ICAD Inc (ICAD) 2008 Q4 法說會逐字稿

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

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

(OPERATOR INSTRUCTIONS)

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

I would now like to turn the presentation over to your host for today's conference, Anne Marie Fields, of Lippert/Heilshorn.

Please proceed.

Thank you, Maria.

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 closed yesterday, iCAD announced financial results for the fourth quarter and fiscal year end 2008.

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

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

I encourage you to review the Company's past and future filings with the Securities and Exchange Commission, including, without limitation, the Company's 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 content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 26, 2009.

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

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

Ken?

Thanks, Anne Marie.

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

I can enthusiastically describe 2008 as an exceptional year for iCAD.

It represented our second consecutive year of significant progress.

For the year, we achieved record revenue, earnings and cash flow.

In addition, we made considerable progress on our product pipeline, which expands our addressable markets for image analysis and workflow solutions to the MRI and CT imaging segments.

When we began assembling this management team 10 quarters ago, we faced the challenging task of turning around a company that was on a negative growth trajectory, incurring increasing losses and burning a fair amount of cash.

We are particularly proud of our progress over this time frame against these key metrics.

And, while the current economic downturn has created a significant level of additional challenge and uncertainty for all of us going forward, I'm as confident as ever that the talent level and track record of our management team, combined with our compelling strategy, will enable iCAD to increase its competitive position as we work through this dynamic economic cycle.

I'll begin with some comments on our business performance and will also provide an update on strategy, and then turn the call over to Darlene to review our financials in greater detail.

Direct to what I said in my opening comments, we achieved phenomenal revenue growth in 2008 versus 2007.

This is largely attributable to the growth in digital mammography systems sold with CAD as a standard of care in the United States.

Even with several years of rapid adoption of digital technology, the market in the United States is only 47% penetrated as the end of the year.

This leaves nearly 7,000 MQSA-certified systems that will need to convert to digital technology over the next several years to remain in the mammography screening market long term.

Also, as our installed base of digital systems now exceeds 2,600 worldwide, we see a sizable growing market opportunity for new capabilities via upgrades when we make them available for commercial sale.

Now I'd like to move on to some details relative to the quarter.

There's no question that the difficult global economic conditions have affected all companies, including those in healthcare.

Despite the challenging economic environment during the fourth quarter of 2008, we were very pleased to post solid revenue growth in the quarter, which continued to be led by our digital product sales, which increased significantly over the fourth quarter of 2007.

And, although the MQSA data showed unit growth in the quarter as down versus Q3, we continued to respond to the demand for our SecondLook Digital CAD product from an increasing number of OEM partners on a global basis.

Although we expect some continued near-term softness in systems placed, we remain confident in the long-term growth opportunities for our digital products as the transition to digital continues and reaches toward the inflexion point where you must go digital or exit the mammography screening business.

Our film-based products were led by the ongoing strong market acceptance of our comparative reading solution, TotalLook MammoAdvantage.

TotalLook MammoAdvantage achieved continued sales traction through direct sales and our OEM partners, increasing significantly compared with the fourth quarter of 2007.

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

These increases were offset by declining sales of our film-based CAD products.

We expect this trend to continue as our business continues to shift away from film-based CAD products to those associated with digital workflow, such as TotalLook MammoAdvantage.

As to our service performance during the quarter, we were experiencing a revenue decline because of film-based CAD systems, service agreements and time and materials billings, as customers rapidly implemented digital technology.

So, while service agreements grew very nicely during the quarter, we saw this softness or offset, if you will, as it relates to service agreements and time and materials from the analog, older products we had under support.

We expect to see increasing growth in service overall as a result of this rapidly growing install base of digital CAD systems and TotalLooks, which are transitioning quickly from warranty to service contracts.

Our full-year growth of 16% for service contracts supports this trend.

While international revenue during the fourth quarter were down slightly compared to the fourth quarter of '07, overall, our international business increased 10% in 2008 versus 2007.

We believe the international market offers a sizable and growing opportunity for CAD long term, and we continue to expand our footprint in markets particularly in Europe and in Japan.

Toward that end, during the fourth quarter we initiated the European launches of SecondLook Digital CAD customized for use with Agfa HealthCare's Computed Radiography Systems and for use with Planmed's Nuance Full-Field Digital Mammography system, as well.

We remain well positioned to benefit from the ongoing global transition to digital mammography, which we feel will continue for some time to come.

Our goal moving forward is to maximize growth and earnings from the ongoing transition to digital mammography and to build on the investments we're making in new business segments, particularly MRI and CT-based CAD solutions, where placement of our CAD products is less dependent on new system sales, as our products can be integrated into MRI and CT systems already in place today, which leads me to discuss our progress with our recent entry into the MRI CAD business.

In the fourth quarter of 2008, we launched SpectraLook and CADvue, two new breast MRI products, and VividLook, a new prostate MRI product.

These products assist radiologists' workflow significantly to detect cancers of the breast and prostate.

And, while our field's top priority was to maximize mammography business at year end, I was quite pleased to see a documented sales funnel for MRI products of $3.6 million by the end of December.

This has grown to over $6 million in the February time frame, and we are now booking new orders and beginning installations of these new offerings.

This leads me to an update on our progress with CT CAD.

As you know, iCAD has been working with the ACR Image Metrix organization, a subsidiary of the American College of Radiology, conducting a multi-reader clinical study to demonstrate the product's performance effectiveness on polyp detection.

I'm delighted to report that we've completed that study and are compiling the data in preparation for an anticipated FDA submission by the end of next month, the end of March.

Working with the ACR organization, a group with significant expertise in radiology clinical trial management, has put us in an optimal position to submit solid clinical data to the FDA that will help us to meet our regulatory goals for this important product line.

Positive results released and published from the ACRIM-sponsored national CT colon trial has created considerable interest in virtual colonoscopy, or CTC.

