ICAD Inc (ICAD) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 iCAD Incorporated earnings conference call.

My name is Marsha and I will be your coordinator for today's call.

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

We will conduct a question-and-answer session toward 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 Ms.

Anne Marie Fields of Lippert/Heilshorn.

You may proceed.

Hi.

Good morning.

This is Anne 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 second 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.

For the strategy discussion on today's conference call, management has provided a PowerPoint presentation that will coincide with their prepared remarks.

If you have not done so already, we encourage you to go to the Company's website at www.icadmed.com and from the homepage, click on the link for the second quarter 2008 financial results conference call to access both the audio and the slides.

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 SEC, including, without limitation, the Company's Forms 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 contents of this conference call contain time-sensitive information that is accurate only as of the date of the live broadcast, July 31, 2008.

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

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.

I'll begin with a business strategy update and then Darlene will review our financial results greater detail and provide second half and full year 2008 guidance.

Turning now to our business results, the second quarter of 2008 was a very strong quarter in which we reported record revenue, earnings and generated positive cash flow.

We also made measurable progress against our long-standing strategy to advance our product development pipeline and to acquire synergistic technologies that expand our CAD operating beyond mammography.

These results underscore that our growth strategy and financial controls are on track in delivering meaningful results.

Further, we believe we are well-positioned to take the business to the next level of growth and continued profitability over the remainder of 2008 and beyond.

The core of our growth today comes from the ongoing global demand for full-field digital imaging systems in CAD as the mammography marketplace transitions from film-based technology to digital technology.

According to the FDA website, digital mammography system placements in the US grew by 42% in the quarter versus Q2 of 2007 and system placements for the first half of 2008 were 40% ahead of the same period in 2007.

Even with this continued strong growth, only 38% of US mammography systems have converted to digital technology as of June 30, 2008, leaving considerable room for growth in the coming years.

In addition, our international business demonstrated strong growth this quarter versus last year's second quarter, and when comparing the first half of 2008 to 2007, the business has nearly doubled.

I'd now like to add some color on the key growth drivers in the quarter.

First, we've been signaling for some time that Fuji would be a major source of new revenue once the FDA approval was obtained.

As you know, we received FDA approval on April 4, and began first installations around mid-month.

I'm pleased to report in what was essentially a 10-week quarter with Fuji, we installed systems at nearly 40 US sites, many of which had multi-gantry configurations.

Overall feedback from Fuji customers has been very positive with regard to CAD performance and installation and training.

We expect business from Fuji to continue to be quite robust and to be a considerable revenue source through 2009 especially as we respond to the demand for CAD from the 500 systems installed prior to our FDA approval and from new systems sales.

Second, GE had an extremely strong shipment quarter in the United States.

On our first quarter conference call, I commented that GE had come in a little light versus forecast, but would make it up in Q2.

From all of our sources, it appears that they did so and more.

We're also encouraged by feedback from their US field reps that in spite of substantial existing backlog, the lead time to receive a new system continues to shorten.

This is important because it will enable GE to compete even more aggressively outside of their loyal customer base going forward.

As a result of the continued strong demand for digital mammography, we are proud to have reached the milestone of having SecondLook Digital CAD connected to more than 2,000 digital mammography systems worldwide today.

We expect this rapidly growing install base to serve as a major source of recurring revenue for upgrades and service agreements in the future.

At this point, I'd like to comment on the performance of film-based products in the quarter which was quite strong versus Q2 2007.

This was led by TotalLook MammoAdvantage which was launched late in Q1.

We saw solid sales traction through direct sales and OEM partners, particularly GE, Siemens and Fuji as revenues increased nicely versus the comparative period of 2007.

We received a very favorable customer response to this new state-of-the-art digitizing solution, and expect this product to continue to be a key catalyst for film-based product growth as it digitizes film-based prior exams, provides software tools that enable comparative reading with the current exam, and contributes to increased productivity with digital workflow.

We expect increased demand for this advanced comparative reading solution as the transition from film to digital mammography continues and the need to digitize archive film images grows as well.

As to our service performance in the quarter, we are experiencing a revenue shift away from film-based CAD systems and corresponding service agreements in time and materials billings and a move towards digital CAD systems and TotalLook service agreements which results in a decline in labor and materials.

So, while service agreements grew very nicely in the quarter, it was substantially offset by the decline in labor and materials.

Over time, we expect to see increased growth in this business segment as the sale of digital CAD systems and TotalLook systems continues to grow and the transition from warranty to service contract continues.

And related to service, I would like to comment on having recently been ranked number 1 in user satisfaction by the independent healthcare research group, MD Byline.

To be ranked number 1 for all of 2008 for user satisfaction in system performance, system reliability, installation implementation, applications training, service response time and service repair quality is a real compliment for all of our employees and particularly our service team.

Overall, we are quite pleased with our current growth rate, particularly fueled by the global transition to digital mammography which we feel will continue for several years at a minimum.

In addition, margin expansion attributable to digital products and the continued widening spread between revenue and operating expense growth has enabled iCAD to deliver very strong earnings in the quarter.

Our goal moving forward is to continue to deliver strong net earnings in the low to mid-teens range, while increasing investment in new business segments, particularly CT and MRI-based CAD solutions.

In achieving this balance, we believe we can expand our addressable markets in a timely manner and sustain our growth in earnings trajectory.

Shifting gears, I'd like to provide an update on our strategy.

Our mission is to provide a broad portfolio of advanced image analysis and workflow solutions focused on early detection of the most prevalent cancers, which according to the American Cancer Society, are breast, colorectal, lung and prostate.

Each of these cancer indications also has or has the potential for an imaging screening protocol to be adopted which would further increase exam volume and demand for CAD.

Our comprehensive portfolio of CAD products are being developed in conjunction with a range of imaging platforms, including digital mammography, CT and MRI.

