ICAD Inc (ICAD) 2010 Q1 法說會逐字稿

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

Please proceed.

Hi, guys.

This is actually [Maggie Lovett] in for Jon.

I just had a couple of questions.

Darlene, I guess, first for you.

Do you expect to be largely cash-neutral through 2010 to a slight increase?

Is that fair?

I would say that's a fair assumption.

We haven't given any long-term projections on that.

But given the historical look at cash, even with this first quarter, we had $681,000 in one-time charges, we were still able to maintain sort of cash-neutral or slightly up.

So yes, I think that's a safe assumption.

Great.

Thanks.

And then the gross margin, very impressive; 87%.

I just was wondering maybe how much is that kind of due to mix and the increase in the service revenue?

And kind of just how sustainable is that type of gross margin?

I think, as we've talked about in the past, we have put price increases through to most of our OEM partners.

So we are seeing the benefit of that, and at the same time, we have been able to take some costs out of the product, as well.

Our service contracts and our product sales are pretty similar in gross margins.

Obviously the analogue products carry a slightly lower margin, because they have more of a material component to it.

But as more of this shifts to digital products, we're seeing the benefit of that, so the margin's increasing, along with price increases and cost reductions, so I think this is not probably a one-time event.

Okay, very helpful.

Thank you.

And I guess on your OEM partner, in terms of waiting for FDA approval for a new detector plate, is there any update there?

Is that going to continue to weigh on you guys?

Or any color there would be helpful.

The latest information that we have, Maggie, is that it's Siemens.

We have been told by their people that late in Q2, kind of in the June timeframe, is the latest that they project that this could be approved.

But we also know the FDA is very hard to predict.

And so we're hopeful, as they believe they have significant pent-up demand, that they would have approval in June.

But they've been in a difficult predicament, where essentially they ran out of their lifetime buy with their older detector, and they have to essentially take product back from the international market and refurb it, to supply key customers; which is not an ideal position.

And they're doing everything they can to get the new detector approved, and the latest information is June timeframe; but again, that's hard to tell whether that's accurate or whether it might spill out into the third quarter.

When they do get approval, our hopes are we'll see a nice increase in business, because clearly what we have seen particularly since the third quarter of 2009, is a pretty significant drop.

I think we would estimate that their shipments are at about 50% of what had been a historical run rate.

So provided that those loyal customers hang in with them, we would see some upside probably in the second half of the year, should they get a timely approval.

Okay.

Great.

And then it sounds like along those lines that you guys are having some success with the FDA.

Colon CAD looks like it's going to be approved.

I was wondering if you could maybe give us some color on your go-to-market strategy, and just remind us kind of what the market opportunity that you see in that market.

Sure; yes.

We had, as I mentioned in my opening comments, a very productive call in April, around the 12th, with the FDA, and there's still work to be done, so we don't want to get out too far ahead of this.

But I do think from the call, we're very encouraged that the types of issues that are left are very workable, as opposed to anything that would provide for us to have to go back and do extensive work or data collection.

So we're kind of optimistic that we are at the final phase, and hopeful that we could see the approval sometime in the quarter, based on what we understand are the final remaining issues.

What has to be done after that is, we have to finish the clinical and technical validation with our advanced digitalization partners, because it's not a product that you sell standalone; it's sold in conjunction with an advanced digitalization application.

And we have a range of partners that we're at different stages of technical integration with.

Some, we might have very little work to do, and others we may have a fair amount of work left.

So we're kind of looking at it as maybe a two- to three-month exercise, post-release, to get that final work done, which would put us out toward the end of Q3 from a commercial standpoint.

We've looked at the opportunity, Maggie, to your question.

We think there's about roughly 8,000 to 9,000 workstations in the clinical environment in the US alone that are running 3D advanced visualization software, and that is probably the most-defined, addressable market for this capability.

And a number of those, thousands of those, workstations actually have some sort of a version of a colon advanced-visualization application, as well.