This trial of nearly 2,600 patients has largely proven that CTC is an effective optical colonoscopy alternative for 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 the adoption of CTC will dramatically increase colorectal screenings.

As a result of this positive data, the American Cancer Society, the American College of Radiology in the United States, and the Multi-Society Task Force for Colorectal Cancer have added guidelines for CTC versus optical colonoscopy screening.

So, with this said, we were disappointed when CMS recently proposed to not cover virtual colonoscopy for colorectal cancer screening, citing the lack of sufficient evidence, to include virtual colonoscopy improves net health benefits in asymptomatic Medicare beneficiaries despite its promising technology.

As the average age of Medicare beneficiaries is 75 years old, we continue to believe that the net health benefit of CT screening is for patients in the category of 50 to 65 years of age and we will see favorable reimbursement as we go along.

We see this already in the marketplace, with several major payers already covering and paying for CTC screening.

For example, it is now covered by Kaiser Permanente, CIGNA, and various Blue Cross Blue Shield affiliates, as the Blue Cross Blue Shield Technology Assessment Committee has indicated that CTC does meet their criteria for coverage.

We'll continue to follow these proceedings closely and keep you posted as we see progress.

So, with this portion of the update concluded, I'll turn things over to Darlene, and she'll give you more details on our financial performance.

Thank you, Ken, and good morning, everyone.

As you can see from our press release, 2008 was an exceptionally good year for iCAD, and these record results represent back-to-back years of comparative financial improvement.

We were especially proud to report that these results showed significant progress in every financial metric used to assess a company's success -- revenue growth, earnings growth, gross margin expansion, debt reduction and cash flow generation.

Some of the highlights of this banner year and fourth quarter include record full-year revenue of $37.5 million, up 41%; total Q4 revenue of $9.3 million, up 15%; record full-year digital revenue of $26.7 million, up 63%; record full-year international revenues of $2.9 million, up 10%; record gross margins of 83.7% and 83.5% for the fourth quarter and full year, respectively, both up over 300 basis points; record full-year net income of $4.4 million, or $0.10 per diluted share; and the sixth consecutive quarter and second consecutive year of positive cash flow, generating $2.1 million and $8.8 million in cash for the quarter and full year, respectively.

Let me now provide more detail on our quarterly and annual performance.

Beginning with the fourth quarter, total revenue was $9.3 million, a $1.2 million, or 15%, increase compared with total revenue of $8.1 million for the fourth quarter of 2007.

This increase reflects continued growth in our core digital mammography business, with our SecondLook digital products, as well as ongoing strong market acceptance of our new TotalLook MammoAdvantage product, as well as increased service contract penetration.

Digital revenue in the fourth quarter grew $1.3 million, or 26%, to $6.3 million, from $5 million in the prior year fourth quarter.

We realized digital growth this quarter from our broad and growing portfolio of OEM partners.

During the fourth quarter of 2008, total revenues from our film-based products were essentially flat, at $2.2 million.

This is compared to a very strong fourth quarter 2007 in the analog business, which included much higher film-based CAD sales.

Sales of TotalLook MammoAdvantage, however, were very strong, increasing 23% over the prior year fourth quarter, and represented 71% of our total film-based product sales for the quarter.

This increase was offset by declines in sales of film-based products.

For the fourth quarter, service and supply revenue of $798,000 was off by about 11%, or $97,000, compared to total service and supply revenue of $896,000 recorded during the fourth quarter of '07.

This decrease was largely the result of declines in labor, parts and supplies associated with our film-based products.

Conversely, service agreements were up nicely, increasing 10% quarter over quarter, and in Q4 represented 94% of our total service and supply revenue.

As our business continues to transition from film-based to digital products, and as digital CAD systems continue to grow, we expect to see ongoing growth in service contract revenue as customers transition from warranty to service contracts.

International sales for the fourth quarter were off by about $90,000, or 12%, to $669,000, from $759,000 in the prior year.

Having said that, for the full year of 2008, our international revenue increased 10%, or $274,000, to $2.9 million, from $2.7 million for the full year 2007.

We continue to believe the international markets offer a growing opportunity and expect to continue to leverage new opportunities with additional global partners such as Sectra and the recently announced Agfa and Planmed partnerships.

During the fourth quarter, we expanded our gross margins by over 300 basis points, from 83.7%, from 80.5% in the prior year quarter.

This increase is the result of continued 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 mix of some higher average selling prices and some material component cost reductions.

Operating expenses in the fourth quarter of 2008 increased $1.6 million, or 27%, to $7.5 million, compared to operating expenses of $5.9 million incurred during the fourth quarter of 2007.

$1.3 million of this $1.6 million increase is a direct result of investment in new businesses to address long-term sustainable growth, specifically, the retooling and launch of our new MRI CAD products and the clinical reader study for our colon CAD products, which, as Ken mentioned, has been completed.

Excluding these investments in expanding our product pipeline, operating expenses for the quarter would have increased only about $300,000, representing about a 5% expense growth quarter over quarter for our core mammography business.

During the final quarter of 2008, we posted net income, including stock-based compensation expense, of $508,000, of $321,000, or $0.01 per diluted share.

This compares with net income, including stock-based compensation expense, of $387,000, of $525,000, or $0.01 per share, posted for the final quarter of 2007.

Importantly, during the fourth quarter we generated $2.1 million in positive cash flow, as compared to $491,000 generated in the prior year fourth quarter.

Adjusted EBITDA, a non-GAAP measure which includes stock-based compensation expense, was $1.4 million for both the fourth quarter of 2007 and 2008.

For the full year 2008, adjusted EBITDA was $8.5 million, as compared to $1.8 million for the full year of 2007.

Product backlog, which excludes service and supplies, was $1.1 million at December 31, 2008, as compared with $1.9 million at December 31, 2007.

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

Moving to full-year results, 2008 was a banner year for iCAD, with 41% total revenue growth, to $37.5 million, as compared to $26.6 million in total revenue recorded in 2007.