To this end, we are making excellent progress with the development of a colon CAD product to be used with virtual colonoscopy, an imaging exam of the colon using a CT scanner and interpreting software to identify polyps.

As you may be aware, almost 150,000 people will be diagnosed with colon cancer this year and it's the second leading cause of death from cancer.

And, ironically, 95% of colon cancer deaths are preventable through early and regular screenings and interventions.

Also, of the approximately 80 million Americans over the age of 50, at best 50% have been screened to date.

We believe CTC will be a more acceptable procedure to the public and has the ability to dramatically increase colorectal screenings.

We also see this acceptance building through last fall's publication of the results from the ACRIN-sponsored National CT Colon Trial.

This Trial of nearly 2,600 patients has largely proven that CTC is as effective as optical colonoscopy for colonic polyp detection.

In addition, The American Cancer Society, The American College of Radiology in the US, and the Multisociety Task Force For Colorectal Cancer, have all added guidelines for CTC versus optical colonoscopy.

A key element of the ramp will be reimbursement for CT screening, and CMS has recently completed the comment period on this.

Some believe reimbursement could be enacted as soon as 2009.

All of this momentum will make colon CAD an even more important tool for radiologists as the volume of studies increases substantially.

As to iCAD's product status, we met with the FDA in early July to discuss the final details of our current colon clinical study to demonstrate its performance on polyp detection.

We anticipate concluding this study around year-end and plan an international launch in the fourth quarter, followed by a 510(k) FDA submission into the FDA in the early part of Q1 2009.

We intend to utilize the colon CAD platform to kick off a CT-based lung nodule CAD product sometime later this year as well.

Initial work on lung nodule detection was started a few years ago prior to shifting priorities to colon.

We plan to use this work and to leverage the body of knowledge obtained from our colon CAD project to advance this new product and hopefully reduce the overall development time.

As to the demand for lung screening, the number of chest CT exams in the United States is projected to double from 9.4 million in 2005 to 19 million by 2015.

Also, the National Lung Screening Trial is well underway, a 50,000 patient study of heavy and former smokers, and its findings are expected in 2009 and may create a lung screening initiative for certain categories of patients such as the smoker and nonsmoker/former smoker category.

A CAD product for nodule detection should be a key contributor to cancer detection in radiologists' workflow for this growing imaging procedure as well.

On the MRI imaging segment, we recently concluded the acquisition of CAD Sciences, a small privately-owned company that develops and distributes pharmacokinetic-based CAD products that aid in the interpretation of contrast-enhanced MRI images of the breast and prostate.

This acquisition immediately enabled us to enter the breast and prostate MRI CAD markets.

Breast MRI was originally approved by the FDA in 1991, and the American Cancer Society released new guidelines recommending MRI screening of high-risk women in 2007.

As a result of this and other factors, breast MRI procedures have doubled to 645,000 between 2003 and 2007.

Some estimate that MRI breast screening for high risk women could reach 1.2 million studies by 2012, and at some point in the future up to 10% of the 35 million women in the screening population as well.

The use of CAD is critical to the radiologists' workflow as an exam can contain up to 800 images.

Breast MRI's most common use today include high-risk screening, evaluation of the extent of malignancy, abnormal mammograms, followup to chemotherapy and for BRAC-positive patients.

As exam volume continues to grow, the market for breast MR-CAD will substantially as well.

As part of our due diligence on CAD sciences, we did side-by-side performance evaluations with each of the known competitors.

We came away very impressed with the competitiveness of CAD Sciences' second generation algorithm.

It will also serve as an excellent platform for combining kinetics, with iCAD's core competence with more quality-based detection capabilities in future releases.

As to prostate cancer, 1 in 6 men over 40 in their lifetime will contact it today.

Today's testing paradigms are outdated and inaccurate at best.

It starts with a simple blood test, a prostate-specific antigen, or PSA, of which 10 million are performed each year in the United States.

This test has a very high false-negative rate and the majority of the abnormal results are not ultimately cancerous.

Also, the diagnostic workup typically begins with a biopsy through multiple random samples in the prostate, and while it's estimated that $2 billion is spent each year on this procedure, it also has its accuracy issues.

Statistically, cancers are typically missed in 20% of the biopsy patients and in 30% of the patients the extent of the cancer is under-detected as well.

This may lead to unwarranted surgeries, radiation treatments and serious side effects.

Advanced MRI imaging has shown to improve accuracy of cancer detection through tissue characterization, helping to eliminate or substantially reduce unnecessary procedures, and to assist with more accurate image-guided biopsies.

We see MRI as a valuable tool in prostate cancer screening, diagnostic workups with CAD playing a major role here as well.

Today, MRI-based prostate procedures are being done at approximately 200 to 250 US sites and leading institutions internationally.

There is legislation in front of Congress to authorize up to $650 million for prostate imaging research and education.

Should this funding be approved, it will likely identify prostate MRI as a critical screening and diagnosing tool for cancer.

CAD will play a key role in the detection and workflow for radiologists as it does today in breast MR.

CAD Sciences has 23 prostate MRI systems in place today globally, and we intend to prioritize this market as it becomes one that could rapidly grow.

As to our go-to-market plan for MRI-based CAD solutions, the customer call point is highly leveragable with our mammography call point today.

Our market strategy is to field a small team of MRI specialists to support our current US sales team as we enter these markets.

This acquisition also increases the potential for us to expand our relationships with OEM partners that manufacture and market MRI systems today.

So, in summary, we've made excellent progress expanding our portfolio of CAD products.

We're also well-positioned in a high growth field such as digital mammography and have a broad portfolio of products in development that will leverage our current call points in radiology.

Consequently, we did not expect to need significant additional investments to successfully enter these markets.

And as I commented in my business update, this approach will enable us to strike a healthy balance with top-line growth, product pipeline investment and meaningful earnings to build long-term value.

