ICAD Inc (ICAD) 2008 Q3 法說會逐字稿

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

My name is Michelle, and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

And I would now like to turn the presentation over to your host for today's call, Ms.

Anne Marie Fields.

Please proceed.

Thank you, Michelle.

Good morning.

This is Anne Marie Fields with Lippert/Heilshorn & 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.

After the market close yesterday, iCAD announced financial results for the third quarter 2008.

If you've 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 [Palago].

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, October 30, 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'd like to turn the call over to Ken Ferry.

Ken?

Thanks, Anne Marie.

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

While these past weeks have witnessed unprecedented turbulence in the public equity markets and iCAD has not escaped the volatility, we are delighted to be recording -- reporting to you record financial results for the third quarter of 2008 with significant progress made in all areas of our business.

We're proud of our performance and are optimistic about iCAD's future prospects.

I'll begin today's call with an update on our business and strategy, and then I'll turn it over to Darlene, who will review our financial results in greater detail.

To date 2008 has been an exceptionally strong year for iCAD, and the third quarter proved to be our strongest yet for top-line sales.

Also, we improved on all financial metrics critical to being a growth company: record revenue, record gross margin, and strong earnings in cash flow.

We also made good progress with our pipeline of new products as well.

These results underscore that our strategy to deliver strong growth and meaningful earnings continue to be on track in delivering results.

We believe we are well positioned to continue this momentum relative to growth and profitability over the remainder of 2008 and beyond.

In addition to record total revenues, digital revenue growth was at an all-time high in the third quarter.

This remains a key growth driver moving forward, as the global demand for full-field digital mammography systems and CAD remains strong as the mammography marketplace transitions from film-based technology to digital technology.

According to the FDA's Web site, digital mammography system placements in the US grew by 24% in the quarter versus Q3 of 2007, and system placements for the first nine months of 2008 were 34% ahead of the same period in 2007.

Even with this continued strong growth, only 43% of US mammography systems have converted to digital technology as of September 30, leaving considerable room for growth in the coming years.

Now I'd like to add some additional detail on the key growth drivers in the quarter.

Our digital mammography CAD business more than doubled in the quarter.

We saw strong comparative growth with our OEM partners GE and Siemens, while demand from Fuji continues to be quite strong, as it was in Q2 of this year, when we first received FDA approval.

Our film-based products performed exceedingly well in the quarter and posted extremely strong growth compared to Q3 of 2007.

This growth was led by TotalLook MammoAdvantage, which was launched late in Q1 of this year.

We saw solid sales traction through direct sales and OEM partners as revenue more than doubled for this product versus the comparative period in 2007.

We continue to receive a very favorable customer response to this new state-of-the-art comparative reading solution.

We expect this product to continue to be a key catalyst for film-based product growth as it digitizes prior film-based exams, provides software tools that enable comparative reading with current exam, and contributes to increased productivity with digital workflow.

We anticipate increasing demand for TotalLook MammoAdvantage as the transition from film to digital mammography continues and the need to digitize archived film images grows along with it.

And, lastly, I'd like to comment on our service and support business.

As previously reported, we were especially pleased to have been ranked number one in user satisfaction by the independent health-care research group MD Buyline.

Being ranked number one for all of 2008 for user satisfaction and system performance, system reliability, installation implementation, applications training, service response time, and service repair quality is a real accomplishment of all of our employees and, in particular, our service team.

As to our service performance in the quarter, we achieved solid growth as contract revenues hit an all-time high and grew nicely on a comparative basis.

This performance is attributable to more digital systems and TotalLook's transitioning from warranty to service contracts as the install base rapidly grows.

Although our international revenue during the quarter was soft compared to last year's third quarter, our international business increased nearly 20% for the first nine months of 2008 over the comparable period in 2007.

We continue to believe the international markets are for sizable and growing opportunity for CAD, and we continue to expand our strategy in these markets, particularly Europe and Japan.

As part of those initiatives, during the third quarter we released a digital CAD solution with Sectra's full-field digital mammography system.

From of the first installations were ImageRive Radiology Institute in Switzerland and Aarhus Hospital in Denmark.