So our hope is to work with our advanced digitalization partners in being able to sell our CAD product with new sales, but also to go back into their install base, based on retrofitting, if you will, our capabilities to their revisions, and having it as a product to be able to sell into the install base.

So we think it's pretty significant, and we think it's a fairly clear and addressable target.

We're also confident that internationally there'll be some strong interest, as well, although it's a little bit harder to quantify what that would be.

That's very helpful.

Thank you.

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

Please proceed.

Hi, guys.

Hey, I was wondering, as far as, did you mention attachment rates on digital I guess new orders this quarter?

Is it still pretty much in the high 90s?

Yes, I think, Matt.

It's pretty consistent.

I don't think that we have seen any material change.

I think if there's anywhere you might see a slight change, it could be with Fuji, because Fuji does tend to serve a segment of the market that could have lower volume screening size, and in some cases, satellites; the primary sites that really do only occasional screenings.

So if anything, they may have seen some very modest attachment rate change, but if you look at the 90-plus percent range as being the standard, I would say we're still very much there.

I think the performance reflects more the number of digital mammography machines that are being shipped right now, as opposed to attachment rate, if there's any variance if you will in the marketplace.

So your partners have clearly accepted the price increase that you passed through in 2009, and that really hasn't impacted I guess the upsell of that technology on the digital side of things?

No, it hasn't.

And I think that, let's face it, CAD's the standard of care in the United States for a host of reasons we're all very familiar with.

And a principle competitor of Hologic; includes it on every transaction either as a line item or bundled in to the price points.

So apples-to-apples, you have to quote it and provide it.

So we really don't see any change.

With that said, we cooperate with our partners, and if we have to do business directly to sharpen the price point, we're willing to do that.

And we have done that on a number of occasions with our partners, where we're up against extreme pricing pressures.

So we certainly are nimble to be able to move our pricing around.

Part of that is the ability to sell direct where appropriate, and do our own installation and training and so forth, as well as to work with our partners on larger deals; and if we have to provide them with a little better pricing for a major opportunity, we will do so.

But with that said, our pricing is pretty consistent, and our contractual agreements are valid, and we see pretty consistent pricing day-in-and-day-out from our partners as they OEM our product.

Yes.

And as far as trends within the quarter on the digital side, you know we all track, and at MQSA it did look like the March data point was an improvement over maybe a disappointing February.

And I'm just kind of curious, your thoughts going into April.

Did that trend continue on that side?

Meaning there is a little bit of light at the end of this tunnel here?

Or is it too early to tell?

Yes.

I guess my response would be it's a little early to tell, but what I would say is that if you compare Q1 of last year to Q1 of this year, the placements were down about 12%; however, Siemens was shipping in full capacity in the first quarter of last year.

So if you were to smooth it out if you will for that, you might argue that the total system placements were down probably about 5%.

So it's hard to say, given that it was the first quarter, what that really means in terms of a trend.

What I would look at more significantly is that you're looking at the global market.

In the United States, there's still about 4,500 systems that have not gone digital.

And some might say, "Well, will all those systems go digital?"

I think an important point to look at is that since January of '06, which is now four years, 1,000 systems have come out of the MQSA data.

So obviously, those low-end film-based systems that clearly as a result of workflow and productivity improvements in the digital world, have gone away.

So what I would hope is that with 1,000 systems having gone away in four years of the total capacity, that the 4,500 or so that are still film-based are very viable candidates to go digital.

And a lot of this has to do with, while they're not the highest-volume sites, clearly they need to go digital and they need to get the funding approved, and that, based on the economy and unemployment and healthcare reform, has been harder to do.

So we think that the marketplace still has about 4,000 or 4,500 units that need to go digital.

The question is going to be, "Is that something that will happen over a two-year window or possibly a three-year window?"

And that's really probably a good debate that it's still a little early to make a prediction on.

The other part of this, which is important, is that the international market has about 5,000 systems.

We would estimate no more than 25 to 30% of those have gone digital.

And we think that the opportunity to cement CAD over time, whether it's bundled up front or as an after-sale later, is a very viable option, and we're having some interesting conversations with one of our major OEMs as to how we could really significantly increase the CAD attachment rate OUS.

