ICAD Inc (ICAD) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2009 iCAD Inc.

earnings conference call.

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

(Operator Instructions).

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

(Operator Instructions).

I would now like to turn the presentation over to Anne Marie Fields of Lippert/Heilshorn.

Please proceed.

Thank you.

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 second quarter and six months of 2009.

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 filings with the SEC, including without limitation the Company's Forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, July 30, 2009.

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

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

Thanks, Anne Marie.

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

While the second quarter turned out to be even more challenging than originally anticipated, I'm pleased with the way our team responded.

Faced with the third consecutive quarter of softening demand for digital mammography systems due to capital budget delays brought on by the current state of the economy, we quickly moved to reduce and control spending so as to achieve essentially a cash flow breakeven quarter.

Additional actions have also been taken early in the third quarter to reduce employee headcount by approximately 10% to continue this progress on cost reduction into the future.

Looking more closely at the business, for the first six months of the year we achieved solid growth for film-based products, service, and supplies, which helped lessen what we believe to be the temporary effect of purchase delays for digital mammography machines and CAD.

So while the second quarter is historically a seasonally strong quarter for sales, this quarter our major OEM partners did not place their fairly typical quarter-end stocking orders in preparation for July installations.

This can be attributed to three consecutive quarters of slowing demand for digital mammography machines where unit placements are down approximately 35% versus the same period last year, according to statistics published on the FDA's website.

As we look at the status of the digital mammography market, while demand has temporarily slowed, nearly half of the U.S.

market has yet to convert to digital technology.

Given the lower price point of mammography equipment compared to other modalities, we believe that, as the economy strengthens, this will be a top priority area for capital purchases.

It is clearly proven that digital mammography offers tremendous clinical, workflow, and economic benefits over older film-based systems.

A recent study by KLAS out of Orem, Utah, showed that an investment in digital technology provided workflow efficiencies and cost savings resulting in meaningful ROI for centers in the study.

Moreover, the benefits in cost savings and improved patient care are in keeping with mandates of any healthcare reform.

In late June, we were pleased to announce that new research was presented at the Computer Assisted Radiology and Surgery 23rd International Congress held in Berlin.

Original research presented by one of our directors, Dr.

Rachel Brem, Professor of Radiology and Vice Chair of Research and Faculty Development at the George Washington University Medical Center, further supported the use of computer-aided detection as an effective breast cancer detection tool.

The multicenter study evaluated the performance of CAD with computed radiography for mammography in the detection of breast cancers that had previously been missed.

Dr.

Brem's findings showed that, of the confirmed cancers, 55% were missed by at least one of the six radiologist readers.

CAD correctly pinpointed 88% of all cancers, adding further evidence of the clinical need for CAD with computed radiography.

Today, iCAD is still the only Company to offer a CAD solution for computed radiography.

We anticipate additional growth in this segment of the market as more computer radiography solutions are introduced to the U.S.

market in the future.

Studies and publications as this continue to confirm that digital CAD technology is an extremely valuable clinical tool and a standard of care with digital mammography systems.

It also underscores our confidence that the fundamentals for the continued transition from film technology to digital technology are in place, and that sales of digital mammography systems should increase in growth as the economic outlook improves.

We believe this is just a matter of time.

On the international front, there was continued demand for SecondLook CAD and TotalLook MammoAdvantage from our increasing number of global OEM partners and, as a result, we achieved significant international sales growth in the quarter when compared to the comparable period of 2008.

Longer term, we believe that the international markets will continue to offer a growing opportunity as we broaden our reach with new partnerships, new products, and with increased sales through our current OEM partners in Europe and Asia.

We remain well positioned to benefit from the ongoing transition to digital mammography on a global basis.

Film-based product sales remained steady during the second quarter, primarily as a result of the continued demand for a comparative reading solution, TotalLook MammoAdvantage, which, as you may recall, benefited from a strong product launch in the second quarter of 2008.

This product continues to show sales traction through our direct sales and OEM partners, and we expect it 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 contributes to increased productivity and digital workflow.

Service and supply revenues achieved growth during this year's second quarter as well.

This is largely the result of the growing installed base of digital products transitioning from warranty to service agreements.

Also, this area of our business benefited from customers holding onto legacy systems rather than replacing them at this point in time with new ones.

Moving forward, as our installed base of digital CAD systems is now at 3,000 globally, we see significant opportunities for growth in the installed base, not only from new service contracts but from potential new sales of new software and product upgrades that are planned in our future.

In addition, the rapidly growing installed base of TotalLook MammoAdvantage is becoming another source of service agreement revenue growth as early shipments have reached the end of warranty and have transitioned to service agreements.

Shifting topics, I'd like to provide an update on our progress with our CAD for MRI business.

We are very pleased to have launched SpectraLook and CADvue, our two new breast MRI products, and VividLook, a new prostate MRI product, during the fourth quarter of 2008.

We were delighted to report that, by mid-February 2009, we had an impressive sales funnel of approximately $6 million of potential orders for these MRI products.