Also, a recent international study highlighted in the "New England Journal of Medicine" featured positive results using CAD in an article entitled "Single Reading with Computer-Aided Detection for Screening Mammography." The study involved over 31,000 women undergoing routine screening by film mammography and compared the cancer detection rates of a single reader using computer-aided detection with rates of a double reading in diagnosing breast cancer.

The study was conducted at three centers in England, where, like the rest of Europe, a double-reading protocol is standard of care.

The results of the study showed that a single reading using CAD technology was comparable to double-reading in sensitivity, specificity, and positive predictive value.

These positive findings led the authors to conclude that -- and I quote -- "Single reading with computer-aided detection could be an alternative to double reading and could improve the rate of detection of cancer from screening mammograms read by a single reader."

Throughout 2008 iCAD has made significant progress in expanding its international revenues, specifically in Europe.

It's our expectation that the positive results of this study will aid in the further adoption of CAD with digital mammography in Europe.

We believe these positive results can also provide additional marketing support for the use of CAD in markets where single reading are the standard of care, such as the United States.

Shifting gears, I'd like to discuss our progress with the CAD Sciences acquisition and our recent entry into MRI CAD.

As you know, we recently closed on the asset acquisition of CAD Sciences, a small, privately owned company that develops pharmacokinetic-based CAD products that aid in the interpretation of contrast-enhanced MRI images of breast and prostate.

While the technology is quite different from mammography, the customer call point is highly leveragable.

These products also increase the potential for us to expand our relationships with OEM partners that manufacture and market MRI systems through direct integration of these solutions.

I'm delighted to report that, within the 60 days of closing the asset acquisition, we completed the rigorous retooling, rebranding, sales training, and relaunch of SpectraLook, VividLook, and CADvue products.

This accomplishment underscores our successful integration of these products and is a testament to the hard work and dedication of our talented team of engineers, operations, and marketing professionals.

We fielded a small team of MRI specialists for our current US sales team in advance of the product launch at the Seventh Annual Symposium on Advances in Breast MRI, which was recently held in Las Vegas.

We're excited to expand into this new market with the most comprehensive detection solutions for breast care and workflow, and we're very pleased with the positive responses these products received at the conference.

I'd like to take a minute to provide you with an overview of these products and how they fit within the diagnostic progress within the radiologists' workflow.

SpectraLook, iCAD's breast MRI analysis solution, provides more diagnostic information by creating colorized images based on signal point changes defined by tumor physiology.

iCAD's unique All Time Point -- or ATP -- analysis is based on an advanced pharmacokinetic model that calculates numerical values of key physiological parameters, allowing the user to detect the different biological processes taking place in malignant versus benign tumors.

These key physiological markers can aid in the analysis of large MR data sets.

CADvue image review and analysis software provides maximum functionality, facilitating the analysis of All Time Point colorized images and quantitative data.

CADvue allows the user to create standard and customized reports that enable the user to communicate time-sensitive breast MR study results to the referring physicians.

The reports provide detailed and comprehensive information that is critical to the identification and analysis of abnormalities.

3D colorized images within the report assist clinicians to effectively communicate treatment options to their patients.

In 2007 the American Cancer Society released new guidelines recommending MRI screening for (inaudible) women, which 1 in 50 fall into one of these categories.

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

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

The use of CAD in this modality is critical to the radiologist workflow, as an exam can contain up to or in excess of 800 images.

These new products for contrast-enhanced MRI studies of breast and prostate will significantly help radiologists to look at images faster with greater confidence.

In addition, these efficiencies will help reduce operating costs while enhancing the effectiveness of patient care, which is ultimately the goal of all new product iCAD brings to the market.

Which leads me to an update on progress with our CT-based CAD products.

Our mission remains steadfast 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 the demand for CAD.

Our comprehensive portfolio of CAD products are being developed in conjunction with a range of imaging platforms, including CT, where we have products in development for colon and lung cancer detection.

Colon cancer is the second-leading cause of death from cancer, and 95% of colon cancer deaths are preventable through early and regular screenings and interventions.

While conventional colonoscopy has been the gold standard for diagnostic screening and has proven effective in detection of cancer at early stages, many do not participate in the screening because of its invasive nature in the exam.

Consequently, adherence to the US screening protocol remains abysmal, with fewer than 50% of the approximately 80 million Americans over the age of 50 being compliant.

During the last year there has been considerable interest in virtual colonography due to the positive results released and published from the ACRIN-sponsored National CT Colon Trial.

