ICAD Inc (ICAD) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the iCAD first quarter for 2008 conference call.

I will be your coordinator for today.

At this time, all participants are in listen-only mode and we will be facilitating 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 presentation over to your host for today's call, Ms.

Anne Marie Fields.

Please proceed.

Thank you.

Good morning.

This is Ann Marie Fields with Lippert/Heilshorn and Associates.

Thank you all for participating in today's call.

Joining me from iCAD are Ken Ferry, Chief Executive Officer; and Darlene Deptula-Hicks, Executive Vice President and Chief Financial Officer.

Earlier this morning, iCAD announced financial results for the first quarter 2008.

If you have not received this news release, or if you would like to be added to the Company's distribution list, please call Lippert/Heilshorn in New York at 212-838-3777 and speak with Cheryl Palazzo.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of iCAD.

I encourage you to review the Company's past and future filings with the Securities and Exchange Commission, including, without limitation, the Company's Form 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 7, 2008.

iCAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

So with that said, I would like to turn the call over to Ken Ferry.

Ken?

Thanks, Anne Marie.

Good morning, everyone, and thank you for joining us this morning.

On today's call, I'll provide a business update and then Darlene will review our financial results and guidance in greater detail.

To get things started, I would like to note that this is the seventh full quarter at iCAD under the new management team and I'm pleased to report it is our seventh consecutive quarter of comparative improvement.

On a comparative basis, first quarter of '08 revenue growth was not as robust as we had hoped, but this was due to several quarter end business issues that we will go into in greater detail.

As a result of these and other first quarter events, we believe we are poised and positioned to take the business to the next level of growth and profitability over the remainder of 2008.

So back to Q1, we saw continued strong demand for digital CAD products on a global basis and when you look onto the FDA's website, several important market factors stand out.

First, the rate of adoption of digital mammography continues to increase over a very strong 2007.

In the first quarter of 2008, 561 full field digital mammography units were placed in service.

This represents a 39% increase over Q1 of 2007.

If this run rate were to continue throughout the year, we believe approximately 2250 units would convert to digital technology in 2008.

This would be approximately a 400-unit, or 21% increase over 2007.

Second, at the end of the first quarter, only 33% of the overall mammography equipment installed base in the United States has converted from film to digital technology.

This indicates that this market should enjoy strong demand for digital technology throughout 2010 and beyond.

This momentum should benefit iCAD significantly, as CAD is being purchased at a near 1 to 1 rate with digital mammography equipment.

And with our recent FDA approval for Fuji CRM in the United States, we will now have the opportunity to sell SecondLook Digital to Fuji's installed base, in addition to new Fuji customers.

We've been saying for sometime that there's a considerable pent-up demand for CAD with Fuji CRM as the product has been shipping since July of '06 and there are now greater than 500 Fuji systems installed in the United States.

We have certainly confirmed this in the first five weeks since receiving FDA approval, as we have booked just under 2.3 million in new Fuji orders and have recognized over 1.7 million in revenue from Fuji in this five-week timeframe as well.

We also see installation demand increasing significantly on a weekly basis.

So combining strong demand for new digital mammography systems with Fuji's existing installed base, we see tremendous opportunity for sustained growth of CAD well into the future.

In addition, we anticipate by year's end our CAD will be connected to over 2000 digital mammography machines in the United States.

This rapidly growing installed base will become a major opportunity to generate recurring revenue for upgrades and service agreements.

This is of particular importance as our service business goes through a transition, from a significant reliance on film-based CAD systems to service agreements and upgrades for TotalLook in digital CAD systems.

In addition, we launched the next version of our comparative reading solution TotalLook late in Q1.

And while it had a negative impact on quarter end film-based revenues in that we proactively offered it to an existing backlog and new customers, we fully expect to benefit substantially from a full quarter's traction in Q2.

Total (inaudible) state of the art digitizing of prior exams with enhanced image customization options and workflow efficiency features for all mammography care settings.

And while TotalLook technically sits in our film-based product set, it is sold in conjunction with an end to end digital mammography conversion.

As a result of the growth numbers I shared with you earlier around digital mammography, we anticipate strong demand for TotalLook throughout the year.

In 2007, it represented over 50% of our film-based revenues.

We anticipate solid growth with film-based products overall in 2008, largely due to the continued market acceptance of TotalLook.

Shifting gears a bit to our overall strategy, we have been working on expanding our addressable markets while taking full advantage of the opportunity in digital mammography.

To this end, we are making good progress in getting our colonic polyp detection product ready to enter clinical trials.

While this process has taken longer than first anticipated, we've continued our dialogue with the FDA on the clinical trial scope and protocol, and now expect the trial to begin in the June timeframe and conclude in early Q4.

This should put us on track for an international release in the fourth quarter and an FDA filing in this timeframe as well.

Beyond colon, we're investigating where we can apply our core competencies around pattern recognition and radiology workflow to enter new markets in 2009 and 2010.

Our goal is to establish additional new product lines over this timeframe to offset the potential maturing of the digital mammography business beyond 2010.

We'll keep you updated on our progress, as we work to build a substantial recurring revenue stream from the installed base combined with the growth associated with new CAD radiology workflow opportunities that we expect will materialize.