This is important because, as I mentioned before, sales of CAD for MRI are not solely reliant on the sale of new imaging systems but are also marketed to the installed base of over 8,000 MRI systems already in place today.

Of the 8,000 MRI systems, about 5,000 are capable of doing breast MRI exams.

Of those, it's estimated that about 2,000 systems are doing them actively today and about 800 of those 2,000 are using computer-aided detection.

So as procedure growth continues, there should be much room for growth in this market while having to be so reliant on new imaging system sales.

In addition during the second quarter, received 510(k) clearance from the FDA to market PrecisionPoint, our interventional planning solution for breast MRI that is being offered as an integrated module within our CADvue breast MRI image review software.

PrecisionPoint software enables the user to pinpoint exactly where the biopsy is needed without the need to manually calculate the location and depth of the lesion, allowing for faster and more reliable biopsies, which could help reduce the need for repeat exams and aid in quicker clinical decision-making and ultimately better treatment for the patient.

Turning to VividLook, our MRI prostate product, in addition to our CAD for breast MRI and we are excited about the opportunity for VividLook, our prostate MRI product.

In addition to its use as an adjunct screening tool for cancer, we believe it has significant potential as a tool to assist in image-guided biopsies for prostate cancer diagnosis and treatment.

VividLook uses a sophisticated algorithm to provide radiologists and radiation oncologists with precise information to assist in determining malignancies versus benign tumors, and to pinpoint tumor location and size.

We believe there is a great unmet medical need in diagnosing and staging prostate cancer.

The National Cancer Institute has estimated that, in 2008, more than 180,000 men were diagnosed with prostate cancer and that approximately 27,000 will die of this disease annually.

They also estimate that one in six men will be affected by this disease in their lifetime.

Current diagnostic tests, such as the PSA blood test, have been shown to have high false positive and false negative rates.

Biopsies are typically done without image guidance and can miss at least 20% of the cancers.

While dynamic contrast-enhanced MRI of the prostate has shown great promise without CAD, radiologists can have difficulty distinguishing benign from malignant lesions because many portions of the prostate show large enhancement with contrast MRI alone, making it difficult to identify the real areas of concern.

By incorporating MRI with CAD to actually locate sites of the cancer from within the complex vasculature of the prostate, doctors should be able to better determine the extent of prostate cancer in ways that they have previously not been able to using CT or biopsy alone.

Armed with this knowledge, they can more confidently map their plan of attack in fighting this form of cancer.

Strong interest has been shown in using new technologies to improve prostate cancer diagnosis and treatment, both here and in Europe.

It's an early evolving market; however, we believe that it's a significant opportunity going forward.

On the last call, I highlighted our affiliation with AdMeTech, a nonprofit organization whose priority focus is to end the era of blind prostate cancer care and to create the future of image-guided, precisely-targeted diagnosis and treatment.

In addition, there is a bipartisan support -- legislation that would authorize up to $650 million for prostate imaging research and education.

We will continue to be involved in these activities and are committed to being at the forefront of these advances in prostate imaging.

We remain very excited about the opportunities for growth of our VividLook product and will continue to update you with our progress on this very promising product and technology.

Turning to our progress in the CT space, we are very pleased to have filed our 510(k) submission with the Food and Drug Administration for clearance to market VeriLook for use in CT colonography, or virtual colonoscopy.

With our submission on May 22nd, we expect to hear from the FDA in late August and will look forward to launching this product once all regulatory requirements are met.

As with MRI products, our VeriLook product will be marketed for use on the 30,000 installed CT systems worldwide today as interest in this alternative screening procedure continues to grow.

As a review, CTC employs cutting-edge technology to produce 3-D images that permit a thorough yet minimally invasive evaluation of the entire colorectal structure.

CTC requires no sedation, so patients receiving a CTC exam are able to return to their normal activities immediately following the exam.

And while colon prep is still required today as with the optical procedure, significant progress is being made with software algorithms that will reduce the need for prep further than what is required today through the use of electronic cleansing technology.

By incorporating CAD with virtual colonoscopy, radiologists will have a highly sensitive tool that will aid them in detecting colonic polyps and improve the confidence of their diagnoses.

VeriLook has a potential to reduce oversight errors that can occur during a virtual colonoscopy study review, due to the large number of images generated by the CT system, often exceeding 800 images for a single patient.

As with any new technology, favorable reimbursement is critical for widespread adoption.

On our last call, we discussed CMS or Medicare's preliminary decision not to cover for CTC, based on what they consider to be a lack of sufficient evidence to conclude CTC improves net health benefits in asymptomatic Medicare beneficiaries, despite it being a promising technology.

While disappointed with this early assessment, we remain encouraged that there will be favorable reimbursement in the future.

Our position is supported by the data that 26 states currently mandate reimbursement for CTC for colorectal cancer screening.

