2 versus Q1 was flat.

I see -- we all know that you were up by $500,000 in the digital and you dropped $500,000 in the film.

Is that what you had expected going into the quarter?

No, it's not Scott.

We really thought the film-based business -- if you go back and look at Q1, we had $1.8 million in the film-based products.

I think we were probably looking at a $1.5 million, $1.6 million as a ballpark number.

We were surprised that it was this soft.

It really was odd, in that we didn't really receive any new orders for film-based CAD in April or May.

Everything we got came in in June.

So, it was very odd seasonality and I really can't describe it any better than that.

But, sometimes the seasonality of our business is not as perfect as you'd like.

I'll give you two data points to your questions.

The first one would be, we've already received in the month of July and early August as many orders for analog CAD, as we did all of last quarter.

So, the inverse, we've got a whole bunch of business come in in the first month.

Secondly, is we actually got in the international space in July as much orders in July as we got all of last quarter.

It's kind of a very interesting seasonality is the best way to describe it.

But, we're more confident of a stronger analog film-based quarter based on a number of factors; looking at the field, sales forces, bottoms-up forecast, looking at their funnel, looking at the strong start we've had.

On the international front, as Jeff said, Q1 is unusually strong in Europe.

Q2 tends to be a little softer and we're off to a very nice start.

We've landed several large orders.

One with GE in France.

Another big one with Siemens in Spain.

So, we're seeing some good traction already this quarter and that'll contribute to our more bullish guidance in the second half.

I just want to review.

You guys mentioned earlier, 13.7 to 14.7 for the second half total revenue.

Yes.

Okay.

My simple mathematics, taking away the $6.1 million from the $13.7 million, the minimal amount, is a 7.6 average of the two quarters coming up, the quarter that we're in now and the fourth quarter.

So, therefore, we should average 7.6 at the minimum of your $13.7 million revenue for the second half, is that correct?

Well, 13.7 divided by 2 is just under 7 a quarter.

So, we should average about 7 a quarter.

What I'm saying, the difference between, if you're 13.7 and I take away -- well, alright, okay, whatever.

But, I'm saying your averaging -- you should be up there, you should be improving by, your totals should be significantly better.

You're talking about $800,000 or $900,000 more average per quarter minimum, right?

Yes, that's correct.

Last, can somebody tell me what is telesynthesis?

I'm unfamiliar with that.

Tomosynthesis is the ability to take a three-dimensional image of the breast versus a two-dimensional image --.

Okay, got you there.

Somebody else, I hope, will ask or I'll ask it now.

The comment on how you're doing with the virtual colonoscopy?

I know this is early and you're talking -- getting FDA guidance I suppose, whatever you're doing, maybe somebody should comment on that.

Because somebody's going to ask it.

I'm sure.

We're ready to take our colonic polyp detection algorithm to clinical trials.

Given that there's a lot of new people at the FDA, which are a large part as to why we're still going round and round with Fuji.

We're basically taking a different approach.

What we're doing is we are trying to come to agreement with the FDA on what the data collection process and analysis process needs to be on our clinical trial with colon.

So, what we're basically trying to do is, rather then go out and do a trial and then submit a 510-K.

It's not a PMA by the way.

What we're doing is saying, let's sit down.

We've had two meetings with them.

Let's agree on what the protocol is.

Then, we'll go collect the data based on our agreed upon protocol.

That should be a more productive experience for both sides to get the product to the market.

Yes, I guess so.

We're ready to do that.

We have not come to a complete agreement with the FDA on what the content of the trial needs to be.

Once we do, we think and hope, it's a three to six month process, with a submission toward the end of that.

So, we're hopeful still we should have a product by the middle of next year into the market.

It is somewhat dependent on the agreement with the FDA of what this trial should entail.

Okay, I'll let somebody else come in then.

Thank you very much.

Thanks, Scott.

Ladies and gentleman, this concludes the question and answer session of today's presentation.

I would now like to turn the conference back over to Mr.

Ken Ferry for final remarks.

In closing, I'd like to thank our employees for their many contributions made over the last year that really has enabled our strong progress.

With this said, we are ambitiously working on a broader global strategy for iCAD.

We're making good progress and, over time, expect to have a much richer portfolio of CAD and workflow solutions for the imaging market.

I thank all of you who have participated on our call today, and look forward to speaking with you again after third quarter results are released.

With that, I hope you enjoy the rest of your summer and have a good day.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation, you may now disconnect.

Good day.