Lastly, before turning things over to Darlene, I believe we've demonstrated over time a substantial improvement on our balance sheet.

We believe our near-term ability to achieve strong top line revenue growth, combined with further margin expansion will be the major source of funding our new business opportunities mentioned earlier in this update.

And with that, I'll turn things over to Darlene.

Thank you, Ken, and good morning, everyone.

As Ken stated, we are pleased with our progress and financial performance during the first quarter of '08 and this represents our seventh consecutive quarter of comparative improvement.

Among the highlights of the first quarter are continued growth in our core digital mammography CAD products, the FDA approval of our second look digital CAD for use with Fuji CR systems and the introduction of the new version of our TotalLook product for comparative reading.

In addition, we narrowed our net loss by 24%, improved our gross margins by 2%, and generated over $900,000 in cash, marking our third consecutive quarter of positive cash flow from operations.

For the quarter, total revenue was $6.4 million, up 5% over the $6.1 million in total revenue during the first quarter of 2007.

Sales growth was led by our digital CAD products, which increased 24% to $4.3 million from $3.5 million in the first quarter of 2007.

Our film-based product sales were soft for the first quarter, decreasing by 25% to $1.4 million, from $1.8 million in the comparative quarter last year.

This was due in a large part to the mid quarter launch of our new revision of our TotalLook product.

While product sales slowed as customers waited to see the products demonstrated before making a purchase decision, this product is being very well received and we began to see a pickup in orders in mid to late March and we expect substantial increased demand as this advanced product gets a full quarter of traction in the second quarter, and the second half of the year.

Service and supply revenue of $777,000 was off by about $100,000, or 11% during the quarter, largely due to a reduction in time and material billings for repair services and related product sales this quarter.

Revenue from service contracts continues to increase.

That said, we expect to see service and supply revenue increase over time, as the installed base of our full sale digital mammography, TotalLook and Fuji CR CAD products grows and transitions from warranty to service contracts.

As we have reported, international sales began picking up during the second half of 2007 due to strong demand from GE and Siemens in Europe and from initial shipments to GE to Japan.

This trend continued in Q1, posting 34% gains over last year's first quarter.

We expect continued international sales growth, as we leverage new opportunities with additional global partners, such as Phillips, (inaudible), Spectra, and others.

Gross margin increased 2% to 82.3% from 80.3% in the prior year first quarter.

This increase in gross margin is primarily attributable to our digital products, which have higher gross margins than film-based products, and are increasing as a percentage of total sales.

Along with the realization of the material component cost reductions and higher selling prices.

Operating expenses in Q1 this year of $5.6 million, were at the low end of our guidance of $5.6 million to $5.9 million, and were approximately 5% higher than the $5.0 million in operating expenses realized in Q1 of '07.

The majority of this increase was in research and development, which also included a one-time rent expense charge of approximately $94,000 relating to the recent sublease of a portion of our Ohio facility, which was subleased for slightly less than the lease obligation.

The net loss for the first quarter of 2008 including stock-based compensation expense of $392,000 narrowed to $446,000, or $0.01 per share.

From a net loss, including stock-based compensation expense of $277,000, a $583,000, or $0.02 per share in the first quarter of 2007.

Product backlog, which excludes service and supply, was approximately $2 million at March 31, 2008, as compared to $2.1 million on the corresponding date in 2007 and $1.7 million at December 31, 2007.

Backlog as of any particular period should not be considered indicative of the Company's net revenues for any future period, as approximately 75% of our product is booked and shipped in the same quarter.

As of March 31, our total head count included 104 full and part-time employees.

This is an increase in head count of three, from the 101 full-time and part-time employees at December 31.

This head count increase this quarter is primarily in the area of R&D hires.

Now, turning to the balance sheet, most notable at March 31, the Company had over a $900,000 increase in cash and cash equivalents, to $5.3 million, up from $4.3 million at December 31, 2007.

This represents our third sequential quarter of positive cash flow from operations.

As of March 31, inventories increased modestly to $2 million, from about $1.8 million at December 31, primarily due to preparations for the launch of our Fuji CAD product.

Accounts payable were $1.6 million at quarter end, down 20% from $2 million at year end, and accounts receivable decreased 30% to $4.5 million, from $6.5 million as of December 31.

I would like to take a moment to, again, comment on our shelf registration.

As Ken and I received many questions about it as we meet with investors.

In November of last year we filed a $75 million shelf offering with the SEC.

We filed a shelf when our stock was in the $4 per share range and we thought we saw some interesting opportunities on the horizon.

Given the recent market conditions, our lower stock price, and our bullishness on our organic growth plan, we reevaluated and chose not to use the shelf registration at that time.

The shelf registration has always been a strategic filing and is not intended to raise funds for operations.

Over time, we plan to build iCAD into a leading provider of solutions to the radiology and healthcare markets, and want to be in a position to strengthen our competitive position and move nimbly on potential acquisitions at a time when the right opportunity presents.

Now, I would like to move on to affirm our financial guidance for the first six months of 2008.

As we stated in this morning's press release, we reaffirmed that we expect total revenue for the first half of 2008 to be in the range of 15 million to $16 million, which represents a 22 to 31% increase over the first half of 2007.