In addition, many of the private payors are already covering CTC, including United HealthCare, Kaiser Permanente, CIGNA, and numerous Blue Cross Blue Shield affiliates as the Blue Cross Blue Shield technology assessment concluded that CTC meets its technical criteria for coverage.

In addition, the American Cancer Society, the American College of Radiology, and Multisociety Task Force for Colorectal Cancer all have added guidelines for CTC versus optical colonoscopy and are in strong support of this reimbursement.

We will continue to keep a close watch on these reimbursement developments.

We'll also keep you updated of the progress.

In closing, my opening comment, as I said earlier, I am very pleased with our ability to respond to a very challenging market environment.

When the economy improves, we are well positioned to continue to capitalize on the transition from film to digital technology and mammography.

In the interim, we will continue to expand our addressable markets with the continued marketing of our new SpectraLook and CADvue products for breast MRI, VividLook for prostate MRI, and VeriLook for virtual colonoscopy.

Although modest contributors to our revenue stream today, these new products are gaining traction and expected to become important growth drivers over the coming quarters.

This is a good segue for me to turn things over to Darlene, who will give you more details on our financials.

Thank you, Ken, and good morning, everyone.

The second quarter proved to be a very challenging one.

The demand for digital mammography systems in the U.S.

continued to weaken for the third consecutive quarter as customers delayed purchases amidst uncertainties in the overall economic environment.

We think it's important to note that we believe anticipated customer orders have not been canceled outright, but rather have been postponed or delayed.

While the subdued hospital spending environment has lengthened our sales cycle, we are optimistic that, as confidence in the economy returns, we will see more customers begin to convert their intended orders into actual purchases.

Having said that, we are pleased to report that despite this negative revenue growth, we continued to maintain a healthy balance sheet and, with disciplined financial management, we were able to tighten expenses, continue to invest in our new product pipelines, maintain low inventory levels, and reduce Accounts Payable, all while generating modest positive cash.

Let me provide some additional detail and color on our quarterly performance.

For the second quarter, the 46% comparative decline in total revenue, to $5.7 million from $10.5 million in the second quarter of 2008, primarily reflects, as we mentioned, the challenging economic environment for our core digital CAD mammography business, partially offset by continued demand for our TotalLook MammoAdvantage product, increased service contract revenue, and growing MRI CAD sales.

Digital CAD and MRI revenue in the quarter was $3.1 million, off by 61% from $8 million in the prior year's second quarter.

In addition to the current challenging business environment for digital CAD, last year's second quarter benefited from the FDA approval and launch of our SecondLook digital CAD for use with Fuji's CR system.

In addition, our OEM partners, being concerned about their slow demand for their products, did not purchase a stocking order at quarter's end, as they very typically do, making comparisons to last year's second quarter even more difficult.

Our film-based products remained steady with a 0.4% increase to $1.72 million in revenue, compared with $1.7 million in the second quarter of 2008.

This increase was largely due to the continued demand for our total TotalLook MammoAdvantage product.

We continue to expect this demand to grow as the ongoing transition to digital CAD technology creates a growing need for comparative reading software.

Second-quarter service and supply revenue of $908,000 showed an increase of 4%, compared with service and supply revenue of $872,000 in the second quarter of 2008.

This, again, was prematurely due to increased service contract agreements, which continue to grow as our installed base of customers migrate from warranty to service contracts.

Service agreements were up nicely, increasing 14% comparatively, quarter over quarter, and represented 92% of our total service and supply revenue for the second quarter.

We are also pleased to report sequential sales growth of our MRI CAD product.

As Ken discussed, we are very excited by the future potential of these products, and are encouraged by the strong sales pipeline and momentum our sales team has developed and is working to convert into revenue in the coming quarter.

International sales for the first quarter were up by 73% to $1.2 million, from $693,000 in the prior-year second quarter.

The increase was the result of sales from our new global partnerships, such as Sectra, Agfa, and Planmed, that were launched in recent quarters, as well as from our other ongoing OEM partners.

We are confident the international markets will continue to offer a growing opportunity and expect to continue to leverage new opportunities with additional global partners and products.

Second-quarter 2009 gross margins were 81.6%, compared with gross margins of 83.6% in the prior-year second quarter.

This decrease is primarily the result of lower revenue.

Operating expenses in the second quarter of 2009 decreased slightly to $6.1 million from $6.2 million in the second quarter of 2008.

This decrease was due primarily to a reduction in accrued expenses and reduced travel and legal expenses, offset by costs associated with our new MRI CAD product lines and stock-based compensation expense.

For the second quarter of 2009, we reported a net loss of $1.4 million, or $0.03 per share, which included stock-based compensation expense of $503,000.

This compares with a net profit of $2.4 million, or $0.06 per basic and diluted share, including stock-based compensation expense of $425,000 for the second quarter of 2008.

Now turning to the six-month results.

For the six months ended June 30, 2009, total revenues were off 24% to $12.9 million, compared with total revenue of $17 million for the six months ended June 30, 2008.