Net profits for the full year of 2008, including stock-based compensation expense of $1.9 million, was $4.4 million, or a positive $0.10 per basic and diluted share.

This represents a bottom line improvement of $6 million, or $0.14 per share, as compared with the net loss for 2007 of $1.6 million, or $0.04 per share, which included stock-based compensation expense of $1.2 million.

Increased sales in 2008 was led by digital CAD revenue, which grew 63%, to $26.7 million, from $16.4 million in 2007.

Full-year revenue for our film-based products advanced 10%, to $7.4 million, from $6.8 million in 2007.

Full-year revenue from our TotalLook MammoAdvantage product, which is included in our film-based product revenue, increased 40% over the prior year.

Our full-year service and supply revenue was down about 3% year over year, to $3.3 million, from $3.4 million reported in 2007.

As I mentioned earlier, this is mainly due to declines in labor, parts and supplies associated with our mature film-based products.

This, however, is positively offset by increased revenue from our service agreements, which was up nicely, increasing 16% year over year.

International sales for 2008 were also strong, at $2.9 million, increasing about 10% over 2007.

We also continued to make positive progress on gross margins in 2008, increasing full-year gross margins by 3.3%, to 83.5%, from 80.2% in 2007.

Importantly, on approximately 41% total revenue growth in 2008, we realized only an 18%, or $4.1 million, increase in operating expenses, to $26.6 million, compared with $22.5 million in 2007.

Approximately $2.1 million of the $4.1 million expense increase, or 10% of the 18%, is a direct result of our investment in new businesses to address sustainable long-term growth, specifically our new MRI CAD and colon CAD products.

The remaining $2 million of the $4.1 million in expense increase, or 8%, was in our core mammography business.

I would classify our fourth quarter performance as quite respectable, in light of a difficult economic environment, and our performance against full-year guidance very good.

We ended the year at 99% of our low-end revenue guidance.

We met our gross margin targets.

We stayed within our operating expense range guided for the year.

And we modestly missed the bottom line guidance by about $250,000.

Now, turning to the balance sheet, we continued to bolster our balance sheet in the fourth quarter and are very proud of the progress we have made in strengthening the balance sheet throughout 2008.

Specifically, we are very pleased to report that we continue to generate cash, having posted our sixth consecutive quarter and second consecutive year of positive cash flow.

For the fourth quarter, iCAD's cash position increased by $2.1 million, to $13.1 million, from our cash position of $11 million at September 30, '08, and represents a significant increase of $8.8 million from the $4.3 million we had in cash on December 31 of 2007.

During the year, we generated more than $9.8 million in cash from operations.

We received approximately $1.9 million in cash from the exercise of stock options.

We paid $2 million in cash on the asset acquisition, paid $621,000 for additions of property and equipment, and remitted $259,000 on the former lines of credit.

In addition, we issued stock in full payment of the remaining $5.8 million in debt.

Inventory at year end was down to $1.4 million, from $1.8 million in 2007, due to strong operations management, inventory control and forecasting capabilities.

Accounts payable increased slightly, to $2.2 million, from $2 million last year end, and accounts receivable decreased to $5.6 million, from $6.5 million a year ago.

Now, before taking questions, I'd like to discuss guidance for fiscal 2009.

In the past, we've offered guidance for the first half of the new fiscal year during our year-end conference call.

These difficult economic conditions make it hard for us to gauge with certainty what effect that will be on our business.

Consequently, we are going to withhold making projections until we have a clearer picture of how the economic environment will impact iCAD.

At the end of the first quarter 2009, we will reassess the situation to determine if we have any better visibility.

At that time, we will report to you our findings and, if any, forecast.

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

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Jonathan Block, with SunTrust Robinson Humphrey.

Please proceed.

Thank you, and good morning, guys.

Good morning, Jon.

Good morning, Jon.

First question, Ken, maybe if you can just help us out -- clearly the environment is very difficult and probably very choppy -- what you're seeing on a trend basis as we exited '08 through January and February.

Are things getting worse, better, choppy?

Any color would be very helpful.

I think the color, Jon, probably starts with the MQSA data, as it got published on the first of January.

And obviously what you saw was some very, very strong demand for digital mammography through the third quarter, but a startling drop in demand in the fourth quarter, which ended up about, sequentially from Q3, down about 25% in units.

When you think about the growth trajectory that had been going on for several years, that was a pretty significant drop.

And I think it was the realization that the combination of the economy and the banks and all of the risks out there really caused a significant number of healthcare enterprises to really take on an extraordinarily cautious mode.

With that said, there was a fair amount of business done, because a lot of people are on calendar fiscal years, certain health systems are doing better than others financially and didn't necessarily see a lot of risk in holding back the funding.

But, if you net it out, people did.

And I think that our results would have been significantly better in the fourth quarter if we had had what I would describe as a business as usual environment compared to Q3.

But the reality is that this is unprecedented time economically, and even with a new administration in place in early January, I don't think anyone today, with all of the speak coming out of Washington, has some new resolve or confidence that the economy is going in a direction that even healthcare financial experts would get bullish about spending in the short term.

So what we think is that the business will be softer in the first quarter than it was in the fourth quarter.

That's not unusual.

In healthcare the first quarter is obviously always your softest quarter.

And I don't think there is a compelling reason for people to spend significant sums out of their capital budgets until they really better understand what's going on economically, as well as how this economic environment's going to help or hurt their particular business.

So I think it's a very challenging environment.

Hospital systems look at capital budgets as one of the first things that they cut.

If they don't cut, they tend to seasonalize them toward the back half of the year so that they don't say no but postpone.

And I think that they look at everything from operating expenses to staffing, just like any other business out there.

And I think that's a lot of what is going on right now.

So my sense would be that the first quarter is going to be a very, very tough quarter.