This guidance includes sales of SecondLook Digital and TotalLook products to Fujifilm globally, which commenced earlier in the second quarter.

We also expect to sustain first half gross margins in the 82% range and per Ken's earlier comments regarding Fuji, should that volume sustain itself, we could see an additional 1 to 2 percentage points in margin expansion over the year.

We anticipate operating expenses will be between 5.6 million and $5.9 million per quarter for the first two quarters of 2008, and we expect to be profitable for the first half of the year.

With that, let's open up the call to questions.

Operator?

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Adrian Dawes with Hartwell.

Please proceed.

Good morning.

Good morning, Adrian.

Can you talk a little bit about the longer-term margin impact on future service migration from the time and materials to retainer?

Yes, what -- as you know, our overall sort of blended gross margin has been in the 80 now to 81 kind of percent range.

Service tends to be in the mid 70s, if you will.

I think we're making a lot of progress from a warranty standpoint, so our margins are improving.

And so I think as we begin to see this service revenue grow over time, as these service contracts increase, as products come off warranty, there's some potential margin improvement in there as well.

And you have more software in, let's say if we do upgrades, you've also got a lower cost of hardware as it relates to digital CAD products that are on contract versus our film base, which are more hardware intensive.

So we would anticipate probably a modest margin expansion just based on the components being both software and a lower hardware mix, Adrian, as it relates to digital contracts.

So for service contract, it's approximately what cost per user, an average user?

Well, as I said, it's been in the sort of mid-70s range, mid 70% range.

That's the gross margin.

I'm thinking revenue.

Oh, the contracts vary a little bit in price.

They could be anywhere, and don't quote me on this, from 6500 to $9500 a year roughly.

Okay, great.

As you look at the rollout of the Fuji program, can you talk a little bit about what you've learned during the first four to six weeks of that rollout, and what in the latter part of the year may be different than the initial start?

Sure.

Well, just to kind of put it on a time line, Adrian, we got our approval on Friday the 4th, and in a perfect world we would have loved to have been in March, because on the day we got the approval, Fuji immediately sent us an $850,000 stocking order.

And what that reflected really was that they knew they had substantial pent-up demand.

The challenge was, though, that in the week of April 7, when we shipped them the stocking order, they were all out in Phoenix at their kickoff meeting for the year, so it really took us until the mid-April time period to really engage with Fuji in a very active way, which really is about three weeks ago, to really work collaboratively.

So what we learned was that they had a number of sites that had had an urgent need for CAD and what they did is they have prioritized their largest sites.

They have been waiting the longest, along with other strategic sites to provide the product.

With that said, they still had to get purchase orders from the customer.

They had to obviously work with us in the collaborative fashion to plan installations.

What I would say is that we have been very, very encouraged by the rapid progress over what really has been about three weeks.

Fuji, understanding the demand as the orders are coming in and as they are in dialogue with their field, has placed at least three additional stocking orders with us in a mix of servers and licenses spread across their two warehouses in Connecticut and California.

So what we're learning is that the demand is out there.

It's very brisk.

And just to give you an example, we installed about 15 units of CAD in the last couple of weeks of April and in collaborating with Fuji, we now have almost 50 units planned for installation in the month of May.

So you can really see that the demand is real, the ramp is happening very, very quickly, and ultimately, a lot of customers when they bought Fuji CR, had the expectation that CAD was coming in three to six months worst case, and here we are 21 months later.

So I think that the way this will begin is the customers waiting the longest, in conjunction with those with the largest installations, will be served first.

Obviously over time, we would expect that to kind of normalize out into, just normal demand.

Now, with that said, what Fuji is also seeing is somewhere in the range of 75 to 100 new systems purchased per quarter.

So when you look at the demand side of this, you've got 500 systems that were installed as of the end of March.

You've got somewhere between 75 to 100 new systems going in.

So when you kind of model that out, it says that they should be somewhere around 750 systems in their installed base by the end of '08 and possibly as many as 1100 systems by the end of '09, if they continue with their current run rate.

So, we've learned a lot.

There's still a lot more to learn.

They have not yet been able to tell us, it's too early, whether CAD is having an impact on the competitiveness of the product and winning more orders, but the demand is real.

The fact that we booked $2.3 million right up front and we've actually recognized $1.7 million in our installation capacities are getting exercised very rigorously every day, we're very, very encouraged by this, and hence, we feel very confident about the guidance we put out there.

We needed this for Q2, and with that kind of wind at our back going into the second quarter, that hence gives us a lot of confidence relative to our guidance for the first half.

Last question in terms of the guidance for this quarter, film-based revenues are expected to sequentially increase meaningfully as part of this.

How do we model that?

Yes, I definitely think that will be the case, and when you think about our film-based revenues, the major source of that, about 60% of it, has been TotalLook.

We introduced a new version of TotalLook and we're not able to ship it until the first week of March.

What we also did, having been in this business a long time, sometimes you take some short-term pain for long-term customer satisfaction.

And what we basically realized is we had a far superior product to the prior one.

We had a lot of customers in our backlog that were willing, not knowing about the new product, to take the old one.