So we think that when you add that into the mix, now there are 7,000 or 8,000 systems out there globally that are still using film.

So we think there's an attractive opportunity over the next two to three years in this space.

The real question's based on all the dynamics of healthcare legislation and the economy of the United States, and the kind of maturing CAD adoption rate outside the US, based on the clinical recognition of its utility.

How fast are those systems going to adopt CAD?

I think it's a tough question to answer, so right now, our view is probably more that what we saw in Q1 is more of a reflection of 2009 demand, and it's hard to say whether that demand is going to move up significantly or stay somewhat flat, until we have more months of MQSA data under our belt.

Okay.

Thanks, Ken; that was helpful.

Just thoughts on Siemens and your discussion earlier, as far as it sounds like they're taking units from OUS markets, refurbing them to satisfy kind of loyal US customers, to hold on until FDA decision.

Is that correct?

Do I have that accurate?

Yes, it is.

I mean I think that obviously when you're in a major product transition, you try to estimate demand.

You try to make lifetime buy on all your components, and you try to estimate the timeframe of a regulatory approval for a new product.

And I think we all know how difficult the FDA environment has been to predict when things would get approved; so they've been caught in kind of both of those dynamics, and clearly it's not an enviable position to be going out to an international customer and offering a new innovative detector with the motivation to take back the older one, which is approved in the United States, and have to refurb it and sell it.

So clearly it's not an offensive strategy, and one they're not happy to be dealing with; but with that said, they've got a very senior US regulatory team that has been working with the FDA for a long time, and those people have said that they're hopeful the June timeframe they should have the approval.

Who knows?

Is it June or is it maybe sometime early in the third quarter?

But clearly, they will have the capacity and, they believe, the demand to increase their shipments significantly once that event occurs.

So for us, I guess the way I would look at it is, we have upside in the second half of the year, probably, is a fair way to look at it, with Siemens.

Okay.

Okay; thanks.

And then finally, just piquing the curiosity as far as the transaction costs here, the word, "transformational," is used.

And I'm curious if that means outside of both advanced imagining and women's health therapeutics.

Meaning something -- a separate call point, per se, or are we still sticking in those kind of two silos?

Right.

Yes, I guess the way I would answer it, Matt, given that we're under a non-disclosure for a period of time, is that we have said from kind of the beginnings of the new management team of iCAD, that we're going to have a very compelling organic strategy as well as an inorganic strategy.

So what we've done organically is said, "Mammography's a great business, but we have to really go after the leading cancer categories with CAD products." So obviously our MR entry, our CT entry are really solid examples of where we are in making progress on an organic strategy we think is still very compelling; it has a significant amount of potential.

With that said, we took out a shelf registration as early as the summer of '07, which certainly signaled that we were very interested and active in looking for very, very complementary solutions that would really extend our value proposition, very much with a radiology focus.

You know, radiology is our call point; it's our business; and we think the opportunity to extend our value proposition there is significant, and it does go beyond CAD.

And it doesn't become an either/or; it becomes an extension of what you're doing in the context of cancer detection, diagnosis, treatment and follow-up.

And that's really where we've been looking for something that would be substantial, to highly complement what we're doing.

And we think at a certain point last year we found something extraordinarily attractive that would've allowed us to do that, but usually when you see an asset that's very attractive, you're obviously bidding against other companies that have a similar feeling.

And in our case, we came very, very close, and it was very, very complementary to this radiology strategy that we have, and extending our value proposition to the radiologist.

With that said, it's not the only fish in the sea, and we will very carefully continue to look for opportunities.

And I think the fact that we let the shelf registration expire shows our discipline here.

You know, we're not trying to do something for the sake of doing something.

We're very comfortable with our organic plan; but we think that we can accelerate the Company's growth, and we think we can increase shareholder value better if we combine a very, very strong organic plan with some inorganic complements, because we have a good strategy, a great call point, and we have a very senior management team that has the bandwidth to take these things on and create more value over time for the shareholders.