This trial of nearly 2,600 patients has largely proven that CTC is an effective -- as effective as optical colonoscopy for chronic polyp detection.

Throughout the past year we've seen greater acceptance of this procedure by both the medical community and the public and believe that adoption of CTC will dramatically increase colorectal screening.

As a result of this positive data, the American Cancer Society, the American College of Radiology, and the Multisociety Task Force for Colorectal Cancer have all added guidelines for CTC versus optical colonoscopy.

Clearly, reimbursement remains a key element of the adoption.

Toward this end, CMS completed the comment period on this during the summer and is holding a follow (inaudible) advisory meeting regarding Medicare coverage on November 19th in its Baltimore office.

We will follow this process closely and hope that screening reimbursement for CTC will occur sometime in '09.

All of this momentum will make ColonCAD even more important as a tool for radiologists as the volume of studies increases substantially.

As with MRI, CT imaging procedures generate large amounts of data.

Reviewing and assimilating CT images can be tedious and challenging because of the daunting amount of information captured in an exam.

Our ColonCAD product is designed to identify colonic polyps, to aid in the reading process, integrate with specialized CTC reading environments, improve accuracy and productivity in workflow, and streamline the reading process and improve consistency.

As to iCAD's product status, we are working with ACR Image Metrix, a subsidiary of The American College of Radiology, conducting a multireader clinical study to demonstrate the performance of our polyp detection algorithm.

We feel that working with the ACR Image Metrix group, which has significant expertise in radiology clinical trial management, will put us in an optimal position to submit solid clinical data to the FDA and would help us to meet our regulatory goals for this important product line.

We anticipate concluding this study around year end, followed by a 510-K submission to the FDA in early 2009.

We expect to initiate an international (inaudible) of the product in tandem with the US submission to the FDA.

We will utilize the ColonCAD platform in our development of a CT-based one-nodule CAD product and will also build some of the earlier work we had conducted on this product prior to shifting our priorities to ColonCAD.

We plan to use this work and to leverage the body of knowledge obtained from our ColonCAD experience to advance a new product around lung, hopefully, and to accelerate the development into the market.

As you can see, we've made tangible progress expanding our portfolio of CAD products.

We are well positioned as a leader in high-growth digital mammography and have a broad portfolio of products available today and in development that leverage our current call points in radiology.

And as stated last quarter, we do not anticipate the need of significant additional investment to successfully enter these new markets.

This should enable us to continue to strike a healthy balance between strong top-line growth and meaningful earnings performance while broadening our addressable markets to build long-term value.

I'll now turn things over to Darlene, who will give you a more detailed review of our financial results.

Darlene?

Thank you, Ken.

And good morning, everyone.

Let me begin by saying that we are exceptionally pleased with our progress and financial performance during both the third quarter and the first nine months of 2008, and these record results represent our ninth-consecutive quarter of comparative financial improvement.

To touch upon some of the highlights of the third quarter, we had record quarterly total revenue of $11.2 million, up 79%; record quarterly digital revenue of $8.2 million, up 104%; third quarter film-based revenue of $2.2 million, up 48%; third quarter gross margin of 84.1%, up 400 basis points; third quarter net income of $2.1 million, or $0.04 per diluted share; and it was our fifth-consecutive quarter of positive cash flow.

Now let me provide some additional detail on our quarterly performance.

Total revenue for the third quarter of 2008 was a record $11.2 million, a 79% increase compared with total revenue of $6.3 million for the third quarter of 2007.

This increase reflects strong continued growth in our core digital mammography business for our SecondLook digital products, as well as extremely strong market acceptance of our new TotalLook MammoAdvantage product.

Digital revenue this quarter was at an all-time high and more than doubled to $8.2 million from $4 million in the prior year third quarter.

While we strong -- while we saw strong comparative growth this quarter in all of our OEM-partner business, we benefited particularly from SecondLook digital sales to Fuji for use of their CR mammo system.

In addition to this, our film-based products performed exceedingly well, largely due to the successful late Q1 march and continued outstanding marketing acceptance of our TotalLook MammoAdvantage product, which itself more than doubled in sales over the prior quarter.

Film-based revenue of $2.2 million this third quarter increased 48% compared with last year's third quarter film-based revenue of $1.5 million.