And as well, we had new incoming business that if we had stayed with the older product we could have shipped, which would have had a significant impact on increasing revenue for that product in the first quarter, but we decided to do what we thought was the right thing for the customer in the longer term and we proactively reached every customer in our backlog, as well as accommodated customers that were going to purchase and take delivery in March with a demonstration of the new product, in that bottleneck business.

So what we now have is that opportunity in Q2 to see a much bigger performance with TotalLook, and out of the gates, so to speak, there's nothing that would concern us that that isn't going to happen.

Secondly, analog CAD, while it is somewhat of a mature business, we had our biggest quarter of the year in Q4 of '07.

So when you're in a maturing business, obviously after a big fourth quarter, we had a very soft first quarter.

We landed a large analog CAD order at the end of March, which we believe is shippable this quarter, which is more business in that single order than all of the business we did in the first quarter.

So we're encouraged that the overall volume, principally driven by the new TotalLook product, is what's going to drive the film-based revenues much higher sequentially from what we did in the first quarter, but clearly, what we're anticipating is the large increase in volume would come as a result of our digital products.

Absolutely the right decision, so congratulations on the quarter.

Thanks.

Thank you.

Your next question comes from the line of [Matthew Taylor], please proceed.

Hey, guys, I'm just trying to do some quick math here.

I've got $3.5 million for total revenue attached to Fuji.

You just commented on $1.7 million for the first five weeks out the chute here, you've got another 50 coming on in May.

Does that rate, should we look at anywhere between, say, 40 and 50 systems per month until we get to some level of penetration of that 500 installed base?

The way I would look at it, Matt, is that Fuji took stocking order that probably at today's demand and installation run rate, that $2.3 million is enough to carry them through the month of May.

So they have enough inventory.

What they have said to us is it's early, we're kind of new at this, so we're going to try to keep 30 days inventory on hand.

So what I would not assume is we've sold $2.3 million and it's gone and everything beyond today, May 7, is new business.

So we think that by the end of May, they will have substantially worked through with our current installation plans the majority of that inventory.

It's really not clear to us how much additional product they would purchase for June.

So we need to really work through this to understand that.

But obviously it should be North of a total of $2 million for the quarter based on what we already have in hand, but to go further than that, it's really hard to say.

What we're also seeing is a lot of large installations, so we've gone onto certain sites that literally were doing six or seven installations on the same site, so initially that's going to make us very productive to get installations done.

What's not really clear is when we get out to June and get out to Q3, will there be a lot of single installations, which obviously would not be as productive in installing, so we really don't have the ability yet to model what Fuji means in terms of units on a quarterly basis or a monthly basis, but what I would say is that, as I mentioned, we installed about 15 units across seven sites in the last two weeks of April and across only about 10 sites in May we're going to install about 40 or so, or 45, again, reflecting these large sites that have multiple gantries, so we probably don't have enough experience across a broader representation of their installs to then model what the demand, as well as what our ultimate installation capacity would be.

I think the easiest way to look at it is you've got 500 units that have been out there anywhere as long as 21 months.

Assume that some can buy right away, some will buy later in the year, and some will probably not get capital approval for the purchase until '09.

And then you've got the, let's call it 75 or 85 units per quarter that are new, where a higher percentage now can budget and purchase up front, both the Gantry and the CAD and you're going to have a blended model of the pent-up installed base combined with new systems, but it's too soon for us to really say we've got a model that could give you a dollar figure per quarter and in addition, any sort of an installation ramp.

What I would say is that when we finish the second quarter, we will try to reflect that sort of communication in our second half guidance, because we'll have had a full quarter of installation under our belt.

Yes, and that's great detail, because I guess in past quarters, we've talked a little bit about kind of going slow on the installations, trying to work through the integration with pack systems and then kind of accelerating that process.

It sounds like due to these large orders, the integration has been a little bit easier.

Is that fair to summarize?

Again, it's early.

But I don't have an example in the, pick a number, 20 or 30 installs we've now been engaged in from a unit standpoint.

Not necessarily sites, maybe it's 10 sites.

I've not heard that we've had any problems as it relates to installations.

And what I would say, again, these are larger sites with multiple Gantry so the likelihood of connectivity into Pax is higher versus something smaller in a community setting.

Obviously we've had a lot of time to learn how to install these systems, we've had the benefit of some of these installations internationally.

One thing that happened in the quarter so far, which was a pleasant surprise, we actually got two orders in Italy from Fuji, because in Europe they really decide on their CAD on a country by country basis, versus a pan-European strategy from Fuji.

So if you combine that with several orders we've installed in Singapore, combine that with a number of the beta sites that we have, that we have installed, we've got a pretty good fix on the installations.

They are not all going to be smooth because there are many different quirks in the IT world of hospitals in this world, but I think at least so far, we've not run into any major glitches.

Could I ask just one lass question on the gross margins, does Fuji -- can I ask you specifically on the profitability of Fuji, is it higher or lower than other providers out there, specifically GE?

Yes, Matt, it's actually very comparable to our other OEM partners.

Okay, terrific, guys.

Yes, I would just add, as the digital product revenue continues to grow, and it becomes a larger part of our total revenue, it does have a higher gross margin than the analog product, so we will see, or we expect to see that gross margin continue to go up.