This is respectable in light of the fact that the U.S.

market for digital mammography equipment experienced about 35% negative comparative growth in that same time period.

While our digital revenue results for the first half reflect the market pause, it was offset by solid gains internationally and in our film-based products and service revenue.

For the first six months of 2009, sales of our digital and MRI CAD solutions decreased 36% over the prior-year period to $7.9 million from $12.2 million.

This decrease was in direct proportion to the negative market growth experienced in digital mammography equipment sales in the first half of the year.

For the first six months of 2009, film-based product sales of $3.3 million increased by 7%, compared to $3.1 million reported during the first six months of 2008.

During the first half of 2009, service and supply revenue increased by 5% to $1.7 million from $1.6 million reported for the first half of 2009.

International sales for the first half of 2009 increased by 68% to $2.4 million from $1.4 million reported during the first half of 2008.

Gross margins for the first six months of 2009 was 82.1%, down slightly from 83.1% in the comparable prior-year period.

Operating expenses for the first six months of 2009 increased to $13 million from $11 [point] million in operating expenses reported in the comparable prior-year period.

Net loss for the six months ended June 30, 2009, including stock-based compensation expense of $1 million, was $2.4 million, or $0.05 per share.

This compares with a net profit, including stock-based compensation expense of $817,000, of $1.9 million, or $0.05 per basic and diluted share for the six months ended June 30, 2008.

We ended the second quarter of 2009 with product backlog, excluding sales and services supplies, of $511,000, as compared with $1.1 million at December 31.

Again, I would like to remind you that backlog really should not be considered indicative of the Company's future revenue, as a significant amount of our products are booked and shipped within the same quarter.

Now, turning to the balance sheet, we continued to maintain a healthy balance sheet during the second quarter of 2009 through disciplined cash management, tightening of expenses, and strong inventory control.

In addition to modestly increasing our cash balance this quarter, we reduced our accounts payable by $730,000 and maintained flat inventory levels versus year-end 2008.

We continue to have no debt and ended the quarter with $13.2 million in cash, as compared with $13.1 million at December 31.

We continue to stay focused on cost reduction and to this end in July, as Ken mentioned, we initiated an approximately 10% reduction in employee headcount.

As a result of these initiatives, we believe we are in a strong position to see our way through these challenging external economic times.

Now, before we take questions, I'd like to discuss financial guidance for 2009.

Due to the continued challenging economic environment and associated uncertainty in the healthcare market, the Company has made a decision to defer providing guidance on the second half of 2009.

What I would say, though, is that we are feeling more confident at this time that the financial results for the second half of the year will be stronger than the first half of the year.

Having said that, the decision on providing future guidance will be reviewed at year end, and we will provide a further update at that time.

With this financial update, let me open the call up to questions.

Operator, please proceed.

(Operator Instructions).

[Jonathan Bloch].

Just first question, Ken, for you.

It seems like, in terms of the numbers, it was a little bit more difficult because you didn't get those stocking orders that you usually get.

But maybe if you can speak a little bit to just trends in general.

Were the trends worse in the June quarter relative to March?

Or was it just the absence of the stocking order and the tougher comp because of the Fuji?

And then, maybe any trends that you see so far in the first month of the third quarter.

Thanks.

Sure.

Let me kind of start with the framing of the stocking order situation.

When you look at our digital CAD business, it literally grew north of 60% from 2006 to 2007, then grew 60% again 2007 to 2008.

So when you have a business that goes from $10 million in 2006 to almost $30 million in 2008, you can imagine that our partners are really generating a tremendous number of orders, a significant amount of backlog, and as a result, their need for CAD is pretty significant.

So essentially, the stocking-order scenario has really been in place for several years as we've been growing at such a high clip, and it's really been to cover the first month of installations of the following quarter.

So if you look at where we are today, the business really peaked in the third quarter of 2008, if you look at the U.S.

MQSA statistics at 610 systems.

It dropped down to about 450 in the fourth quarter, 396 systems placed in the first quarter, and 387 in the second quarter of 2009.

So you've really seen three consecutive quarters of decline and, as a result, obviously our partners did not feel confident that they would need the inventory as you go into what is typically, next to January, the slowest month of the year, July, which is a big vacation month.

So that's kind of the dynamic of what we experienced, Jon.

But what I would say is, if you use the MQSA data as a barometer, the business has slowed, and there were approximately 10 less units placed in Q2 -- 387, according to the FDA website -- versus the 396 in Q1.

And Q2 is usually, next to Q4, your strongest quarter in healthcare of the entire year.

Also, take a look at June, which normally is a very, very big month.

126 units were placed, versus March, which was 136.

I've never seen June be a weaker month than March in my many years in healthcare.

So I think that it does show that the market softened more in Q2 than in Q1, did not finish with a bang, if you will, in June.

And I think that was a surprise, at least to the OEM partners that we do business with, because each of them, at the beginning of the second quarter, had much stronger forecasts than they actually achieved in the quarter.

so clearly there was a lot of optimism in April and early May, and we actually saw a fair amount of business early in the quarter, but we saw a surprisingly quiet finish to the quarter, which is very atypical of June.