With that, I'm going to turn things over to Darlene, who's going to provide you with more detail on our financials as well as will introduce our guidance for the second half and all of 2008.

Darlene?

Thank you, Ken.

Good morning, everyone.

We are exceptionally pleased with our progress and financial performance during the second quarter and first half of 2008.

We delivered extraordinary revenue growth this quarter, coupled with strong bottom-line earnings and positive cash flow.

These record results represent our 8th consecutive quarter of comparative financial improvement.

Highlights of the second quarter in six month periods include record total quarterly revenue of $10.5 million, up 73%.

Record total six month revenue of $17 million, up 39%.

Record second quarter digital revenue of $8.0 million, up more than 100%.

Six month digital revenue of $12.2 million, up 65%.

Quarterly international revenue of $693,000, up nearly 300%.

Six month international revenue of $1.4 million, up nearly 100%.

Second quarter gross margins of 83.6%, up 3.6%.

Six month gross margins of 83.1%, up almost 3%.

Record quarterly net income of $2.4 million, or $0.6 per basic share.

Record six months net income of $1.9 million, or $0.05 per basic share.

And, the fourth consecutive quarter with positive cash flow.

Let me now provide you some detail on our quarterly performance.

For the second quarter of 2008, total revenue was $10.5 million, a 73% increase compared with total revenue of $6.1 million for the second quarter of 2007.

Among the contributors to the record revenue results of the second quarter are the continued growth in our core digital mammography products, which is due to the strong global demand for digital mammography systems and CAD, the initiation of sales of our SecondLook Digital CAD for use with Fuji CR systems, and sales from the introduction of our new version of our TotalLook MammoAdvantage product for comparative reading.

During the second quarter of 2008, our digital products sales surged, increasing more than 100% to $8 million, from $4 million in the prior year period, reflecting continued strong sales growth of the Company's digital products.

In addition to a strong shipment quarter with GE, we benefited from new sales to Fuji of our SecondLook product which received FDA approval early in the quarter, and was launched to sell with Fuji's computed radiography system.

Sales of film-based products also showed robust growth during the year in second quarter, increasing 32% to $1.7 million from $1.3 million in the second quarter of '07.

This growth was largely driven the successful launch of the Company's new version of TotalLook MammoAdvantage product as customers held off purchasing decisions in the first quarter of '08 awaiting this new product.

Our second quarter service and supply revenue increased 4% to $872,000 from $841,000 during the second quarter of '07, primarily due to an increase in SecondLook Digital and TotalLook service contracts and supply sales, offset by a decline in new contracts from film-based products which are maturing.

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

International sales have continued to be strong, posting an almost 300% increase to $693,000 from $176,000 recorded during the second quarter of '07, due primarily to strong demand from GE in Europe.

This trend which began in the second half of '07 has continued and we expect international sales growth to increase as we leverage new opportunities with additional global partners such as Spectra, Phillips, Agfa and others.

The gross margin for the second quarter of 2008 increased to 83.6% from an even 80% in the prior year second quarter.

This 3.6% 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 some material cost component reductions.

We are also pleased to report that with a 73% increase in revenue this quarter, our quarterly operating expenses of $6.2 million increased only $632,000, or 11%, as compared with last year's second quarter operating of $5.6 million, demonstrating the leverage in our business model.

The increase in operating expenses for the quarter is due primarily to an increase in research and development personnel and their related costs.

FAS 123 expense and cost associated with the commencement of our colon clinical trial.

Also, during the second quarter of 2008, we posted net income, including stock-based compensation expense of $425,000 up $2.4 million, or $0.06 per basic share, compared with a net loss, including stock-based compensation expense of $216,000, of $866,000, or $0.02 per basic share posted for the second quarter of '07, and we generated $1.9 million in cash for the quarter.

Now, turning to the six month results, for the six months ended June 30, '08, total revenue increased 39% to $17 million compared with total revenue of $12.3 million for the six months ended June 30, '07, and exceeded the high end of our financial guidance of between $15 million and $16 million for the first half.

For the first six months of 2008, sales of iCAD's Digital Solutions increased 65% over the prior year period to $12.2 million from $7.4 million.

Film-based product sales of $3.1 million were modestly off by 1% compared with $3.1 million of film-based product sales recorded during the first six months of '07.

During the first half of '08, service and supply revenue decreased slightly by 4% to $1.6 million from $1.7 million reported for the first half of '07.

International sales for the first half of '08 nearly doubled to $1.5 million from $721,000 recorded in the first half of '07.

Gross margin for the first six months of '08 increased by 2.9% to 83.1% from 80.2% in the comparable prior year period.

Operating expenses for the first six months of '08 increased modestly by 8% to $11.9 million from $11 million in operating expenses recorded in the comparable prior year period.

Net income for the six months ended June 30, 2008, including stock-based compensation expense of $817,000, increased to $1.9 million or $0.05 per basic share.

This compares with a net loss including stock-based compensation expense of $493,000, up $1.4 million or $0.04 per basic share for the six months ended June 30, 2007.

Product backlog, which excludes service and supplies, was $2.7 million at June 30, 2008, as compared with $1.6 million on the corresponding date in 2007, and $1.7 million at December 31, 2007.

Let me remind you the backlog as of any particular period should not be considered indicative of the Company's revenues for any future period, as a significant amount of the Company's product is booked and shipped within the same quarter.

We do expect, however, that the majority of the backlog will ship this fiscal year.

At June 30, our head count included 105 full-time and part-time employees, a small increase of 4 from the 101 full-time and part-time employees at yearend.

Now, turning to the balance sheet, most notably as of June 30, 2008, iCAD increased its cash position by $2.8 million to $7.1 million up from $4.3 million at December 31, 2007.

This represents our fourth sequential quarter of positive cash flow.

During the second quarter, we also reduced the Company's debt by a total of $2.8 million.

This was due to the retirement of the line of credit with the Company's founder, of which $2 million was converted into 1,622,012 shares of common stock, and $259,000 was repaid in cash.