Okay, terrific.

I'll get back in line.

Thanks, Matt.

And your next question comes from the line of Dalton Chandler with Needham & Company.

Please proceed.

Good morning.

Good morning, Dalton.

You've touched on this a little bit already, but could you just take us through the process, as you go back to the installed base and sell into them, how that works?

Do you need to send out a sales rep with a Fuji sales rep, or is Fuji handling most of the process?

Basically, the fact, again, Dalton, we've had so much time, and what's important here is that we have 20 salespeople out there ourselves.

They have forged really good working relationships with their Fuji counterparts and we have as well, in well marketing I think a very good relationship.

We kind of have what I would describe as a top 100, that we've mutually agreed upon that these were the most urgent customers that we would proactively go back to and it could be largely a Fuji sales call or a joint sales call.

Our salespeople told us that when they got back from their Phoenix kickoff meeting, because their fiscal year ends in March, our people's phones were ringing off the hook with demand to go visit customers and it was all the customers on that top list, because while we've trained Fuji sales people, they need our support to really kind of close the order.

So first kind of approach would be collaborate with your Fuji salesperson, go back to the most urgent customers that they have had waiting patiently and some impatiently for sometime.

Second part of that would be certainly Fuji Independent going back to customers that are not needing a demonstration or a technical discussion and placing an order.

One of the things we're working on with Fuji, and it's not been agreed to yet, is taking advantage of our telesales people.

We have proposed to them that our telesales people at our nickel would go out to the 500 customer installed base list, generate the demand and then hand the orders to Fuji.

We think that's a mutually beneficial exercise, so we would not take the business directly.

It would all go through Fuji.

So basically that is the way the model is working and we're hoping they will take us up on that offer, because, as you know, someone's out there trying to sell $250,000 Gantry they don't always have time to run back to an installed base customer and sell CAD, unless the customer has expressed an immediate desire to purchase.

So we would like to help them, but at the same time, we're respectful of the fact that it's their customer and we need to coordinate that such that no one feels that turf has been threatened.

I know from my many years in the field, that field people can be very turf-oriented and we want to be careful not to damage whatever relationships we've created.

So I think you're going to see a blended model on the installed base, and I think kind of more consistent with the way GE does business today, or Siemens, you're going to see new orders coming in bundled for their CRM product with CAD, very similar to how you see it today when GE's competing with Siemens or Hologic.

Obviously when you talk to Hologic they make comments like we don't see Fuji, but when you talk to Fuji, what they tell you is they compete with Hologic in every deal, so we would expect that CAD is now going to become a very offensive component of a Fuji offering and that the orders will now start to come in simultaneous as a bundle, similar to how it's done competitively today when they are competing with GE or Siemens or Hologic in the FFDM world.

Okay, as Fuji tries to work through the backlog, though, when they take a new order today and that customer wants CAD, are they having to tell them, well, you're going to have to wait a few months while we work through our existing backlog, or are they--?

Not really.

At this point, Dalton, what I would say is the incoming orders that we're seeing are typically getting scheduled anywhere from 2 to 4 weeks out, and it really depends on the urgency.

We have installation capacity, and so at this point in time, I would say we have comfortably been able to handle this demand, mainly because, again, they are large sites.

We can go on camp and get the work done.

But as they get more dispersed, we have third party service companies that have substantial personnel all around the country that are already installing and servicing our products with other partners.

So we have the track record with them and we can turn on that variable cost channel to remain competitive with availability.

We know that in the DR space, between the long lead time that GE deals with and the four to five-month lead time with Hologic it could be a competitive advantage for Fuji to be able to install a Gantry in four to six weeks, which I believe is roughly their availability, and we would need to obviously synch the CAD up to be able to be done in that same timeframe whether it be on a new sale or in the installed base.

Okay, and, on the 500-unit installed base, I guess Fuji's been selling that product for about seven quarters, so if you just do the simple division, you get an average of around 72 units per quarter.

And, right now, they are still selling at about that average.

Do you get the sense that maybe they have been constrained a little bit in terms of new orders, by the fact that they haven't had the approved CAD and could we see that 75 to 100 units per quarter you mentioned move up?

Well, we certainly hope so.

When you talk to Fuji, what they will tell you is one of the major competitive constraints has been a lack of CAD.

And obviously when you're competing with, let's say Hologic or they occasionally compete with Siemens, they really don't see GE too often.

What they tend to say is they compete on workflow.

Could you in, a let's say a Hologic or Siemens environment use less Gantries because the view of those companies is that their workflow is more elegant, if you will, and then the second thing they deal with is CAD.

What's interesting, though, is that when we were at the site of the Breast Imaging in June of '07, so almost a year ago, they had only installed about 150 systems in a year.

They have now installed 350 systems basically in the last three quarters, so there clearly was a slow ramp to the product.

Then there was this burst of activity and now it seems to be in this 75 to 100-unit per quarter run rate, which is probably is a lot more aggressive than they started in the first 12 months, but maybe not quite as aggressive as the last couple of quarters.

But our hope is that with a more competitive product, where CAD goes hand in hand with digital mammography, it's got to help them sell units over the longer time.

Okay.

Thanks a lot, and congratulations on your approval.