Our third quarter service and supply revenue saw solid growth, increasing 9% to $871,000 from $801,000 recorded during the third quarter of 2007.

This increase is largely the result of our increased sales volume with new service contracts for digital products that have come off of warranty.

We expect to see continued growth in this area as digital CAD and TotalLook systems sales grow and customers continue the transition from warranty to service contract.

During the third quarter international sales were off by about 29% to $836,000 from $1.2 million in the prior year, mainly due to seasonality and timing of larger deals.

Having said that, on a year-to-date basis, our international revenue is up nearly 20%.

We continue to believe the international markets offer a sizable and growing opportunity and expect to continue to leverage new opportunities with additional global partners, such as the recently announced Sectra partnership in which we saw positive performance right out of the box this quarter.

During the third quarter we expanded our gross margins by over 400 basis points to 84.1% from 80.1% in the prior year third quarter.

This increase was directly related to the significant growth in 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 component cost reductions and some higher average selling prices.

We are also pleased to report that with a 79% increase in revenue this quarter, our quarterly operating expenses of $7.2 million increased only 29%, compared with last year's third quarter operating expenses of $5.6 million.

The increase in third quarter operating expenses over the prior year include investments in research and development, primarily in increased R&D head count, costs associated with our colon clinical trial, and the amortization expense on the recently acquired MRI CAD technology.

It also includes investments in sales and marketing, primarily in increased head count for field sales, tele sales, and product management, along with increased commissions expense associated with the increased level of revenue, rebranding costs associated with our new MRI CAD product, and increases in stock-based compensation expense.

During the third quarter of 2008, we posted net income, including stock-based compensation expense of $538,000, of $2.1 million, or $0.04 per diluted share.

This compares with a net loss, including stock-based compensation expense of $363,000, of $682,000, or a negative $0.02, posted for the third quarter of 2007.

Also during the third quarter, we generated more than $3.9 million in positive cash flow.

For the third quarter of 2008, adjusted EBITDA, a non-GAAP measure which includes stock-based compensation expense, was $3.3 million, as compared with $223,000 over the prior year third quarter.

On a nine-month basis, adjusted EBITDA was $7.1 million, as compared to $402,000 over the prior year's nine-month period.

Product backlog, which excludes service and supplies, was $1.6 million at September 30, 2008, as compared with $1.9 million on the corresponding date in 2007 and $2.1 million at December 31, 2007.

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

Now turning to the balance sheet, we are particularly proud of the progress we have made in strengthening our balance sheet throughout 2008.

Specifically, we are very pleased to report that we continue to generate cash and have posted our fifth-consecutive quarter of positive cash flow.

As of September 30, 2008, iCAD's cash position increased by more than $3.9 million to $11 million from our cash position of $7.1 million at June 30, 2008, and represents a significant increase from the $4.3 million we had in cash as of December 31, 2007.

During the quarter we generated more than $4.6 million in cash from operations, received approximately $1.6 million in cash from the exercise in stock options, and paid the $2 million tax payment due upon the closing of the asset acquisition.

In addition, we issued stock in full payment of the remaining $3 million in convertible promissory notes.

Third quarter inventories remain essentially unchanged compared with year-end 2007 due to strong operations management, inventory control, and forecasting ability.

Accounts payable were $1.8 million, down slightly from $2 million at year end, and accounts receivable modestly decreased to $6 million from $6.5 million at December 31, '07.

Now, before we take your questions, I'd like to move on to discuss our financial guidance for fiscal year 2008.

As stated in yesterday's press release, our financial guidance for the full year of 2008 remains consistent with previous guidance announced in July.

The company expects total revenue for the year to be between $38 million and $39 million, which represents a 43% to 47% increase over fiscal 2007.

The company also expects to sustain gross margins in the 83.6%-or-better range, and anticipates operating expenses for the full year to be between $26.3 million and $27.1 million, a 17% to 21% increase over the prior year, which continues to underscore our ability to scale revenue while controlling expenses.

The company also expects net income for the full year to be between $4.6 million and $5 million.

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

Operator?

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Jonathan Block of Suntrust Robinson Humphrey.

Please proceed.

Great.

Thank you, and good morning, guys.

Good morning, Jonathan.

Good morning.

First question, I guess, Ken, this is for you.