We have seen what I would describe as a slightly stronger business trend than we did in the first couple of months of last year, but I wouldn't want to take what would typically be a very strong third month and assume that it's business as usual and we're going to have a huge month in March and be pleased with our results.

I think we're in uncharted waters, and I think all bets are off in terms of looking at historical data.

So, from my standpoint, it's kind of basic.

I think we have a very, very strong, talented management team that's proven what they can do over several years.

I think we have a very strong product position in a market that's less than 50% penetrated.

I think we've got some exciting products in our pipeline around MRI and CT.

And I think that we've got a financial strength going into this that will allow us to work our way through it.

But trying to hang on to quarterly performance at the moment I think is more challenging, particularly when you are dependent on capital equipment placements.

So we're taking a very conservative position in light of these unprecedented times.

With that said, we've been proud of our performance against the guidance we've given in the past.

We take guidance very, very seriously and certainly don't want to throw numbers out there that we don't have a fair amount of confidence that we can achieve.

So we're taking a very conservative posture, and hopefully by the end of this quarter there'll be better data, better light on where we are, and we can come forward with something more specific.

But this is a very challenging time, and I think, while we're extremely proud of what we've accomplished and we're extremely confident of our future, kind of getting it down to a quarter level at this moment in time is very difficult to do.

So we'll just real-time manage the business, Jon, and see where we come out the other end, which we think will be, in a competitive sense, better than most.

Okay.

Great.

That was very helpful, and I appreciate that.

Maybe next question, clearly, as you mentioned, the MQSA data, hospitals pushing off the receipt of the FFDMs, I'm just curious if you're seeing that on some of the Fuji CADs as well.

In other words, you had a big backlog there.

People certainly want the technology.

Is there any -- is that part of the business more insulated, a $50,000, $60,000 purchase, or are you actually seeing some pushbacks on the Fuji CAD as well?

I think we're seeing it across the board.

I think what happened in the fourth quarter was that the leading market share companies all had reasonably good backlog.

Right?

So they certainly had committed business that they had going through.

And they had it going through at a time when you might have to use those capital dollars or lose them at the end of a fiscal calendar year.

So I think that was kind of like the Q4 dynamic.

I think, though, what we've seen is that all of these companies in the first quarter are challenged to get business.

So it isn't just a Fuji CR solution.

It's everybody, from market leaders like GE, Siemens and otherwise.

So I think it's more of an across-the-board phenomenon.

What you would hope is that as the market conditions improve, certainly those with lower price solutions, like Fuji, would benefit sooner.

And as this market has moved more to the midrange, since the 47% that have bought digital mammography are more skewed towards the high-end, high-volume sites, they would be well positioned coming out of this challenging environment to benefit sooner, because they have a sharper price point for their solutions.

I think, though, that it's all across the board, I guess, is the easiest way to describe the impact, and that includes, certainly, Fuji.

The international business is a little bit different.

I don't know that we've seen quite as significant an impact on the international business.

We expect it will over time.

I would say in the first few months of this new year we've been pleasantly surprised by international business, but part of that is we have new partners.

We have, along with Sectra now, Agfa and Planmed, and in most cases they had customers that they've sold FFDMs and CR mammo solutions to for some time, really waiting for CAD.

So there was some pent-up demand for CAD out there, which was a similar experience we had when we released with Sectra in Europe.

So it's kind of all over the map, I guess, is just the unfortunate response I have to give you in terms of the situation.

I do think, though, that in the context of the United States, you've got to go digital in the next several years or you might as well get out of the business.

Women are very aware of the importance of digital technology when it comes to mammography screening.

And I think what will happen is those sites that hold back are going to ultimately be handing the business off to their competitors down the street that will add capacity.

So that will be good for all of us in this business, because I don't think you can wait.

The other thing I would add, too, is that the price point for digital mammography now is coming frequently under $200,000.

And so, obviously, contrasting that investment versus an MRI or a CT machine, it's much more viable.

So we think that this segment of the capital market will come back sooner, because it's just not as big a ticket item for people to buy, and it's an extremely important service to offer as you offer health both to women as well as the entire family.

So we're kind of this in real-time assessment and management mode.

I wish I had a better crystal ball.

But it is what it is.

Okay.

Okay.

Great.

And, then, you mentioned I think it was roughly 2,500 or 2,600 install base, your desire to go ahead and do a software upgrade there.

Can you tell us where you are in the development of the upgrade and then what still lies ahead in terms of things that need to be thrown in front of the FDA before approval?

Right.

We've been working on a new generation algorithm for some time, and we're very, very excited about the preliminary results we're seeing on internal test data.

The performance improvement has been really, really an order of magnitude over where we are today, and we're proud of where we are today.

So the challenge you have is when and where you can release this.

And so if you take the OUS market, it's very likely, before the end of this calendar year, we will have this new generation product into the market.

It is basically ready to go to clinical trials as I speak, and we think that a quarter or two of testing, at the most, will enable us to release this outside of the United States probably later this year.

The United States is a different circumstance, and we certainly understand that's where the big opportunity is in this large, growing install base -- 2,600 digital systems, probably 90% of those are in the United States.

And we would love to be able to offer this either directly as an enhancement upgrade or as part of a service agreement to customers.

And we think it's a huge opportunity for recurring revenue.

With that said, the FDA environment, if you've been reading The New York Times or any of the other periodicals that comment, has become even more difficult in the short term to get products through.

So what we anticipate, very similar to colon, is we're going to have to do a reader study, and that reader study, we hope, within a quarter or so, will begin, and conclude roughly around the end of this calendar year, and then we will submit some sort of a PMA application, whether it's a full application or a supplement, that's still to be determined.

We're trying to nail a date to meet with the FDA to establish the protocol for that reader study in the next 30, 45 days, and that will give us better indication of the amount of effort it's going to take to get a new generation product into the US market.

But I certainly wouldn't anticipate it this year.

What we would hope is that at some point mid to late next year we may be in a position to have the product into the United States market.