So, how does that impact the third quarter?

Well, in a few days we will get the MQSA results for July, in probably the early part of next week.

We'll certainly have the ability to listen to Hologic next week when they communicate their results, and that will be, I think, two important data points to better understand the trend of business for the third quarter.

But clearly, our partners took in inventory, not a significant amount, but a little over, say, $1 million at the end of March, anticipating a very strong second quarter, only to see it fizzle toward the second half of the quarter.

So, that is kind of the dynamic we're dealing with.

I would speculate that it's hard to get this data, but I wouldn't want to be in the MR and CT space right now in terms of selling new equipment.

I would project that they are probably seeing comparative-unit sales even more negative growth than what we've seen in mammography.

But as it relates to mammography, I really think this temporary pause is temporary.

As we talked to hospital administration and CFOs, at least what we think we've seen is somewhat of a stabilization in their census as well as their cash flow.

And in many cases, where they rely on investment income, they have seen improvements in investment income, because obviously investing in the last 90 to 120 days has been a lot better than it was in the first quarter of 2009, and that has helped improve their cash flow.

When you think about what digital mammography is, it's been proven so overwhelmingly to be superior to film, which is really a dinosaur technology, and then when you look at the workflow benefits, when you look at the reimbursement benefits, and when you look at the overall direction with healthcare reform, we are very confident that this will be one of the first places where investments will be made.

And then ultimately, it's a couple hundred thousand dollar purchase, not a several million dollar purchase.

So we think this will be one of the first areas of capital equipment to come back, but clearly, what we're seeing is CFOs that have more cash on hand today than they did at the beginning of the year.

But that has not affected their behavior as it relates to spending in the capital budget space, because they are still being extremely cautious on where they stand.

So that is the environment we are dealing with today.

I hope that does, to some extent, answer your questions.

You know, we are bullish on the space.

We are just challenged with what the timing is going to be for a rebound.

Understood.

I think maybe just one more follow-up question there.

In terms of the inventory that now resides with your partners, Ken, do you feel like we've now reached a more normalized level going forward?

Yes, they were at very low levels at the end of the quarter.

We are in active dialogue with them relative to what their needs will be for the entire third quarter.

But we certainly are feeling confident that we'll have a stronger second half as a result of the inventory flowthrough.

And we're getting nice traction in the MRI space as well, which we think our revenues will be materially better than they were in the first half.

It's a low base of business for us, but we literally doubled our revenue in the second quarter versus the first quarter in MRI CAD.

So we see some encouraging drivers of stronger performance in the second half from a topline standpoint compared to the first half.

We also took some corrective actions on our expenses that should benefit us in lower operating expense, and when you combine those two, I would say we are optimistic that we're going to have a stronger second half than we did first half.

Maybe just one or two more, and then I will get back in the queue.

In terms of sort of the software you mentioned, I think the number was 3,000 in terms of the installed base.

Is there a number that you can break out, at least approximately, on how many of those may be older than, I don't know, three or four years, that they've got real old software, where you feel with a high level of conviction that when you get a -- your new software through the FDA process, they would sort of be the low-hanging fruit that you would target with the new version?

Yes, I would say probably one-third of those have been out there for a substantial period of time.

And obviously, we've sold an awful lot of product over 2007 and 2008.

But what I would say, Jon, is that we're going to be required to do a reader study.

We've not done the reader study yet, and we have a new generation algorithm that we've put into clinical environment and we are extremely encouraged with the performance improvements and the workflow enhancement that that offers.

But when you think about a reader study, just comparing it to what we did with colon, that's going to take us about a year.

And then the FDA process could take six to 12 months.

So I think the way to answer the question is to say, when it hits the market, all customers that are in our installed base today are going to be good candidates for this upgrade.

And we think that performance improvements, particularly around masses versus calcifications, we think is going to be significant enough, and then some of the workflow enhancements, that this will be a compelling piece of software in a large installed base when it's ready.

But I don't want to give the impression it's right around the corner because, again, it's going to take a reader study.

It's also going to take a regulatory cycle, which, as we all know, can be very unpredictable as well.

But we're going to see, at some point over the next two to three years, more of a saturation of digital technology in the market.

And then, ultimately, the business is going to shift into upgrades of new capabilities, it's going to shift into CAD for tomosynthesis, as that becomes more pervasively adopted, so that the mix in this space is going to shift dramatically from brand-new system sales into recurring revenue in the installed base.

And we have strong plans, both in a next-generation 2-D algorithm, as well as in a first-generation tomosynthesis algorithm, to really go out to this growing installed base and see some healthy recurring revenue at a time when this market will shift more to a saturation.

But as we sit here today, it's just barely over 50% saturated in the United States and it is even far less than that internationally.

So there's going to be, I think, two or three solid years of growth.