Thanks.

Your next question comes from the line of Valerie Braun with Alliance Bernstein.

Please proceed.

Hi.

Can you hear me?

Yes, Valerie.

Hi.

Good to talk to you and congratulations on the approval.

Thank you.

Just a couple of clarifying questions.

Of the 500 that have been installed, how many of those were from January through March during the first quarter of '08?

Well, if you go back to the Radiology Society of North America meeting, when we talked to Fuji, Fuji at the time was signaling that they would have about 400 installed by the end of the calendar year.

So I guess what I would say is that we're under the impression that they had about 300 installed at the end of Q3 '07.

They signaled about 400 by the end of Q4, and now they have said March 31, 500.

Okay.

So in a rough sense, it looks like about 100 per quarter has been their most recent quarterly installation rate.

Okay, great.

Then you mentioned 2.3 million in new orders, of which 1.7 million I think has been recognized in the first five weeks of this quarter.

Correct.

How many units does that core respond to?

Well, we don't typically give out units, because then it's easy to determine what our average selling price would be.

But what I would say, this, is that there's been a very high mix of licenses, and licenses will take average selling price down.

And the reason we have had an unusual number of licenses is because we're going to their largest sites, where they are buying for multiple Gantry installations.

So what I would say is that the average selling price for this business might be 2K below our thinking relative to when we get into more dispersed installation environment, there's a much higher percentage of servers than there are licenses.

Right now the installation are almost running 50/50.

Services to licenses.

So that has taken the average selling price down a little, but we think, again, it's a more temporary phenomenon.

Over time, what we'll get back to is more consistent with what we see with people like GE and Siemens, which is more of a 60 to 65% server to license mix.

So we're a little bit lower out of the box.

But we're still very encouraged that that will normalize itself.

The other thing I would add is that we're doing the installations for Fuji, so that our average selling price for Fuji because of installation is higher on a total transaction basis, and so some of the Delta between the orders and revenue is deferred installation until those installations have been completed and signed off.

So there is some additional work to be done, if you will, to get the gap between orders and revenue more close to 1 to 1 between now and say, end of May.

Okay, and then you have a strategic agreement in place with GE as well.

I thought for a new version of a CAD system for use with their machines.

Can you comment on how that's going and what you think that will be in terms of a driver in the U.S., as well as outside of the U.S.?

Yes, we're working on, as always, a new version of our CAD, and what we're trying to do is to optimize the feature set for actually both GE, who we have a multi year development agreement, and for Siemens, who is a good partner as well.

That version is probably going to go into clinical trials in the Juneish timeframe, June, July timeframe, and a lot of the differentiation, if you will, is more what we can export from the CAD to the mammography workstation.

So the work, if you will, is a joint effort between ourselves and, say, GE, to put some differentiated functionality on their mammography workstation, similar for Siemens as well.

So it's really a collaborative effort.

It's not just what are we doing in a differentiated fashion.

It's really what are we doing in a mammography workstation system environment, and what we're hoping to do is to have something into the FDA for the next version of our product, hopefully in the Q4 timeframe.

And we would really hope to have something into the market by the middle of '09 and that would be differentiated product for our key partners as well as a product that we could then market to the installed base.

And I mentioned earlier that we should have well over 2000 installation in the United States as of the first of '09.

And we think an upgrade to some of the customers that may be on a version of our CAD that could be as old as six or seven years would be a great opportunity for us to get some nice recurring revenues.

So that's kind of the motivation obviously from a business case standpoint.

But our relationship with GE is very strong.

We're working on now a new commercial contract, a multiyear commercial contract with them, now that the R&D agreement is behind us.

All in all, I would just simply say that the relationship both here and the states, as well as in Europe, is going very well.

Thank you.

Thank you, Valerie.

Your next question comes from the line of [Margaret Lovett] with SunTrust.

Please proceed.

Hi, this is Margaret Lovett in for John.

I was just wondering, do you all have a sense yet of what the long-term attach rate is likely to be between CAD and CR in the U.S.?

Well, it a good question, Margaret.

It's a little early to be certain.

But one of the ways I would answer that question is that Fuji has signaled to us in communication that 80% of their installations are dedicated mammography.

So again, this notion that they sell in the hinterlands and small, rural settings is contradicted when 80% of their installations are dedicated mammo.

So you would think that a very high percentage of that 80% would buy CAD.

The wild card might be for 20% of their installs are multiuse systems, meaning that CAD, based on mammography exam volume might be less important to certain customers, that could obviously diminish the attachment rate.

So what we have done is used a blended model of about 80%, and I would simply say that it will take time to bear that out as accurate, but at this point in time, we assume that any dedicated mammo competitive situation, again, whether it be Hologic or Siemens, they are going to have to offer CAD as part of the offering given that Hologic and others have all signaled that over 95% or so of their installations include CAD.

So we're kind of looking at it as a very high percentage of that 80% that are dedicated, then a spattering of the other 20%.

But on a blended basis, we would say 80% is probably a number that at this point in time we're using in our models.

Okay, that's very helpful.

And how about internationally?

Are you seeing the attach rate stable, or is it increasing?

Any sort of directional advice you have there?