I mean, you mentioned digital penetration, I believe, being right around 42% or 43% as of last count on MQSA.

I mean, if we take a step back, where do you think we go with this market, and what would you consider the ultimate penetration?

Well, I mean, the ultimate penetration is 100%.

I think the question really is how long does it take to get there, Jonathan.

So I think what we saw clearly is that the first half of the year the growth was 40% in units based on the MQSA data and 24 in Q3.

We would hope that that would be a sustainable growth rate for Q4, and then the challenge, of course, would be trying to project next year.

So I think that, as you cross over the 2009 timeframe, you now are going to be up into the high-40%'s, close to 50% penetration.

Our sense is that the next 30%, if you will, would still be very much something on the order maybe of 4,000 units.

They're going to go down, we think, at a fairly brisk pace, and it's probably those final 20% which are going to be the laggards that, from an economic standpoint, are going to be quite challenged to get there.

So while I think the pace has slowed, I don't think anyone expected this breakneck pace, if you will, in terms of unit growth could go on indefinitely.

So we think that 2009's going to be a strong market.

A lot of people have different views on that, anywhere from flat to, say, 20% unit growth, and we're probably somewhere in the middle of that range based on what we see today.

So we think the market's going to be strong in 2009, as well as 2010, but certainly we could not sustain the growth rates that we had in 2007 and the first half of 2008.

It was probably one of the hottest transformations that ever happened in film-to-digital technology in just about any imaging modality.

But it's a big opportunity, we think, for several years.

We also are in a unique position because of Fuji.

We know that Fuji installed 500 systems through March of this year that didn't have the benefit of CAD because we were waiting for FDA.

And as we look at our situation, we think a good 400 of those customers are candidates for CAD between, let's say, 2008, 2009, and maybe some might even trickle into 2010.

And as I speak, I think we've only addressed somewhere around 25% to 30% of the potential.

So we're going have the benefit of the tailwind, if you will, behind this large Fuji pent-up demand that was there prior to FDA approval in addition to whatever the growth in the market would be.

So we've got some nice opportunities to continue our growth.

Okay.

Perfect.

And then moving on, you reiterated the top-line guidance of $38 million to $39 million.

That would imply a little bit more modest of a 4Q than we were expecting.

So I guess the question here is it just you guys being your usual conservative selves, or did you see anything in this market -- you know, we've heard a lot of concerns out there with capital as we move through September and into October -- that gives you reason to pause?

Well, I think, in general, Jonathan, there's been so much change going on in the financial markets -- all of the experts out there on a daily basis seem to have different opinions of what's going on with the economy, with credit, and to think that health care, while it might be less affected, won't be affected would be naive.

We did do -- I think it's worth pointing out -- a survey of about 100 customers, and of the 100 customers, just over 50% of them were hospitals and the rest imaging centers or radiology practices.

And what we found was that about 80%, which are active deals in our funnel, were going forward business as usual, about 15% said that they had frozen their capital budget to really better understand if they would be impacted, and about 5% said we just don't know if we're going to go forward because there's so much uncertainty out there.

So I don't think it would say that the sky is falling, but what it would say is that the current credit crunch and the economy is certainly not going to help us.

So I think that, in our case, we achieved more than 50% of the threshold of our guidance in the third quarter.

Normally the fourth quarter in health care is a blockbuster.

With all of these uncertainties swirling, we thought it was the safest thing to do was to just stick with our current guidance, recognize that we're going to be affected negatively by all this credit crunch and so forth, as every company is, but at this point it doesn't seem to be dramatic so the safe thing to do was to stick with our guidance, and we'll see how the quarter unfolds.

It's just a time that, I think, just about every company is taking a more conservative stance.

We're talking to our OEM partners.

We were in France with GE last week, we've talked to Fuji, we've talked to Siemens, and the general consensus is that we may see a little slowing from what would be a typically very strong fourth quarter, and if we didn't have such a strong third quarter, we may have reevaluated guidance, but since we did so well and what we're hearing is more of a modest effect, we're kind of sticking to our numbers, and we certainly will do everything we can to achieve them.

Okay.

Perfect.

That color was very helpful.

All right.

Just a couple of others -- you mentioned the colon reimbursement, and maybe we get some more detail around November -- I believe you said -- 19th, and is there something that we should be looking out for?