We've got to get back to an environment where healthcare systems are investing in their capital budgets as opposed to this very conservative philosophy that is pervasive across our economy and pervasive across the world right now.

Okay, great, and just last one.

I'll get back in the queue.

You mentioned the opportunity that resides within tomo CAD.

If you can just give us a feel, maybe, where some of your partners are and how you have been working with them.

Who seems to be taking the lead there in terms of your partners?

Thanks, guys.

Thanks, Jonathan.

What I would say is obviously all the major companies are working on tomosynthesis, and GE and Siemens would be our lead strongest partners that are making very good progress getting the technology ready to go to the FDA.

I'm really not in a position to express where their programs are.

That's up for them to really communicate directly.

But what I would say is that I think both companies have some very exciting innovation in store, and we are very enthused about providing CAD capability for what is going to be a much larger image set than you would certainly be reading in a 2-D environment.

So we see that, over time, as a significant growth opportunity.

Maybe not in the near term, in the 2009 timeframe, but certainly somewhere out in, maybe, late 2010, 2011, we may see these technologies available from a number of companies in the market.

And when we do, we will be there to provide these on new platforms and also to provide CAD to the installed base where upgrades would be appropriate.

So, over time, it's going to be an exciting growth opportunity.

I'm not certain it's in the near term but it certainly will be, over a three- to five-year window, a good opportunity for growth.

Matt Scalo, Canaccord Adams.

Just looking at the gross margin here, it looks stabled.

Is that kind of reflective of pricing?

Maybe you can walk through as far as -- have you already renegotiated contracts with your partners on pricing?

Maybe compare that versus going direct, what you are seeing there in the marketplace.

First what I'd say, Matt, is that margin is still very strong -- north of 80%, down a couple of points from our normal run rate because of mix.

We are -- obviously, higher percentage of our film-based products which margins are not as high as our digital products.

So that is, really more than anything, why our margin is down slightly.

It's really a mix and volume issue.

Our contracts with our OEMs are in place from a pricing standpoint.

We are certainly seeing some heat in the market on pricing pressure.

I don't think it had much of an effect on the quarter in terms of our margin, but what we are seeing is FFDN pricing is coming down.

Particularly in large deals, we are seeing price points from all the companies that are surprisingly lower than they would've been a year ago.

Not a big surprise when demand is down by 30% some odd.

And that has put some pressure on us to take more deals direct so that we can ultimately provide with our partners a sharper price point in the market.

I would say, though, that our digital product pricing is relatively stable right now and, if anything, I would speculate that we may end up doing more direct business going forward, when pricing pressure on our OEMs doesn't allow them to bundle and sell our product and meet their margin requirements internally.

That's probably what we would see, but ultimately, you've got, obviously, more capacity chasing less demand.

In almost every market in any area of the economy, you are going to see pricing pressure and I would expect we will see some.

I don't expect the pricing to have a material effect on our business as much as, really, the sheer demand.

Okay.

And so, Ken, just looking at the comments you already made on the call in regards to kind of increased confidence in the second half of 2009, that's based on, I guess, two data points here, number one, inventory levels and number two, kind of the anecdotal comments you made about hospitals seeing stabilization in their cash flow.

Is that fair or am I leaving something out?

I think it's inventory levels have now reached a point where, whatever we didn't get in that traditional quarterly stocking, will likely be purchased in the second half, up and above what they would normally be buying, and that could be at least $1 million or more.

I do think that we will see more MRI business.

We had some very nice traction in the second quarter versus the first quarter, so we are projecting that run rate for both breast and prostate to improve comparatively with the first half.

So that would increase our business volume.

And, yes, I think what I'm hearing is that a lot of the larger health systems have more cash on hand, in part because they have done their job cutting costs.

You have certainly seen a lot of that where they have laid off people or they've done pay reduction programs, so that hospital systems are taking their cost structure down.

That, in itself, even with flat revenues, is obviously generating more cash flow.

The other thing we're hearing is those that rely on investment income, whether it be endowments and just investment strategies, have fared much better in the second quarter than they did in the first.

So they have many more days of cash on hand.

I think that the challenge is that while their balance sheets, if you will, look stronger, how much risk, if you will, are they willing to take to invest in technology when we continue to get mixed signals in the economy.

I think we are seeing some positive signs across the economy, but I think the holy grail here is employment.

At the end of the day, I think a lot of health systems -- no different than other businesses -- are looking for a positive employment trend at a macro level, and that, to me, might be the strongest trigger for capital budget investments.

So, better shape financially at the moment versus Q1, but the caution is still there.

We continually hear from our customers, "We are going to buy the equipment.

We've just put it off a quarter." And Darlene made those comments earlier when she spoke about business is not being canceled.

What we continually hear is that it's been delayed, it's been delayed.

And we even hear from our OEM partners that orders in their backlog are not shippable in the timeframes they were originally going to do installations.

So there is a big slowdown and a pause.

But certainly if you want to be in, let's say, just the mammography business, if you basically were to tell your patients you have no plan to go digital because you can't afford it, I think you'd see a fast exit out the door of your patients.