I think I would say it's increasing slightly.

The 25 to 30% of the systems shipped, if you were to look at GE as an example, is still a pretty solid number.

It really depends on a lot of things obviously, and as people know, in the countries of Europe that have a screening protocol, they use a double reader system, and so when you have to have two radiologists reading every exam, even when they are normals, it makes it more difficult to present the clinical and the business case for CAD, and then, of course, you don't have reimbursement nor do you have the liability risk that the radiologist has here.

I think in the private setting we're seeing a nice increase in the attachment rate of CAD, we're seeing it on tenders for large government-backed purchases, but on a day in and day out basis, I think a lot of the, let's call it community profile hospitals around Europe that are doing mammography screening on an as-needed basis are probably where we're seeing the least traction.

So the blended model is still probably 25 to 30% attachment.

Great, thanks.

And then for the total -- for the customers you are (inaudible) this product, can you give us a feel for what percent of those customers have decided to move on with purchasing decisions in the April, May timeframe?

Well, here's what I would say, is that anyone who goes into the world of digital mammography has to face the dilemma of having a film library and the need to do comparative reading if you see something suspicious with prior year's exams.

So every customer needs a digitizing solution, and then I would say a subset of that could do relatively reasonable volumes of mammograms need to have really elegant comparative reading software that really helps them to do the comparisons, clinically accurately, as well as productively from a workflow standpoint.

So that's where we're targeting TotalLook, really to the centers that really see the value and the comparative reading software versus those sites that are really looking for commodity to just check the box and say they have digitized the priors and they can pull them up if need be.

So it's very hard to give some sort of an estimate, but what I would say is last year, for every, let's say five digital systems we sold, we were probably selling one TotalLook system.

So the attachment rate was maybe 20% of the transactions.

What we're really hoping to do is to do well north of that, so that we maybe get up into the 30 to 40% of our transactions this year that would buy TotalLook in conjunction with the digital CAD.

Now, one of the things that will help us do that is that TotalLook is now on contract with both GE and Siemens.

And so we are seeing traction with GE and Siemens, and so that should help from us an attachment rate standpoint.

I'll give you one last example of why I think that will help us.

HCA, which is now known as Health Trust or used to be Hospital Corporation of America down in Nashville, one of the largest for-profit chains, just went through a bulk buy purchase process.

And basically they have GE and Hologic on contract, and they have their contract broken up into three regions, so they did a bake-off, if you will.

Ultimately at the end of the day the Eastern region, one of the three selected GE and basically what we have seen is that the orders are now starting to come in for CAD for those bulk buy customers.

And I would say we're anticipating that maybe half of those bulk buy customers are also going to buy TotalLook along with the CAD.

So we think that if it's positioned correctly on the front end of the sale, combined with a more competitive product, we can increase that attachment rate, but what I really can't tell you is exactly what that number may be.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [Scott Warner].

Please proceed.

Hi, Ken, Darlene.

One more on the TotalLook, if anybody has a digital, how can they not have to have a TotalLook or if there's a competitive product, which I'm going ask you about if there is any, how can they do without it versus their, using their library of past images?

Scott, I couldn't agree with you more.

In all seriousness, what you have out there is a very mixed situation.

You have services that will go in and do digitization, where you're not committed to buying any hardware.

You've got people that sell very inexpensive, simple equipment, and so you've got those offerings and you've actually got people, if you can believe it, that don't do a significant enough volume of mammograms that are willing to put up with literally putting the prior exam up on a light box and looking at the light box and then turning and looking at the digital display.

Sounds crazy, but that is what some people do out there, so it really comes down to what the size of your volume of procedures are, what the size of the library is, and then what your digitization strategy is.

We have seen customers tha literally live with Light Box for comparative reading and Digital Workstation, which we think really contradicts all the benefits of digital mammography.

So what we're trying to really do is really zone in on where comparative reading, where work flee is extremely important to the customer, because what we're trying to sell quite frankly is software as opposed to digitization.

Now, with that said, we think we have excellent performance in our digitizer, but really what we're trying to sell is a product for comparative reading and not be steered into this, what I would call commodity marketplace of offering just the service of digitization.

Now, in the total -- I never heard you mention, or I know nothing about it.

Is there any competitive product out there to TotalLook?

Yes, there is.

Our former competitor, R2, which is now Hologic, has a product.

I think it's called Digital Now.

There's a number of independent companies that offer their own product.

What I think we have the advantage of is that we really understand the workflow and we're writing software every day around around mammography, detection in work flow, so we think we really have built in this version of the product a real differentiated solution.

Now, you combine that with channel where you're now got GE and Siemens, along with our own team talking end to end digitization.

So it's about you're going to move from film to digital mammography cameras, you're going to move to a need to have a strategy on digitization.

Some customers would say, wow, just look the appointment book and we have the product here, so we digitize the next 30 days worth of patients coming in.

There's a lot of opportunity to consult with the patient and then sell an end to end solution.

And I think that's kind of our approach, to try to differentiate ourselves in the marketplace.

Last year TotalLook represented almost 60% of our film-based revenues and clearly with our film-based CAD business going down in growth, this has been a real bright spot for us.