Additionally, $500,000 of convertible promissory notes became due in June and were converted into 380,000 shares of common stock.

As of the second quarter of '08, inventories increased modestly to $2.1 million, from $1.8 million as of December 31, '07, primarily due to preparing for the launch of SecondLook Digital for Fuji CR.

Accounts payable were $1.8 million, down slightly from the $2 million at year-end, and accounts receivable modestly decreased to $6.1 million from $6.5 million at year-end.

In addition to these improvements to our balance sheet, during the second quarter we retired the line of credit with the Company's founder and established a $5 million line of credit with a commercial bank.

To date, there have been no borrowings on the line of credit.

As you are aware, on July 18, we closed on acquisition of CAD Sciences.

The purchase price of $5 million was comprised of $2 million in cash and $3 million in stock, equating to 1,086,957 shares.

The $2 million cash component was paid out of cash from operations.

With the acquisition of this technology, we also brought on 4 of the key research and development team and had minimal additional hiring needs to relaunch this product back into the marketplace.

Before we take questions, I'd like to move on to introduce our financial guidance for the second half of 2008.

As we stated in this morning's press release, we introduced that we expect total revenue for the second half of 2008 to be in the range of $21 million to $22 million, which represents a 46% to 53% increase over the second half of 2007.

This would mean on a full year basis total revenue would be projected to be in the range of approximately $38 million to $39 million, which represents a 43% to 47% increase over fiscal 2007.

This guidance includes sales of iCAD SecondLook Digital and TotalLook products to Fuji globally, which commenced early in the second quarter, and minimal sales of approximately $300,000 in the fourth quarter for breast MRI CAD as we prepare to relaunch this product into the marketplace.

We also expect at a minimum to sustain second half gross margins in the 83.6% range with possible further margin expansion.

We anticipate operating expenses for the second half to be between $14.5 million and $15.3 million and weighted more heavily in the fourth quarter.

This increase in operating expense in the second half of the year reflects approximately $2 million in spending for the combination of the integration costs associated with the acquisition of CAD Sciences, which includes the hires I spoke about earlier, revamping the go-to-market strategy for the breast and prostate MRI CAD products, and preparations for the relaunch of these products in Q4 '08, along with the cost associated with the clinical trial from our colon CAD product which is currently underway in partnership with ACR Image Metrix and which we expect to conclude in December this year.

Approximately $1.1 million of these $2.0 million in anticipated expenses are expected to be second-half specific expenses, as the colon clinical trial and the MRI products rebranding will be completed in the further quarter.

The remainder of the increase is due to investment in research and development personnel, variable expenses such as sales commissions and some spending to support the increased level of revenue.

Lastly, we expect net income to be between $2.7 million and $3.0 million for the second half of 2008, which would equate to net income on a full year basis of between $4.6 million and $4.9 million.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Dalton Chandler from Needham & Company.

You may proceed.

Good morning and congratulations on a very nice quarter.

Thank you.

I just want to make sure I had a good understanding of what's going on with Fuji since the approval.

I think you said that at the time of approval their installed base was more than 500 systems, and that's US, is that correct?

That's correct.

As of March 31, the US system install base was 500.

Okay.

And -- so you said you installed 40 in the 10 weeks of the quarter after approval, so that's still obviously less than 10% of the installed base, and is it reasonable to assume that eventually you should approach 100% of the installed base?

We'd certainly like that as a goal, Dalton.

But the way I would describe it is that we installed somewhere around 35 to 36 sites in the United States.

They were a mixture of larger multi-gantry sites and individuals, and so the amount of connections we made to see our systems was probably more than twice the number of sites, if you will.

So the amount of business was pretty substantial in 10 weeks, in part because they wanted us to go to some of their customers that have been waiting the longest that had large installations.

So, if you think about that, 500 systems of pent-up demand, about 80% of those customers are dedicated mammo.

So, on 400 of those systems, we would expect a similar 90%, 95% attachment rate of CAD that we see with, say GE today.

On the other 100 systems where they're used in a mixed use model, we're estimating maybe 50% of those customers would buy CAD, but nevertheless the blended number is at least 80% of the 500 units would be very likely candidates for CAD.

So, what we basically think is in the 10 weeks that we installed with Fuji in Q2, we probably got to 12% to 15% of the candidates to buy CAD from the pent-up demand.

And, so, really, if you think about it, we've got maybe 5 quarters where we will be blending new sales with Fuji with addressing that pent-up demand from the 500 systems.

So, we think it'll take us through the end of next year to fully exhaust the potential in that initial 500 systems while we're blending our installations with new system sales.

One additional comment I'd make which I think is important is that in our most recent dialogue with Fuji, they're forecasting just north of 100 new systems per quarter in the United States, so if you now look out at the market and say, where is this headed over the course of the rest of this year, you could certainly say if there's 500 systems installed by the end of March in '08, there should be north of 800 systems by year-end, and easily 1,200 to 1,300 systems by the end of '09.

So, we think that the opportunity is fairly significant through the end of next year, and then in 2010 we really start to address primarily brand new system sales as the pent-up demand will have worked its way through.

Okay.

That's very helpful.

And am I right in assuming that when you sell a new unit with CAD it ships -- the unit ships with the software on it, but when you have an existing site that is buying CAD, you need to send someone out to do the installation, is that right?

Well, with Fuji we have a slightly different relationship than say GE or Siemens.

With Fuji, we take responsibility for installation and training.

So they essentially contract back to us to do installation and training.

So, the way the Fuji model actually works is they have a California and a Connecticut warehouse and we ship product on a continuing basis to their warehouse and then they either ship it to the site for what would be described as an upgrade to the pent-up demand, if you will, installed 500 or they ship it in a bundle with a new system.

They coordinate with our operations team and we send people out on site to do the installation and training.