So it's really a function of timing as we go forward, and my hope is that if we really are seeing some strong signs with the economy and those can be validated versus some of the setbacks we also see, particularly around employment, I would say that could also be a positive factor in our second half being much stronger than it was in the first half.

Okay.

Thanks for the detail on that.

I'm curious on that, the MRI CAD side of business.

You mentioned the sales funnel being $6 million.

Internally, have you kind of changed your assumptions as far as what you think you could close out of that funnel, say by year-end, based on the lack of visibility here?

You mentioned kind of sequential growth you have seen somewhere.

I guess what I'd say, unfortunately, is that that funnel, to a lesser degree than big-ticket capital, is still being impacted by the economy.

So, you are looking at a $40,000 or $50,000 software sale if it's being purchased outright, and we're hearing a lot of the same kind of symptomatic feedback from customers is that they are in a delay.

An area that has been unfortunate in this respect is prostate.

The interest level in prostate CAD is tremendous across our customer base, but obviously if you're a doctor who really wants to use prostate MRI or CAD, you're really in a tough battle with the CFO to show the ROI right now.

And I think that, without the clinical studies, without the evidence, that has been a very tough one to sell, but the interest level is tremendously high.

So, to answer your question, we expect the business to grow significantly in MRI CAD over the first half, but with some of the stall tactics that are going on affecting that business, I would still say we're conservative relative to its impact on our total business.

It's still -- we're early in this game.

You know, we launched these products in the fourth quarter.

We ran into an extremely tough headwind with the economy and we are barely six months into a market where there are several entrenched competitors that have been around an awful long time.

So, we think we're going to gain traction.

We've got an excellent direct salesforce out there promoting the products.

We have a very compelling product roadmap that we are going to share with customers at the RSNA this year, which really will address, I think, some of the innovation that needs to come into this space, such as true thin-client, such as morphology-like capabilities, and some overall enhancements to the product, which will really differentiate us from the companies in the MR CAD space today.

So we're excited about the space, but we need to be realistic about the timing of the ramp-up of the volume.

Okay.

I guess, just last question here.

I'm trying to figure out what the penetration rate of the total of MammoAdvantage is.

It seems like you guys have nice steady demand for that product here.

I'm just -- can you give me what the installed base is, currently?

I guess the way to answer the question is about -- somewhere between 30% to 35% of our customers buying digital mammography buy digitizing solution from us.

Others will buy it from either the competition, and there's lots of competition.

And what it really gets down to is do you see comparative reading software as a real value add in diagnosis and workflow.

And if the customer sees that, then our product is really an important part of their workflow solution.

Others look at it as just a digitizer and they are not as concerned with the comparative reading software, so they are willing to buy something inexpensive to have something in a digital format, should they need to go back and look at older exams.

So you've got a very typically segmented market, and we play toward the high end of that market because it's not our digitization which is our value add.

It's our software around comparative reading.

So we are probably seeing a pickup of one out of three purchasers buying our product.

I would suspect that the majority of the rest are buying something competitively or are still fighting the whole notion of the digital workflow and are looking at priors in film.

And I think that the sale of TotalLook MammoAdvantage speaks not only to an excellent superior product, but also to the fact that those that have gone digital are now realizing that this film-based workflow is very chaotic and not efficient.

So we've sold a fair number of systems in the first half of this year to customers that are not buying digital mammography.

They've already bought it in the last several years.

So that's an interesting opportunity which would, then, obviously increase our attachment rate, and that's where a lot of the sales are.

They are not bundled as they often were in 2007 and 2008 with the digital mammography sale.

So we are back there mining this business, if you will, in the digital installed base because the workflow benefits are tremendous.

As we go forward, we would expect that those customers resisting the whole end-to-end digital workflow will also be looking to purchase this product.

And as the market picks up, we've got some very nice differentiated features versus the competition, and we think that we will do well as the market for digital mammography improves.

[Armagee Gill].

I was just requesting clarification from an earlier statement you had at the beginning of the call, where you were talking about the CTC product of VeriLook.

You suggested that you would probably get approval in late August, where you then be able to commercialize.

But however, you did -- sort of -- suggested later on in the call that possibly the FDA could take longer, especially if there is a -- clinical studies involved in terms of the FDA reviewing a clinical study, where the FDA could take six to 12 months.

Could I just ask for clarification around that issue?

Sure.

We filed a 510(k) with the FDA on May 22, so that was approximately two months ago.

On a 510(k) filing, which says there is an existing predicate device, they are obligated to give you a response to your application within 90 days, and it can be a variety of things from approval, questions, or decline it.

We are about 30 days or less away from hearing our first feedback on that application from the FDA.

So when we say August 22 is the 90-day deadline, they owe us some response.

Very likely, it will be a list of questions.

They're probably going to look for clarifications to what we submitted.

We already did a reader study, which we completed back in the March/April timeframe, which was the basis for the data that we sent to the FDA in May.