But all of that is really dependent on how the FDA responds to us when we meet to talk about the characteristics of the product and what sort of testing they expect.

We expect that they will require a reader study similar or maybe somewhat consistent with what we did in colon, and that is kind of in our thinking and in our resource plan for this year, in light of some of the new testing paradigms that the FDA is requiring.

Okay, great.

Last question, and then I'll just jump in queue, back in queue.

Actually, what you said regarding the FDA dovetailed with where I was going.

In other words, you've got a four-player market right now in the US.

Clearly you guys have about three, or you do have three locked up.

Is there anyone else that you expect to enter this market here in the US this year, and, if so, do you have an agreement, or are in the midst of having agreements lined up with them to provide them their CAD solution?

Thanks, guys.

Sure.

Thanks, Jon.

The company that I think might be closest would be Carestream, which is formerly Kodak.

We keep hearing that they anticipate their CR mammo solution to get FDA approval by the end of the first quarter.

And so we're working closely with Carestream relative to a CAD solution for them.

And they, like Fuji, have a very large market share of CR solutions on a US and international basis.

So I would probably anticipate that the next US entry into this space will be another CR player, and that would be Carestream.

They could be there as soon as 30 days if this first quarter projection comes to reality.

And then we would sequentially need to file with the FDA a submission for Carestream.

We think the opportunity, while it might not be quite as big as Fuji, could be a significant opportunity for us, and we're more projecting that if all this in sequence were to happen it would be late this year that we would have the ability to provide a CAD for Carestream.

Beyond Carestream, it's hard to say, but you might speculate that Philips, which would not have a US product this year, might have the chance of a US product next year.

And, now, Philips, internationally, is out actively selling CR and soon will be selling a DR solution internationally.

And what we would anticipate is possibly in 2010 they may have one or both of those solutions in the United States market.

And we're working very closely with Philips on an international release, which we hope would happen in the next quarter or so.

So those would probably be the two big players that we're aware of.

The smaller players, such as, say, Planmed or Sectra, it's really not clear to us at what point would they have an FDA-approved product, but we certainly know they have a strong interest in doing so.

Okay, great.

Thank you very much.

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

Please proceed.

Hi, guys.

Hey, I wanted just to confirm, did you mention you got about $6 million in bookings from, I guess, the complete MRI and CT, Ken?

I wish I said that, Matt.

What I said was really in salesforce.com, which is our sales funnel tool, we had roughly -- I don't have it in front of me -- $3.5 million documented in the funnel as prospects by the end of the year, and that that had grown to over $6 million in prospects in the month of February.

And of that, say, $6 million, about 80% is breast MRI and about 20% is prostate.

That's roughly what we have as a sales funnel.

We have booked a number of orders this quarter.

We're in the process of installing and implementing those orders.

But they're nowhere near that number.

In other words, we're just building out this business.

This business, basically, was essentially in shutdown mode for a year before we bought it.

We bought great technology.

We've really had to revamp the entire go-to-market plan.

And, with that said, we really said to our field in the fourth quarter, execute on mammo and build a strong sales funnel for 2009 for these products.

And so we're now starting to see orders come in.

We don't anticipate they would really have a material effect on Q1, but it's nice momentum compared to where we launched in the fourth quarter.

And, obviously, tracking the characteristics of the size of that funnel each month gives us some kind of forward-looking indication of whether we're making the progress in getting in front of customers, demonstrating the product, and would we have the hope that each quarter going forward we'll see more business.

And with that sort of trend, we're encouraged and excited.

And one of the reasons we're able to do that is we basically have 19 dedicated sales account managers out there in the United States for mammography.

We have two MRI sales specialists, and we have two direct sales managers.

So we've got a very committed sales team that is now backed up by four insides salespeople, as well.

So we are able to aggressively get out there and touch customers on a regular basis and really generate these sales without having to go to our OEM partners, as we do in mammography, and support them as a first option.

So we're really working this aggressively on a direct basis.

We think by doing so we're going to get higher average selling prices, since we're not in an OEM model with these products, and we have the capabilities from a service standpoint to do all the installations and support these customers.

So we've made this conscientious investment in a direct sales channel in the United States, and we intend to continue to give that channel more and more innovative products, whether it's around MRI or CT, so that they can continue to increase their productivities, as it's extremely important for us as a company to touch customers directly.

We do not want to be strictly in the OEM sales business.

We think it's a great business, but at the same time to be in control of your destiny you need to have strong customer relationships.

I can't think of a better time to have that than right now in this rather challenging environment.

So, those numbers are funnel numbers.

Those are not bookings numbers.

That's helpful.

But I could assume a small percentage of wins out of that prospect and that funnel, the magnitude, the trend, at least.

Do you anticipate it going from $6 million to, say, three times that by year end 2009?

I mean, I know we're trying to get into our projections for 2009 accurate.

I think I've got about $1 million to $1.5 million in actual sales from these new products.

I think that's fairly conservative growth over what you acquired, but understanding full well that they didn't really have a direct sales channel.

Yes, I think the way I would describe it is that the market, from a procedure standpoint, is still growing very nicely.

So, as an example, both breast MRI and prostate MRI procedure growth is growing very strong in this country.

What I believe will happen more so is customers that have the level of magnet that it is a cost-effective upgrade to add a coil and CAD as opposed to buying a new MRI machine will clearly see this more as a business opportunity to really increase procedure volume and revenues, as there's nice reimbursement that goes along with a breast MRI.

So we think more sites are going to continue to adopt what I'll call an upgrade strategy to their existing magnet to provide for breast MRI and will need CAD as their volumes increase.

So we think we can take advantage of a growing market because of our large direct presence of salespeople out there in the United States.

With that said, we're not yet giving projections on how much revenue.

I will at least acknowledge that your comment about your number being conservative is probably conservative.

That's about as far as I think I could go, given, really, how early it is.

And we'll try to provide, Matt, more color on this at the end of the first quarter.