So, our effort is the same whether it's one of those units that was in the pre-FDA approval, or whether it's a brand-new system.

Fuji has said at some point they may want to take on installation and training themselves, such as our other OEMs, but at this point in time given that this is still a relatively new technology to them, they have not signaled any particular timeframe.

We see a lot of benefit in doing the installation and training because, to be frank, we do a much better job of the installation and particularly the training process on CAD when our people do it.

Our OEMs do an adequate job, but I think our user satisfaction data tells us that the best job is done when our people are doing particularly the training.

So, we like this model and would be happy to continue it.

Okay.

And the 40 sites you did in 10 weeks, does that represent some capacity constraint or was there some other factor in that?

Not really a capacity constraint.

I think what you had was an approval on April 4th, all of the customers in this call a pent-up demand had to get real legal quotes from Fuji.

They then needed to get their sites prepared, which is a timing issue.

Fuji had to then tell us which sites to go to first, and so, obviously, to try to really move inside of a couple of weeks is hard to do to really crank up the installations.

So I think without question that April was really a transition month to get going on installations as opposed to a really highly productive month.

So we saw a much bigger increase in our productivity I think in May and June, and we have the capacity to increase to the degree that Fuji needs us to, and we do anticipate that our total business with them will increase over the course of Q3 and Q4 because what we ultimately did in Q2 is about 75% of the installations were done in that 500 systems waiting for us to get FDA approval, and only 25% were done with new customers.

We think since we've only tapped that pent-up demand of the 500 to a small degree, and we're now seeing a very nice volume with new customers, we do expect to increase our shipments.

So, we're not constrained at all by our installation capacity, but it is a function of a lot of different factors including customers' capital budgets, site preparation readiness and then the overall coordination to go in and do installs, so, if Fuji requires us to increase our capacity, we can do so.

At this point, we're obviously generating substantial growth at our current capacity run rate, so we're happy with where we are and we're happy to increase should they desire that.

Dalton Chandler.

Okay.

And just one last question then, a more general question on the MRI product.

Looking out a few years, when you get that fully ramped up, how do you see the mix of business between mammo CT versus MRI?

Well, I think we've said that looking at the FDA MQSA data that through 2010 you're going to have a robust mammography market and we should benefit significantly from that, in addition to having a major algorithm upgrade in the market which we can go to the very large and growing install base and sell.

So, mammography is clearly through 2010 going to be a substantial portion of our total revenues.

But, what we're really counting on based on all the information we have is that the market for virtual colonography will be probably that next major market to really explode with growth, in addition to seeing the traction today with breast MRI and CAD, and looking at prostate in a almost similar fashion to how we look at colon.

A really big opportunity for an explosive market.

So, it's really hard for us to model percentages of revenue in these different categories, but what I would say is that by 2010, 2011 we hope to get a real material amount of revenue in the MRI products because they're in the market today.

They are established products.

There's an established marked.

There's growing procedure volumes.

We think we can get into the spaces in the fourth quarter of this year very aggressively and then we hope that in 2009, 2010 colon really gets traction and lung nodule detection might be more toward the back end of that cycle.

But obviously over time, you will see the mammography business grow slow and what we're really counting on based on these investments we're making today is that MRI and CT-based CAD will pick up the void, because a lot of those markets are very under-penetrated as of 2008, but could become very hot markets like mammo by 2010.

And when you look at some of the data, particularly around colon and prostate, the ability to do really high volume screening we believe really is that millions of patients per year.

So we see a lot of similar characteristics in colon and in prostate to how the mammography market took off.

Breast MR certainly is not going to be a standard screening product with 30 or 40 million tests done a year, and certainly in lung nodule detection maybe not quite as many based on the amount of CT chest studies that are done, but we actually do think that colon and prostate may have similar characteristics to mammo, and when you get out to 2010, 2012 timeframe, they're going to become a much more material percentage of our total revenues.

We think the moves we've made in getting bigger into the broader CAD space is just perfect timing for us.

Because knowing that we've got a 2 to 2.5 year window to exploit the mammography growth, it is perfect timing for us to ramp up these additional product lines such that the Company can sustain this growth trajectory.

What's really hard to do in answering your question is to really project total volumes and percent of these new products, because the markets are still in the early stages.

Okay.

That is helpful and congratulations again.

Thanks, Dalton.

And your next question comes from the line of Matthew Scalo from Canaccord Adams.

You may proceed.

Hi guys.

Yes, very good quarter here.

I wanted to just followup in regards to the Fuji and the 40 sites there.

And you mentioned multiple connections per site, but of those 40, were any of them new customers that were waiting on the sidelines just for the CAD approval so they wouldn't have to have the Fuji CR system and then come in following with the CAD installation afterwards?

Or was it all just -- ?

Yes, about 25%, Matt, were brand new installs and about 75% of that number were the ones waiting for FDA approval.

Interesting.

And they were all fairly large centers, obviously, top of the customer food chain if you will.

Well, I think clearly on the centers that have been waiting for FDA, yes.

On the new customers, it was a mixture of single gantry sites and multi gantry sites, but what you're seeing of course is CAD is going into those sites that are dedicated to mammo.

And, so, if 80% of their shipments are dedicated mammo, a lot of them are multi gantry sites, and, so, certainly we have a mix though.

We've done our share of single gantry installations and we've done our share of multi gantry installations and I think that as the business goes out further, you're going to continue to see a mixed model.

But there's no question that we have several very large customers that we went in and installed what I would call an unusually high number of connections and we may not see that as typically.

So, while the unit volumes we think will still continue to grow with Fuji, the number of sites they also grow is slightly higher.

How -- just -- theoretical question but how do you balance or prioritize customers that call in asking you directly for installations that are Fuji customers versus customers that are going through Fuji and then Fuji gives you a list saying it would really like to get customer XYZ installed ASAP.