In other words, I guess, obtaining reimbursement is one thing; the level of reimbursement is another.

So is there a level that you think tips this industry and a level that, if it comes below, it might not move the needle?

It's hard to say.

I mean, I think that first question is going to be how broad based would reimbursement be because it doesn't always mean it's like a switch on or off.

It may end up that there'll be certain categories of patients in high risks or those that don't tolerate anesthesia.

I mean, you can go through a lot of different nuances to say what would reimbursement mean.

And I think that that's still in the design stage.

Once you decide whether it's pervasive adoption versus for certain categories of patients, obviously, CMS will set some sort of a rate.

And, yes, I do think that the rate of reimbursement certainly could have some impact on the rate of adoption.

I mean, I think the whole imaging space is under a lot of pressure in many respects.

Most of the large imaging companies, with the exception of mammography, are all pointing to negative growth in their imaging businesses.

So I think reimbursement will be a sensitive point, and certainly the degree of reimbursement will have some effect on the adoption rates.

So it's hard to say, but I think that, when you just kind of look at the attributes of CTC, it's just overwhelmingly positive contrasted to all of the pressures that CMS is putting on the companies.

It's a clinically equivalent procedure to optical colonoscopy, it is substantially less expensive to use -- and when you think about a screening population, think about mammography.

It's totally a noninvasive screening protocol.

And to go through anesthesia, invasive scoping, nursing care, gastro care, and all that goes with it for a screening exam, where north of 90% of the patients without family history are not going to have polyps, would seem to be kind of a heavy-duty procedure, if you will.

So we think CTC, with some reasonable level of reimbursement and definition on who qualifies, could really be a major takeoff in the market, and as you start to do volume, CAD becomes more and more important based on the size of the data set.

So we're excited about it, we think it's going to be a real material business opportunity for us, and as we just came from the colonography meeting in Boston this week -- the annual symposium -- there was even more, I would say, optimism and enthusiasm about this as a growing procedure for this large portion of the screening population that today has basically done nothing.

And so we think it's going to be a great opportunity.

I think what comes out of this November meeting in Baltimore, Jonathan, is going to be a good barometer to really answer your question, though, in more definitive detail.

Okay.

Great.

Maybe just one last one.

I think with Fuji -- I believe last quarter you said you had gotten to about 40 sites, and, obviously, some of those sites were multi-installs, if you would.

And -- was I correct?

-- you just said about 25% to 30% of a 400 number.

So are you right around 100 sites as of today?

Well, we -- basically, the data I can give you is that we installed -- even though orders were greater than this -- we installed about 84 CAD connections in the first quarter.

So that could either be a server or a license.

We actually installed about 100 in the second quarter so you can see our increase -- I'm sorry -- the second quarter with Fuji, which was third quarter.

And what we're seeing is about 75% of the Q2 installs were in that pent-up demand for the first 500 that they installed.

It was more of a 50-50 blend with new business versus those in that first 500 in the third quarter.

So we're seeing more of a balance now between new customer purchases and purchases from the original 500.

So all in all, when I say that we're at about 28% or 30% penetration, what I mean is that, if 400 of the first 500 installs are candidates for CAD, roughly 30% of those, which would be something on the order of a little over 100, let's say, have probably purchased, but we think that there is possibly another 300 out there that should purchase over the course of Q4 '09 and early 2010.

So I think the message is that there's still a lot of pent-up demand in there first 500, there's very nice demand in new purchases each quarter, and we really think with four quarters of Fuji in 2009 versus three in 2008 with substantial potential still in that pent-up demand, that it's going to be a nice growth driver for us as a company in 2009.

Okay.

Perfect.

Thanks, guys.

Thank you.

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

Please proceed.

Hi, guys.

Hi, Matt.

I might have missed this on the -- and congratulations on a good quarter here.

I was wondering if there are, kind of, watershed studies published out there demonstrating the improved clinical outcomes of using CAD for MRI?

Just because of the increased sensitivity of the imaging modality itself, it may be more difficult to demonstrate the value add of CAD, or will we see that at RS&A coming up in November?

I can't say, Matt, that we could point to a specific study.

What I think we could say, though, is that the procedure volume is growing pretty significantly and the data sets, obviously, are very substantial, and that CAD in that environment becomes a very, very powerful workflow tool.