So really, what we don't know is what sort of response in August we will get to our application.

What I would say is that we had numerous meetings with the FDA.

We agreed on a protocol for our reader study.

We followed their playbook to a T, and we submitted data that we think is very compelling from a performance standpoint.

That gives us high confidence of the submission.

What we really don't know is what the reaction of the FDA will be in August, and if they require us to provide additional information or clarification, that starts another 90-day window of which they would respond once we have provided them with that information.

So that was what I was talking about relative to colon.

Our hope is before the end of the calendar year to have approval for this product in the United States.

But, with that said, having not heard from them yet, it's really just our goal at this point and we probably, in the early September timeframe, will have a much better handle on the response to the FDA, whether we are on a very fast track to get this approved quickly or there is some information that they require that may take us longer to provide.

I will say again, though, we've worked very closely with the FDA.

It's almost unprecedented do a reader study for a 510(k) submission.

We spent a year and about $1 million doing it, followed their protocol, very pleased with the results, and we are very much looking forward to their response in hopes that we can get this product into the market sooner.

Sometime later in the calendar year.

(Operator Instructions).

[Spencer Lehman], [Financial West].

I know you usually don't like to comment on stock market activity, but there seems to be an elephant in the room here with us.

Yesterday, the stock almost doubled on huge volume.

Do you have any idea what that was all about?

We really don't, Spencer.

We are probably as -- asking the question as anyone else is.

We saw something on the order of about 4 million shares traded over the last two days, and we have been in touch with the NASDAQ and they can give you some limited feedback on large trades.

But to be perfectly honest, we have no idea what has been the catalyst for the high volume of trades.

What I would say is, in reading some of the financial articles and watching CNBC, as a lot of us do periodically, what I've heard is that as the economy is speculatively going to get better and as the stock market, in anticipation of that, has been investing since -- really the early part of the second quarter in different sectors, and we've seen a much stronger market with a lot of appreciation in stocks.

There are some that are saying that healthcare has been beaten down and has not seen that reciprocal bounce in the second quarter that a lot of other sectors around, say, technology did.

And that now, investors are looking at healthcare as a beaten-up sector that will rebound over time, and as a result, they are now turning their investments there with kind of a longer-term view in the sense that this is an undervalued segment.

So I've heard that said.

I think probably some might be speculating that healthcare reform isn't going to have a negative impact on health care from the business side as well.

You are hearing mixed feedback on what could be accomplished in that space.

And so that, again, might have some investors put less risk into this as a sector to invest in.

But to be perfectly honest, that's the best I can tell you.

We really are not in a position to have the visibility to understand what this volume has been all about.

We've not made any material announcements, other than what has been in the public domain throughout the quarter, and what we have communicated today is consistent with that.

So we're just not sure.

Matt Scalo, Canaccord Adams.

I just wanted to follow up.

Do you guys know who the reviewers will be at the FDA for your CTC product?

We have some indication of who's working on the submission, and, you know, it's a fairly large group of people.

And they use different reviewers at different stages, so it's not a dedicated to a person or two.

But there is a group, and the group is largely the same group that looks at mammo in the context of this submission.

I would say this again, Matt.

Our challenges with the FDA have been no different than anybody else in this business's challenges, and ultimately, they are big fans with new product of reader studies.

They really want to see the behavior of the radiologist as it relates to what CAD does, as opposed to strictly what CAD does stand alone, and we have accomplished that for them in a fairly substantial study.

Our colon study involved 19 radiologists reading 100 exams, which half were cancers, in two separate settings, one without CAD and then with a washout period, where they had to go away and obviously forget what they read, they had to come back and read again with at least roughly a 30-day washout, with CAD.

And we were then able to, obviously, mark the difference in performance on a segment-by-segment basis in the colon.

So we powered this study consistent with what the FDA asked for.

And so, while you can obviously be cautious about the reviewer behavior, what I will say is this was probably as collaborative a protocol as you could create for a study, which gives us the confidence that we should fare much better here than we may have in some of our supplements that we have had some challenges with them getting alignment on what the testing protocols should be.

Ladies and gentlemen, this concludes today's question-and-answer session.

I would now like to turn the call over to Mr.

Ken Ferry for closing remarks.

Thank you, Operator.

There is little doubt that the economic conditions will continue to create unique challenges for healthcare companies for the balance of 2009.

We're fortunate, however, in that iCAD's products and technology helps improve efficiencies as well as patient outcomes with early detection and diagnoses.

We have a high-value proposition in our product lines that integrates with systems across the imaging spectrum, including full-field digital mammography, computed radiography, MRI and CT to enhance diagnosis and improved workflow.

Our products have both short- and long-term market opportunities, and importantly, we have a very strong balance sheet and a committed, experienced management team to lead us through these challenging times while building on our platform for future success.

Thank you all for taking the time to join us this morning, and for your support and interest in iCAD.

We look forward to speaking with you again when we report our third-quarter results later in the year.

Have a good day.