Yes, what I would say is we've got great communication with Fuji and of the installations we did in the quarter, I want to say 95% were all directly through Fuji, and then the ones, the handful are probably half a dozen that we did direct, it was at Fuji's request or with full acknowledgement that a customer had a unusual circumstance and it was in our mutual interest to take the business direct.

So we really, I think, didn't run into any conflicting priorities on installation, in part because 95% of them were at Fuji's discretion, and the few that were not were corner cases as a result of a 21-month wait for the FDA approval.

As you can understand, there were a lot of unique circumstances that we had to address.

Sure.

Do you guy report a bookings number, those systems that were shipped to either the California or the Connecticut facility?

No.

We didn't comment on that.

The extent that I would go to only because we were fairly candid in our Q1 call about Fuji orders and revenue, and we don't plan to communicate company-specific revenues going forward, which has always been our policy.

What I would say to close out my comments from Q1 when I had mentioned that we had booked $2.3 million or $2.4 million in orders in the first several weeks and then generated $1.7 million in revenue, is that we did around $3 million with Fuji in the quarter, plus or minus and think that's a pretty solid number for the follow on quarters, but with that said, we're going to go back to our normal policy which is to talk about our total digital revenues and not break it out by company, in part because truth is the companies do not want us to break out that data because people such as at GE as an example really does not disclose as Hologic made the number of units they sell in this space and clearly we don't want people extrapolating from our numbers what their volumes are.

Completely understand and I won't press you on that.

I just -- I guess the next round of questions just on guidance per se, and if I look at the quarter performance year and I -- if I just annualize the non-digital revenue here, the $2.5 million and I back that out of the second half, I'm getting essentially roughly $8 million a quarter for the digital side.

Is that the way I should read it, $8 million, $8.5 million?

I'm looking at about $16 million to $17 million out of that $21 million to $22 million.

Is that fair, or maybe are certain portions of the business going to wane a bit with the third quarter here?

Maybe digital kicks up in third quarter as well.

I think, Matt, without getting into a lot of detail, you're generally okay.

I would say the fourth quarter is more heavily weighted from both a revenue and expense standpoint.

Yes, Matt, I think you had your classic summer quarter and it's hard to sequentially from Q2 to Q3 in this business grow.

What I would also say is Q4 in the imaging space as we know gets a disproportionate amount of the revenue, so we're certainly expecting our revenues in Q4 to be reasonably higher than Q3.

I don't think you'll see the same jump you saw in Q1 to Q2, obviously, where we went from 6.5 to 10.5.

It's not going to be that big a jump.

We don't expect our Q3 numbers to be materially different than Q2, but we also think that Q4 typically -- it's interesting, it becomes not just a very hard quarter for digital products, but also for film-based products.

We've generated very strong film-based product revenue in our last two and fourth quarters.

So, the direction you're going with the splits is pretty solid, and it's (INAUDIBLE) direction.

Okay.

Terrific guys, great quarter.

Thanks.

Your next question comes from the line of Jonathan Block from SunTrust Robinson.

You may proceed.

Hi, guys.

It's Maggie in for Jon.

I had a question just on feedback from your customers on TotalLook MammoAdvantage , how that seems to be going, and I know I think from first quarter you talked about a couple of customers may be delaying purchasing decisions.

So the TotalLook business that you did this quarter, is that slightly inflated or is that something that you think you can continue throughout the

The first comment I'd make, Maggie, is that customer acceptance of the image quality has been outstanding.

And our ability to configure the views of that image has really provided some enormous flexibility based on the quality habits of reading when you're looking at film.

So, I think we have demonstrated that the product's performance is outstanding.

We've done side-by-side competitive situations with our primary competitor and from the feedback I get from the field, we are by far the superior product.

There certainly was some pent-up demand that we did not get to capture in Q1, and that's why the revenues on film-based products was light.

We did see a very substantial uptake in demand in Q2.

What I would say, though, is that we're seeing a higher attachment rate for TotalLook MammoAdvantage to our digital sales because of the attractiveness of the product, focus of our field and putting more emphasis on selling the product through our OEM partners such as Fuji, GE or Siemens.

So, I think what you're going to see is this product category continue to grow sequentially as opposed to just satisfying some demand from Q1.

We are seeing this product being attached to digital sales as a higher percentage, and of course our digital sales are going up substantially.

I'll give you a couple of examples that get us excited.

HCA or Health Trust, one of the largest for-profit chains in the country, did a bulk buy in the second quarter and it's actually going to be a Q2-Q3 bulk buy on digital mammography and their Eastern region was the only region that made a decision relative to which vendor.

And they had a choice between Hologic and GE and they selected GE.

So, with that large bulk buy, we picked up something on the order of 25 digital CAD orders from HCA customers and about, I want to say, 10 or 12 or nearly half of those customers bought TotalLook MammoAdvantage as well.

Some of them bought it because they were planning on a digitizing solution.

Some of them purchased it because they were so impressed with the image quality.

So, we're starting to see a much higher attachment rate of TotalLook MammoAdvantage to our digital transactions.

We actually shipped about half of those systems in Q2 to HCA and we still have about half of them to go this quarter.

Siemens we have a program running where we bundle SecondLook Digital with TotalLook MammoAdvantage .

We've seen some nice tractions.

We also have the same bundle with Fuji, where we sell SecondLook Digital with Fuji in a bundled sale where the customer buys both Digital CAD and TotalLook MammoAdvantage and gets a special price for buying that bundle.

So I think the traction we're getting because the product is that good, along with what our OEM partners are giving us, and the fact that our direct sales force is highly incented, of course, to sell that product, we think it's going to continue to have significant growth for the rest of the

Okay.

That's really helpful.

Just quick on the Fuji backlog, those people would already -- are those customers the potential for TotalLook MammoAdvantage as well?

They certainly are, and we've seen I'd say good progress in the short time we've been working with Fuji on selling TotalLook MammoAdvantage .