And certainly we know that the risk, if you will, with MRI being such a high-resolution image is that you can have more false positives.

But I think at the end of the day it's been proven through the number of years that CAD has been applied in MRI that it's a very, very useful workflow tool.

And so at this point it really comes down to the volume of procedures you're doing.

If you're doing a high volume of breast MR, CAD is becoming a standard of care.

If you're doing only several breast MR's a week, then a lot of the radiologists question the economics and clinical value versus reading the exams themselves.

We think as procedure volume continues to grow -- let's say, north of 1 million procedures a year -- that CAD will become more and more important.

And very much like mammography -- different revisions will create better accuracy, less false positives.

We've seen that trend in mammography and would expect to see the same trend as we improve the performance of these kinetic-spaced algorithms for breast MR as well, and the adoption rate, as a result, would increase.

Okay.

That's helpful.

Okay.

As far -- as of year end -- I want to go back to Fuji.

As of year end, where do you anticipate ending the year?

And I know I'm just trying to back into a little bit on fourth quarter here, but with sounds of maybe some clouds on the horizon as far as maybe demand is concerned, do you see that from the Fuji penetration side, or is that more coming from GE and Siemens?

All I can tell you is, when we discussed demand with Fuji in light of our current economic and credit environment, what they told us was underlying demand continues to be strong for our product.

So we said, "Does that mean you would anticipate more or less or the same level of volume that we saw in Q2 and Q3," and their answer was comparable demand and volumes as we saw in Q2 and Q3.

So it's a combination of things, but a lot of customers, as you know, have calendar fiscal years.

They've got to spend the monies or they're going to lose them.

Some of the concern actually we've heard is out into 2009 (inaudible) year with new capital budgets being put in place be a little tighter relative to capital funds, a lot of these orders, as you know, are already in companies' backlogs.

So at this point we would anticipate similar to Q2 and Q3, similar demands from Fuji in Q4.

I would still add the caveat, though, that, with this credit crunch being an unprecedented event, I don't think anyone can look in a crystal ball and be certain.

I can't personally look at it and say "Gee, this is good for our business." It's got to be bad.

The question is in the context of health care and all the planning and so forth that people have already done to convert to digital mammography, will it have a very modest effect or something greater?

And I think at this point it's very difficult to tell.

And Fuji's in the same boat.

Their view is it's business as usual but with the caveat that some percentage of their customers do use financing.

And we would assume that financing could take longer, credit worthiness could be a little bit more tight in light of some of these dynamics, and worst case what that may do is slow down business or move it into next year.

It's not going to go away.

But I think at the end of the day, one underlying fact is there, which is that this market is going to digital technology, and anyone who wants to be in the mammography-screening business that doesn't have a plan to afford and get in to digital technology in the next, say, two years is going to have to get out of the business because the demand for film-based mammography is going to rapidly decline because, as you know, the informed consumer is just not going to accept that in a screening modality.

Okay.

And then just last question as far as can you describe any differences or trends in Fuji's new customers that you installed this quarter versus legacy base?

Meaning are they smaller kind of rural settings, are they larger multicenter deals going down in these new customers?

Well, I think based on the 21 months of pent-up demand, we certainly back in Q2 did a lot of very large installations out of the box because, obviously, they wanted to go immediately to those large customers that had been waiting, in some cases, 18 to 21 months for product.

So there's no question that we did a lot of larger installations in the second quarter versus the third quarter.

But the underlying demand in terms of units of CAD connected to digital mammography remained very consistent from Q2 to Q3.

So the profile of the customer may have changed a little, but at the end of the day, what Fuji is really able to do nicely is they focus on their install base of CR that's been installed roughly in the last, say, five to seven years.

The ability to upgrade that install base to mammography is far more cost effective than their older technology.

So they have thousands of systems installed, and a great number of those are, let's just say, in a cost-effective manner compatible with an upgrade to mammography.

So there's a real opportunity for them to go to their install base and provide an upgrade, as opposed to needing to sell a new gantry every time customers considering moving from film to digital.

So they're in kind of a unique position in the market.

The other point I'd make is, as this market now moves down to, let's say, the midrange -- more of the high-end, high-volume sites have purchased -- Fuji's value proposition becomes that much more compelling based on the cost-effective nature of what they can sell or upgrade.