And so we're counting on that to be the driver in film-based revenues growing again year-over-year, and if the product acceptance is as good as we hope, we could have a strong year-over-year growth, but almost exclusively due to the acceptance of TotalLook as part of this end to end digital conversion.

All right.

That sounds good.

What are you -- is your share continuing the same of the total in this field, where TotalLook operates against R2 and so on?

Are we getting a greater percentage this last quarter versus previous, or how does it shape up, as our percent of the total market here, of the TotalLook market?

The market's growing and our product performance obviously had us grow in '07.

What we have not had enough time with is the new version of TotalLook, and I think that we think it is so good in its image quality and its newer, enhanced comparative reading software that it's going to increase our volume substantially.

We've also put a very nice incentive program for our sales force out there as well so that they have different volume trip points for units sold and they get bonuses up and above their normal compensation from a commission standpoint.

So we're trying to create all of the proper channel focus, the right incentives.

We're putting a significant amount of our collateral in advertising towards TotalLook as well, and really trying to get our OEM partners, particularly GE and Siemens, to really lead with the product in conjunction with CAD.

One example of that, we actually have a program with Siemens where they sell a bundle and they get a special price from us when they sell a bundle, which includes our CAD with TotalLook.

And we've seen some nice traction with that particular program.

The one challenges we have with our OEMs is that TotalLook is more of a technical and clinical sale.

So when you combine that with CAD, they really need our help to get those sales done, and sometimes given that the digital mammography market is pretty hot, they will steer away from that sale because it's extra time and effort and it's a little bit easier to just nail the fully digital machine sale and move on.

So in those cases, we go in with our direct sales people right behind them and try to sell directly.

As a share of the total, this total market, are we maintaining our share, whatever that is?

I think it's hard for us to quantify the market because of all the different players from those that do it as a service versus those as a commodity.

What I would say is we think we will gain share at the higher end of this market for that mid to high volume mammography center based on the new feature set.

So we're counting on TotalLook year on year to grow substantially.

We would say 25 to 50% growth over its performance last year.

If that is the case, that would seem to be -- at least in keeping if not taking some share in the segment of the market we're going to play in.

Okay, and one last, on GE, I'm -- I understand from people I've talked to, that the GE weakness that they reported in the medical field did not at all impact on the mammography product sales.

So therefore it would not impact on us at all.

Do you just want to comment on that?

Yes, what I would say is that I think about what happened to GE obviously, the Deficit Reduction Act, as it's hurt all of the imaging companies in it -- reducing reimbursement in the imaging centers has really put the whole imaging space into a slowdown.

And a lot of people are waiting for the new generations of product to see that market pick up.

What I would tell you is this.

GE had a very, very strong fourth quarter in 2007 in mammography unit sales.

They actually exceeded the forecast in units that they had given us at the beginning of Q4.

So that obviously helped us relative to our Q4 performance, where we did $8.1 million in revenue.

Conversely, GE did undership somewhat, in the first quarter -- so as we have been talking about our revenue in Q1 and the fact that it was not as strong as we had hoped, we actually, probably based on GE's shipments versus the plan they had, probably lost about 400 or 500 K in business in Q1 in digital CAD as a result of their shipping more ambitiously in Q4 so to speak and paying for it in Q1.

So what's positive in that is that when we met with GE in April, what they have told us is that they will make up in Q2 the shortfall in units from Q1, so hence we are anticipating a very strong second quarter with GE to make up for some of the shortfall from the first quarter.

So that's encouraging and we'll see how that develops.

But is this impact of the -- I forgot the term you use, the reimbursement, is that an, a pole hanging over the digital sales by GE and Siemens and all, because of that environment out there that would impact on us?

Not that we're aware of.

First of all, the schedule for reimbursement for mammography is different than the schedule that was impacted by the Deficit Reduction Act.

So first of all, you don't have the reimbursement pressure on mammography.

And then the other thing I would point to, Scott, is that when you go to the FDA website, you find that they literally installed 561 digital mammography machines in the United States in the first quarter and that was almost 40% more machines than the first quarter of '07.

So when you look at this rate of installation, I mean it's a very impressive number and even if -- typically if you go back to '07, obviously the lowest number of machines that were installed were in the first quarter.

So I don't know what the whole year's going to look like, but if you just took Q1 and you took a linear approach to the rest of the year, that would say that there would be over 20% more mammography machines installed in '08 than '07, and that's about 400 systems.

So that to me, given that Q1 was so strong, is an indication at least to this point that mammography has not been effected by some of these other external forces.

Great.

Okay.

Thank you very much, Ken.

I'll get off the call.

Thanks, thanks.

At this time, we do not have anymore questions in queue.

I would like to turn the presentation back to management for closings remarks.

First of all, I would like to thank all of the investors on the line for listening to our call today.

I would also like to thank our employees who have been doing an extraordinary job in helping us to have this seven consecutive quarters of continued improvement, and obviously we've had some exciting developments over the course of the end of Q1 and the early part of Q2.

Hence, we're very confident of our guidance, and we intend to do everything we can to deliver on it, and then update guidance at our Q2 call for the second half of '08.

So thank you all very, very much for calling in, and we look forward to speaking with you all very soon.

Good day.

Thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect.

Good day.