I think that it's in a segment of the market where the customer really wants high image quality and wants to optimize their workflow.

There's a lot of inexpensive digitizing solutions around, and so basically we're targeting the market where a customer is making a substantial investment in digital mammography and then obviously wants to have a comparative reading solution that is consistent with that large investment in digital mammography.

That's where TotalLook MammoAdvantage fits into the market.

I want to call it a premium performance product.

There is a fair amount of price competition in the space, so we're not unrealistically pricing the product too high, but there is a balance between this premium performance and price.

And we think that our OEM partners as they see this product demonstrated in front of customers are getting much more motivated to aggressively pursue it.

We also put together a very nice incentive program for our own field for the year on TotalLook MammoAdvantage and they all have substantial incentives between now and the end of the fiscal year to sell a certain number as well.

So, we're really counting on this product for substantial revenues from a variety of sources, and at the end of the day, every customer that's buying digital mammography has a dilemma with what they do with the film library, and we think we can show centers that really care about image quality, that really do high volumes of exams that this is an outstanding product to really help them do comparative reading with prior exams.

So we're putting a lot of sales emphasis on this

Okay, thanks.

And then, switching gears to the CAD Science products.

What kind of margins are you expecting with that, and as you ramp that business, where can those margins go to?

Maggie, we're still in the process of revamping this product line but we estimate that these product lines are going to have margins very, very complementary to what we're doing now.

They're very, very similar in the 80%, 85% range.

Okay.

And, then, are you going to look to maybe bundle that or how is it going to work with your current OEM partners like GE and Siemens?

Yes.

We're actively working on a go-to-market strategy.

We're actively hiring MRI specialists both on the sales and the applications side to get our go-to-market plan in place so that by latest beginning of Q4 really, we're in the marketplace aggressively selling.

A component of that obviously would be to go to all of our existing partners, particularly the OEMs that we have really good strategic relationships with and try to establish a relationship on the MRI products, whether it's leveraging multiple product lines or, even more importantly, building development roadmaps around breast care.

What we think we've brought is a unique position in breast care where now we are the only company providing traditional mammography CAD and MRI breast CAD, so that when you think about this from a workflow and from a diagnostic workup standpoint, there's probably a number of things we can do related to a mammography workstation with our partners to really build more depths than differentiation around breast care.

And, so, this is probably not just we bring more to a particular partner, but we can bring more in the context of impacting workflow around breast care.

So we're going to explore development relationships further with the companies we already have them with in mammography, and we're certainly going to look to see if there's a commercial fit where we can expand our working relationship as well.

Great.

Thanks, guys.

Thank you.

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

You may proceed.

Hi.

Congratulations on a great quarter.

Thanks, Valerie.

Thanks.

You're welcome.

I just have a couple of questions.

One is I admire the investment in CAD for breast MRI, but I was wondering what your perspective is on any type of a tab system for 3D tomo and then secondly, I know that with your GE partnership, I think you were developing some type of an optimized CAD system specifically for them as they ramp up their manufacturing capacity and I was just wondering how that's going?

Well, we're collaborating with all of our partners around tomo symphysis and CAD and in the process of getting images and having a dialogue of how we can apply our CAD to their systems.

Obviously, when you think about where the -- a lot of the market is today as an example, we'll just use GE or Siemens as an example, the primary base of CAD in 2D is our product.

And those are going to be a lot of the customers that will want to upgrade to tomo symphysis and the natural evolution would be to upgrade to our CAD.

Once they get familiar with it in 2D, it's obviously to their benefit to do so as well in 3D.

So, we're working with the companies that have it in development.

I certainly don't expect that we would be any lag if you will to their entry into the market.

I think the challenge, though, will be similar to CR when we went to the market with Fuji.

What the FDA told us back then was, you cannot put in a concurrent application for CAD.

You have to wait until Fuji CR's product is in the market.

So what may happen is the approval may come at some point, let's say in the next 24 months, plus or minus, with our strategic partners to tomo symphysis.

We may have to put in an application after their product is approved in the market.

So, it's going to take some time to have a CAD product to tomo symphysis, in part because of the FDA environment where the requirements have been typically to put these in, in a serial fashion, versus a simultaneous.

So, we're working on it.

We're looking forward to it.

I think we just have to be realistic about when tomo symphysis will be in the market, under what labeling and indications, and what uptake in the market will occur and then subsequent demand for CAD.

We're not seeing this in adding material revenues to our OEM partners nor ourselves for several years at a minimum.

I think that the pretty flare is that the FDA has taken a very thorough, and to some extent, conservative view on digital mammography upgrades as well as CAD product introductions through either supplements or new applications, and so, this entire space is going through a very challenging environment, one that does not necessarily bode well for quick approvals and quick introductions to the market.

But we'll be there when it is ready for primetime.

Thank you.

And your next question comes from the line of Scott Warner.

Please proceed.

Hey.

Great work, guys.

Great work.

Couple of questions.

First, on the revenue in the second half, if I'm reading correctly.

You estimate $21 million, $22 million, and the fourth quarter is always stronger.

That means the second quarter would probably be weaker in revenue than this current quarter -- the second quarter -- excuse me, the third quarter will be weaker than the $10.5 million we had in the second quarter.

Does that sound right?

Well, third quarter, Scott, traditionally is the summer quarter, so it does tend to be the slower quarter.

I'm not sure it would be weaker.

We're hoping it'll be complementary if you will, or similar.

But fourth quarter traditionally in this space is a very, very strong quarter.

But still you're only averaging if you divided by 2, say $21 million, you're only getting $10.5 million average, if you take the low end of your $21 million, $22 million second half.

So, the average quarter would be $10.5 million, which is equal to our second quarter.

That's right.

And I think, Scott, we just are coming off a record quarter with really phenomenal growth and when you start looking at that number that you just commented on in the context of our full year, it's in the 45% revenue growth range, and for us to get even more ambitious and to be projecting something even higher than that in the marketplace where most of the imaging companies are all singing the blues, would probably be inappropriate.