So I certainly don't see Fuji's market positioning lessening.

If anything, they may become a stronger player because they do a very nice job of providing value and cost benefit to the customer out there that really is looking to get into digital mammography but not put in a brand new system.

Right.

And I would assume that would also support gross margin expansion?

I mean, 84%-plus is already stellar, but have you seen -- because you're going after maybe the one-off deal, can you get a better gross margin (inaudible)?

I think -- we think our gross margin is at a pretty steady state where we are.

Ultimately, if you think about it, we have contracts with all our OEM's and the majority of our business goes through them at a fixed price.

So -- and our current, let's say, revenue run rate -- somewhere in that range of 84% is a solid number -- we don't see the ability to, say, have a similar revenue number this quarter, next quarter, whenever, and then see a big jump in gross margin.

I think that gross margin, kind of, mix, if you will, is a combination, obviously, of a higher percentage of digital projects, which has north of 84% gross margin, offset somewhat by the film-based product, which has a higher hardware content, which has lower gross margin.

So we're pretty comfortable that this is a sustainable gross margin in the volume range were in today.

We don't see any major shifts in the margin going forward, unless, of course, you had a major shift in volume.

Okay.

Terrific, guys.

Thanks again.

(OPERATOR INSTRUCTIONS)

And your next question comes from the line of Adrian Dawes of Hartwell.

Please proceed.

Congratulations on a great quarter.

Thank you.

Thank you.

Can you talk a little bit about your expectations for additional cash generation from the business as we look out over the next 6 to 12 months and also, in that context, comment to the degree relevant on currency exposure and associated volatility that we've seen of late?

Sure.

I think what we saw this quarter, Adrian, was north of $4 million, $4.5 million in cash flow from operations.

Again, at similar types of levels, we would expect that -- kind of in that range going forward.

We did have a couple of unusual things this quarter, obviously.

We had some employees that exercised stock options, which always helps, and we're great to see the employees can actually do that.

And, of course, we had the $2 million cash payment on the acquisition.

So overall we generated about $4.5 million in cash from operations.

Again, kind of staying at this same level of revenue, you could sort of -- I would model that into my numbers going forward for the next couple of quarters.

With respect to the second part of your question in terms of currency exposure, we really do very, very little business internationally so our currency exposure is almost nonexistent.

We don't actually procure any inventory components internationally.

What we tend to pay in other than US Dollars might be for some international trade shows and things like that.

So it's really a nonissue for us.

Great.

Just the first question in terms of cash flow -- the $2 million cash you paid out relative to the $4 million, $4.5 million generated so I should think of $4 million and $4.5 million to be generated in the upcoming quarter.

Is that the right take, or am I thinking six?

Again, assuming sort of the same level of revenue generation, in that range, I think, would work, yes.

For fourth quarter -- fourth quarter tends to be higher on an expense level.

We do have the investment in RS&A, which could easily cost us another $250,000 for that show, but, again, if you kind of leave the $500,000 wiggle room there, I think you'd be fine.

Perfect.

Great.

Congratulations.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

And there appear to be no further questions or comments.

Okay.

Well, let me try to make some closing comments.

First of all, we're really, really excited -- very, very pleased with our performance, not just in, obviously, this third quarter but our year-to-date results are quite impressive and represent tremendous progress over 2007, which we had made -- I think a lot of people know -- tremendous progress versus 2006.

So we're very, very excited about our performance.

We certainly have to have some caution as we work our way through Q4 based on a lot of forces outside of our control, but we're certainly focused to try to execute as well as possible, as well as to watch our expenses to the degree we can, and look forward to having a very, very strong year overall.

So with that, I wanted to start with thank you to our employees.

Our employees have worked extremely hard over these first three quarters to provide us with the tremendous progress that we've made versus 2007.

Our products are performing exceptionally well in the marketplace, and we're getting very, very good objective feedback, and all of that hard work and effort is really paying off.

I'd certainly like to thank the investors on the line for listening in today to our call, and we will certainly, as I say, look to have a very strong finish in light of some challenging environments, and we very much look forward to speaking to you after we finish up the year and report on our fourth quarter and full-year results sometime early in 2009.

So thanks very much for listening, and we look forward to speaking with you again soon.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.