I think we're still trying to digest how strong we're going to finish this quarter, and, with that growing knowledge, how much ramp that will then give us in momentum going into Q2.

So we'll try to give you a little bit more definitive color after the first quarter.

That's terrific, Ken.

As far as just switching to digital and Fuji, I do recall Fuji had somewhere around 400 or so installed, dedicated mammography systems out there.

Did you comment a little bit about the continuing penetration of that installed base, where we stand right now?

I think that clearly what you had in the first two quarters of release, which was Q2 and Q3, was a lot of these sites that were large, that were really anxious to get CAD, and there was what I'd call some very healthy pent-up demand.

And so we've kind of worked through what I would call the largest sites that had multi-gantry, multi-server, big, big installs.

And so now what we're dealing with is a market that might be more typical of a single unit or a single unit with an additional license or two such that there may be three rooms that are now kind of dedicated from a workflow to digital mammography screening.

So I'd say that the characteristics of the transactions are not quite as large.

But what I would say is there's still, I think, some healthy demand within that pent-up demand, which was actually 500 systems, as well as in new systems.

With that said, though, one of the challenges when you're in what's called a price performance market, is the good news is you've got a very nice solution at a nice price point.

You might also argue, though, that those are the customers that when times get tough like this, they hold back, because their screening volumes are not quite as high as some of those very large city hospitals, if you will, or systems that went directly to DR.

So I think what we've seen is ongoing demand slow a little bit because some of the sites are more or less willing to hold on a little longer in this challenging economic environment, and their screening volumes in the CR world are not quite as high, or aren't quite as high in their affiliate sites, maybe, versus their core site, to go forward with purchases.

So it's been a little slower in the CR space.

The hope would be, again, as the economic environment improves, that would be one of the first places where things do improve.

So we haven't seen the business momentum in, say, Q4, Q1, that we saw with Fuji in Q2, Q3.

And most of it has been very typical of what you'd see in this kind of environment.

People are just putting off purchases.

They're not saying they're not going to buy, but they're moving things out a quarter, moving things out a quarter, trying to get a much better handle on their financial position in the world.

And I think that's kind of affecting the Fuji business, I'd say, short term.

The real question is, relative to this whole economic environment, when the customers that were well qualified to buy that have put off things in the fourth and first quarter, when they come back into the market and actually do purchase.

That's a little bit difficult to predict.

So Fuji has seen some drop in demand, and we as well, but we don't believe those customers are going away.

I think they're committed, largely because they're upgrades.

They're upgrades to existing Fuji gantries.

They're committed to using that gantry for digital mammography.

It's really a question of when they release the funds.

And, Ken, it doesn't seem to be impacting the gross margin.

I mean, you guys had -- exceeded our expectations for the gross margin side even with kind of a little bit of a downturn here.

And it seems like clearly you've got a couple of levers, one, kind of the trend to digital mammography, and maybe even a geographic shift to US, favoring US, that helped the core.

But are you seeing kind of an apples-to-apples basis vendors coming back to you and trying to, I guess, get a discount at the end of the quarter here for some of those products?

Not really, no.

What's interesting is, one of the benefits of the OEM model is you have existing contracts and pricing in place.

And these are large companies that are honoring these contracts, like a GE and a Siemens or a Fuji.

So it isn't necessarily their style to come back to us and say, "Gee, times are tough, and we have a contracted price, so why don't we make some adjustments?"

Now, with that said, if they're working a large deal, a very large deal, let's say some health system wants to buy 20 or 30 systems, we'll work with them on more aggressive transfer pricing for a really large purchase.

We've been doing that regardless of the direction of the economy.

But what I would say in the fourth quarter, specific to your observation, is that it was what I'd call more of a typical business quarter as opposed to any large deals having influence, and, as a result, transfer price to the OEMs is what it is.

And they, then, in turn went out and sold the product in a bundle, so it didn't affect our prices.

The other thing I would add to that, too, though, is that TotalLook MammoAdvantage has really taken off as an outstanding comparative reading solution.

And, while our OEMs sell some of those, our direct sales force sells quite a few.

And they've done a nice job, I think, of articulating the differentiating capabilities, which has increased our average selling price when we sell TotalLook MammoAdvantage direct.

So we're also seeing higher selling prices in the environments where we have the freedom to sell direct, because the product really justifies, based on the differentiated functionality, versus the other providers of these comparative reading solutions, real differentiation to the site that really looks at comparative reading as a differentiator as opposed to some commodity to just digitize film.

So we've been able to do that, I think, with good pricing discipline, good products that can command higher prices, and then these contracts that the prices are what they are when they buy it for an OEM sale.

Okay.

That's very helpful, Ken.

Thank you very much.

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

Please proceed.

Thank you for taking my questions, and congratulations on a very strong 2008.

Thanks, Steve.

Thank you.

Just two color questions.

The first one's on the VC.

I guess when we look at the voting at the MedCAC, we had several members, their voting was as if they didn't really believe VC was worthwhile.

And I guess, I'd like your opinion here, I guess, because the data they looked at, the average age was 58, which obviously is outside CMS reimbursement issue.

But do you think it was the -- it seems to me the average age is one explanation, or that a number of the MedCAC members just didn't buy into the VC.

I guess I'd like your opinion on that.

Yes, I think from the MedCAC standpoint, I think, to be frank, and this is maybe just iCAD's view, it was a little too biased to gastroenterologists and their view on things.

There was just a lot of fist pounding, I guess, from that constituency, unfortunately, versus the radiology constituency.

And, let's face it, Steve, this is a turf battle for these guys.

And I think that, to their credit, I guess, and whatever reasons, they did a good job adding a lot of FUD -- fear, uncertainty and doubt -- relative to the clinical viability of CTC.

One of the things pointed out was that there were three studies submitted -- Pickhardt, Kim and Johnson -- in ACRIN, where the average age was somewhere in the mid-50s for the patients.