Could we do better?

Maybe, but I think at this point what we're saying is that the progress in top-line growth and the progress in earnings is, quite frankly, phenomenal.

And not to put guidance out there that would maybe be more difficult or a stretch to meet.

So, we'll do our best to do better, but at this point we think that the revenue in Q3 should be somewhat comparable as Darlene said to Q2, with an even stronger Q4.

It's hard to tell sometimes just because again we're in now yet our second full quarter with Fuji and that isn't a long enough period of time to really understand the dynamics around the business.

But we will certainly after Q3 give you an update with an extra quarter under our belt and we'll see where our guidance goes for the rest of the year.

Okay.

And then further on the -- still on the second half, the revenue obviously we're going to take a hit with all the -- having to deal with CAD Science and all the rest of the cost, we're taking a hit.

So, in effect the earnings, net income of $2.7 million or $3 million for the whole second half versus our net income of say $2.4 million for this quarter, we're going to be earning -- we're going to have fewer cents per share earnings then in the second half it looks like.

Yes.

As we said, we're investing in bringing CAD Sciences to market.

We're investing in our colon product and we looked at this and said, to be frank, we're not going to be a one-trick pony any longer.

We could certainly let's say exploit this business and continue to make 25% net profit, but then by the end of 2010 the question is, well, where do you go from here?

So what we think we've done is really put, I think, a very good balance between meaningful earnings, and I think if we can sustain mid-teens net profit while we're investing in these businesses for our future, we think that's the best balance for the shareholder rather than, quite frankly, delivering what I think is sustainable profits but not long-term sustainable growth in profits.

Oh, no.

I think it sounds very good.

I guess I'm asking this partially to make sure nobody's going to be disappointed when they see the earnings.

It's -- you've written it up.

It's just -- I'm in effect focusing on this so people wouldn't be surprised in the next two quarters because of your investment.

And, last question I have is on the CAD Science -- by the way, I can't find them in the directory -- in the Westchester directory.

Is there some other name they have?

They're in White Plains.

I know.

That's where I live.

Maybe under 3TP.

How do you spell it, 3TP?

3TP.

T-h-r-e-e?

Yes.

Actually, it's the number 3.

Oh, the number 3 and then what?

TP.

E as in easy, P as in Peter.

T as in Tom, P as in Peter (inaudible)

3TP.

Okay.

Now, reference to them, what competition is there in their field?

What approval FDA is there in the United States anyway, if any?

Yes.

There's two other companies in the breast MR CAD space.

One is called Confirma, who's based in Seattle.

They're a private company, and there's Invivo which is a very large company that's owned by Philips.

So there's two other competitors and between Confirma and Invivo they have the lion's share of the market.

What we were excited about, though, is that CAD Sciences had a great engineering team that really produced really, really state-of-the-art technology and similar to iCAD ironically, they didn't have a strong sales and marketing plan.

And, so they really suffered through a lack of resources in the United States market.

They actually did a very nice job getting traction in Europe.

Their business in Europe actually was about half of their total in 2007 and 2008, and, so, the company has very good technology, had a very good traction in Europe, and really what was lacking was a really strong sales and marketing effort to take advantage of this good technology in the United States.

And, so, it does feel a little bit like deja vu for me relative to the digital CAD products that we inherited when we came to iCAD.

So, we're excited about these products.

We think that our experience and our ability to ramp up is going to be done quickly, cost-effectively and really provide us with a nice growth engine relatively soon.

And so, we're excited about this and I think the message I'd like to convey to everybody is that we are trying in a cost-effective way to expand our footprint.

So, when you think about the purchase price for CAD Sciences, when you think about the incremental spending on the go-to-market plan and for colon as an example, we're not putting out a substantial investment, which I think is one of the major reasons that we can contribute up to a mid-teens net profit while we're still in a develop and growth stage to a much broader portfolio of businesses.

Would you -- is there any particular edge that we have that they have at CAD Science to -- say to Invivo as far as the product?

I think first of all the company's on a second generation algorithm and that algorithm uses what I would call a multi or continuous time point sampling capability.

The basic algorithms which I believe are still used by the other companies today uses three fixed sampling points to measure the vascular ability of tissue, and, so, this company has developed really a second generation algorithm and we think the inherent value of course is more continuous sampling provides us with more accurate information on tissue characterization.

So, we believe the second generation algorithm, where other companies are still using -- call it a fixed three sampling time point algorithm is to their advantage.

And I think that the team in White Plains is very able to scale this across multiple CAD products.

So, prostate as an example uses the same principal algorithm and the modification to that product is more on the workflow side of things.

And, so, they've got some very interesting technology that we think could over the next say two to three years become very viable commercially.

So, we think we're going to get a lot of bang for our buck.

We think there is differentiation and we think that the ability to combine iCAD's core competence in pattern recognition or morphology-based products with this kinetics-based CAD capability is really where another generation of products will surface over the next several years.

So, this can allow us to be on the leading edge for a sustained period of time because we have this core competence in house of pattern recognition and kinetics, which a lot of people believe is going to be yet another generation of products in the MRI space.

So, I keep saying it, but we're excited about this acquisition and we think we can get a lot of progress soon, and we're out recruiting and hiring as I speak to bring in some very experienced people with MRI and CAD both on the sales and the applications side, so that we can move quickly and certainly not stub our toe on things that the rest of the management team here may not have had experience with.

Ken, that's a very excellent explanation and I think you've got an exciting acquisition there.

Wonderful.

Thank you again.

Thanks, Scott.

Alright, goodbye.

We have no further questions in the queue.

I would now like to turn the call over to Anne Marie Fields.

You may proceed.

Just wanted to say in closing, thank you for your time and we'll be looking forward to having you all on the third quarter conference call.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect today.