And obviously CMS is looking at Medicare, where the average age is 75.5.

We clearly think people in that window of age 50 to 65 are the ones that are going to benefit the most from CTC.

And so I do think that the clinical evidence was not consistent with what Medicare's charter is, if you will, relative to this whole evaluation process.

So I think that certainly influenced things.

What I think is interesting, though, is more the groundswell of support for reimbursement that exists outside of Medicare.

So, what I was kind of pleased to see is that the Tech Assessment Committee for all of Blue Cross Blue Shield deemed this as technically acceptable and should be used.

And so a number of the chapters of Blue Cross are now paying for screening.

I mean, ironically and maybe by coincidence, we as a company use Anthem Blue Cross Blue Shield of Ohio, and they pay for virtual colonoscopy.

CIGNA pays for it.

Oxford Health Plan pays for it.

WPS in Wisconsin pays for it.

And a number of the larger insurers all have qualified coverage.

If you have some extended circumstance around a failed colonoscopy, or if you've got some medical condition, they're paying for it.

So I would argue that a bottoms-up kind of groundswell of support starting with the private payers might be a more compelling way to get standardized reimbursement than worrying about Medicare coverage, because the sweet spot, if you will, of the benefit here is the age 50 to 65.

And we're starting to see more and more insurers -- I think it's the state of Maryland mandated that anyone who lives in the state, the insurance companies have to pay for CTC.

So we're seeing more of an atypical kind of groundswell of support for reimbursement on CTC.

And not so certain that CMS will be, as it has been traditionally, as significant a component of this.

And when you think about the motivation for the private payers, let's face it, it's a much less expensive procedure for them, and there is sufficient clinical evidence.

I mean, you've got a 2,600-patient study in ACRIN, basically says CTC works, and it's at least equivalent to optical colonoscopy.

So if you're looking at a procedure that, as a private insurer, you may have to reimburse $300, $400, $500 for, versus something on the order of $2,000 or $2,500 for optical, and it's for screening, and it's also for patients that don't have history and so forth, I think there's a lot of financial compelling motivation for the private insurers to pay for this, because they save money using this technology.

And I think there is sufficient clinical evidence to say that over time this will be a more cost-effective, beneficial solution to both the patient as well as to the payers.

So that's, at least, our view on it, Steve.

Okay.

And, I guess, a little more, I guess, color from the, I guess, The New York Times publicity on the delays you had in the Fuji approval and the FDA reviewers coming out and disagreeing with their superiors.

And, I guess, have we had any -- have you seen any fallout from the whole -- the new review process that you had to go through with Fuji?

Do you see any negative impacts on the market like we did with the Fenton study a while ago?

I think all we're seeing is within the FDA an even more cautious approach to new technology.

So what we're seeing is that if a submission goes in -- and it's not just us, it's anybody -- they are now assigning two independent reviewers to independently review the submission, so it's not just one reviewer taking the lead.

So they're literally looking to double-review in the near term while they sort through some of their internal challenges.

So that, obviously, could be problematic as it relates to getting new technology into the market in a timely manner.

What we've seen absolutely no impact on is commercial business.

I think that you've got a rather unique circumstance going on there.

I feel for management, to a great degree, because there's a lot of people that have been there a long time, very highly educated, Ph.D.s, have really strong track records of performance, and they accusations that are flying are kind of concerning to everybody.

And, at the end of the day, Steve, it's as simple as this.

It's all about science and safety.

And I think, just using CAD as a great example, there just are no smoking guns around flaws in the science, nor are there safety incidences, as you've seen in some of the pharmaceutical products that have got a lot of publicity, to justify this level of scrutiny.

So it's almost like there's a witch hunt going on, and it's very hard to understand why.

Because at the end of the day with the FDA it's all about safety and efficacy, and we think that it's been proven time and time again that CAD fits that category very, very well.

Yet these lingering questions and challenges come up, and the accusations and so forth are present, and it's just unfortunate.

But the net effect is, it could slow down getting things into the market.

There's a new administration in place, a lot of things are changing.

What we're hopeful of for us is that when we file for our colon product at the end of March, that we've done such a good job working with these same individuals at the FDA -- we've had at least three or four meetings in person.

We followed the protocol that the new reviewers asked us to to a T, and did an almost year-long reader study for a 510(k).

So when you think about the effort we've put in, which is normally a PMA application for a 510(k), and when you look at the protocol that we've followed, which was really a recipe prescribed to us to a great degree by the FDA reviewers, we have a high degree of confidence that this new standard that they ascribe to is something we have followed and gives us greater confidence of our ability to get our colon product through in a timely manner.

Had we followed what I would describe as the older testing paradigm, we might have found ourselves in a similar situation that we did for a period with Fuji, where it would take much longer.

All right.

Thanks very much, and, again, congratulations to everyone on a great 2008.

Thank you, Steve.

Appreciate that.

Your next question comes from the line of Dalton Chandler, with Needham & Company.

Please proceed.

Good morning.

Good morning, Dalton.

So, with your digital revenue up 63% for the year, that was -- looks like somewhat faster than the US digital mammography installed base grew.

Do you attribute that to a catch-up from Fuji, or do you think maybe your customers were taking some share?

I think without question the biggest driver, Dalton, was Fuji.

There's no question that the Fuji volume definitely had some significant impact.

So that was probably the biggest one.

The second one is that GE really did over the course of really about a two-year window increase their manufacturing capacity quite a bit.

So their shipments, relative to having had that very large backlog, is something that they were able to kind of work through and I think by the fourth quarter had what I would describe as very normal availability, without having had all that pent-up demand that was patiently waiting.

So that probably influenced it a little bit, as well.

But I'd say Fuji was the biggest driver, then followed really by GE and their increased manufacturing capacity.

That's probably what drove it.

Okay.

Great.

Thanks.

In the next month or two we're probably going to hit the 50% penetration level in the domestic market.

Near-term economic issues aside, what would you expect to be a reasonable growth rate going forward, given where we are with penetration?

That's a very good question, and I really wish I could give you a good answer.

And it's just so hard to say.

You know, when you look at the US data, you look at '08 and the fact that in the second and third quarter there were over 600 placements per quarter relative to the MQSA data, and then you drop down to about 450 in the fourth quarter, it's so hard to tell.

I really think that under a normal market condition the 2,200 or so systems that were installed, per the MQSA data, in 2008, under normal conditions you would assume maybe, let's say, 10% increase in 2009.

Because even with that significant drop-off at the end of the year, the units still grew 20% year over year.

But when you get that dramatic a drop, from 610 down to 450, I mean, I wish I could give you a projection.

I think that our hope, if I could describe it that way, would be that the bottoming is this quarter, a tough first quarter in terms of system placements.

I don't think any of the companies that either communicate information publicly or privately are projecting growth in the first quarter in units.

I believe that the hope is that that's the bottoming quarter and we'll see steady growth the rest of the year.

Think about this.

You did 450 units of MQSA in Q4.

So now we're in Q1 of '09.

Well, Q1 of '08 was 560.

That was over 100 units higher than went down in the fourth quarter of '08.

So to think we're going to start the year and have actual growth comparatively, I just don't think so.

But my hope is that it's the bottoming quarter and then we start to see a steady increase in sales such that at a minimum you would hope that the units sold in 2009 would be somewhat equivalent to what was sold in 2008.

But I've heard everything from 10% to 15% negative unit growth for the year to 5% to 10% positive.

So that's just how wide the range is.

And I don't think we're far enough into the year that we would want to try to make any kind of predictions.

Okay.

And I think you mentioned at one point one of the drivers has been the decrease in the average selling price for digital mammography to below $200,000 a unit.

Is that because you're including CR in the mix, or is that the full field digital mammography price you're talking about?

I think it's both, Dalton.

I think the companies in the flat panel detector business are all trying to kind of scale down or de-feature to a screening unit kind of market.

And in that case I think a lot of them are willing to go down around $200,000 or a little below that, depending on the type of transaction, if it's multiples versus a single gantry.

So I think that -- I think the companies are trying to preserve their price point where they can, and they're trying to create a de-featured product, if you will, in many cases, to address the pure screening market and to provide a much more attractive price point for those customers.

So I've got to believe that's going to take overall average selling prices for FFDMs down.

The real question is, what is going to be the mix of these kind of de-featured screening units to the full-featured products?

Again, that one is hard for me to kind of speculate what the mix percent would be, but it wouldn't surprise me if you see some growth in these screening units at a lower price point because of the market conditions, at a minimum.

Okay.

And then, just to shift to the new MR products, and you mentioned you now have about $6 million in prospects.

Do you have a sense yet for how long it's going to take to convert a prospect to a customer?

As you know, it varies significantly.

As I said, this company had great technology but really was not in the market for all practical purposes in 2008.

And so you don't have what I would call this kind of pent-up demand and active sales funnel.

We brought on two very senior MRI sales specialists in the fourth quarter.

And if you combine that with our strong sales team -- I mean, one of the things I'm most proud of is we've had almost no attrition.

Our field is still very much intact and engaged.

Of course, when you have a [yearly growth] of 40%, there's good motivation to be still intact, because people did well, had a successful year.

But I think that the stability and the talent of our team is going to really be a differentiator for us in that market.

But it's very hard to say.

So if you think about January, February, without looking at the absolute data, we probably booked six or seven systems.

So it's not like we're sitting on a huge number.

But compared to really doing nothing in the fourth quarter, that's pretty good.

And I think what we're seeing is March, as an example, will be stronger than January, February, and then the second quarter, as we scrub, the funnel looks even stronger again.

So the momentum is really strong.

The absolute pace of how many systems relative to that $6 million funnel, which will continue to grow, I'd have to be honest with you and say it's just still too early for us to make any kind of prediction.

Okay.

And can you just remind us what the list price on those products are?

List price on those products, without having it in front of me, I want to guess is in the $60,000 to $70,000 range.

Okay.

That's fine.

Great.

Well, thanks a lot.

Good.

Thank you, Dalton.

Your next question comes from the line of Robert Simpson, private investor.

Please proceed.

Yes.

Good evening, gentlemen.

I have a question that you said you couldn't answer anything on financials, but it's a general question.

You have a nice cash flow right now, and you have some cash equivalents, and this should last for some time.

But do you have a nice line of credit that you think that if any of these were to go down that would last you through the next four quarters?

Yes, let me take that question.

You're absolutely right.

We generated $8.8 million in cash last year.

We retired a former line of credit.

We have a $5 million line of credit in place which we have not yet used, and actually I would say don't foresee having to use this year.

But it is there, and it's fully available to us.

Okay, so --

So from a cash flow perspective, we want to continue to invest in these new products, our new product pipeline, and we'll closely manage our expenses, and I think we can maintain -- either maintain or grow cash going forward here.

So, and we've definitely got a nice line of credit to support us, as well.

Okay.

Thank you so much.

Thank you.

And at this time there are no further questions.

I will now turn the call to Ken Ferry for closing remarks.

Thank you, operator.

As you can see, we've made tremendous progress driving top line growth, improving profitability, managing expenses and prudently investing in our future.

We have a strong balance sheet, remain well positioned in our core business and have recently released a broader offering to the MRI market, with CT-based products to follow over the course of this year.

And all of these products focus on a common call point, radiology.

We have a strong presence from a direct channel and OEM partnership standpoint today.

And, last, we have a very capable senior leadership team and a dedicated group of employees that will guide the Company through the current challenges in this economic environment.

So, with these concluding comments, I thank you for joining our call today and look forward to speaking with all of you again after the release of our Q1 results.

Good day.

Thank you for your participation in today's conference, ladies and gentlemen.

All parties may now disconnect.

Enjoy your day.