I guess, Ken, just last question here, which is, "Does the experience, though, make you kind of review the parameters of what you use for M&A," and say, "Well, if we find attractive assets, we know it's going to be competitive.

Therefore, we can be more flexible on X, Y and Z?"

Well, I mean there's a lot of metrics that go into the process, and I think that each one has to stand on its own merit.

And I think in this particular case, we were pretty pleased at the response that, let's just say, investors that would have to get involved in this financially; whether it be equity or debt; were extraordinarily supportive of the potential opportunities.

But I think it's a combination of the merit of the opportunity standalone.

It's clearly the synergies with our current business.

It's the ability for the management team to transform this into the 1-plus-1-equals-3-or-greater opportunity.

And I think that core assessment is what will drive kind of the parameters if you will of what you're willing to pay, or what kind of terms you would be willing to offer, rather than maybe any experience we gain from this particular transaction.

They all stand on their own.

Okay.

Thank you very much, guys.

As a reminder, ladies and gentlemen, if you would like to ask a question, please press *1.

Your next question comes from the line of Jeb Terry with Aberdeen Investment.

Please proceed.

Morning, Ken; Darlene.

Jeb.

Good morning, Jeb.

Most of my questions have been answered, but I might ask you perhaps to elaborate a little bit more on the significant new products that come out in the second half.

I know you may have several things in the pipeline, and you discussed several on the call, but if you could perhaps bring that into a little more focus for me?

Sure.

I'd maybe start with colon.

Again, I think the opportunity for virtual colonoscopy is significant; particularly in the United States.

And we wouldn't be communicating our enthusiasm for the progress unless the feedback we received as recent as several weeks ago gave us the sense that we can continue to work with the FDA, and in a reasonable period of time be successful.

We stand by the fact that our reader study clearly demonstrated the benefits of CAD versus radiologists trying to read images of the colon without.

So we're pretty excited about that opportunity, and we think that with our advanced digitalization partners, at some point in the second half of this year, maybe closer to Q4, we should be actively selling and generating new revenues.

So that's really something we're excited about.

Something that we believe over time is going to become more of a standard of care for colon cancer screening.

I mean you can't have 80 million Americans over the age of 50 and less than half have been screened in dealing with the second leading cause of cancer deaths.

You've got to find ways to get more people screened.

Even President Obama had a virtual colonoscopy as part of his annual physical.

So you combine that kind of visibility with the growing reimbursement for this, where the big guys like United and Cigna and a number of the Blues all pay for this now; we think it could be a significant opportunity.

It has to be sold in conjunction with our advanced digitalization partners, so we have to continue to work those relationships.

What we have found is that given how tough the marketplace is today and how difficult the FDA has been to get innovation through in this area, a lot of our partners have said, "We'll work with you to a point, but we need to see that you have the FDA, for us to kind of complete the final phases of the work, and then we're very enthused about getting into the market."

And we're just very hopeful that we will be in that particular phase of this product plan in the not-too-distant future.

As it relates to MRI, we are still seeing a significant growing interest in prostate MRI, and I mentioned in my opening comments all the reasons why moving away from this PSA blood test that's kind of the only gold standard in testing, is important.

And it's extremely important to look at how you could use contrast-enhanced MRI in advance of biopsy.

As it relates to biopsy, we do something on the order of 1.2 to 1.4 million biopsies in this country on men each year.

And what you'll find is that in 15 to 20% of the cases, at best, prostate cancer is present.

So we are really going through unnecessary procedure on top of procedure.

And if a prostate exam was followed by a contrast-enhanced MRI study prior to the decision of biopsy, we think that those procedures going forward either would be much more targeted and useful, or be eliminated altogether.

I think education is the key, and we're investing a lot in education, trying to bring these important principles to bear with both the radiologist, the urologist, and hopefully the primary care physician that still gate-keeps the screening if you will from a physical standpoint, typically, when a patient comes in or at a certain age.

And so that market opportunity we think, over time, has a lot of the same characteristics as breast cancer in terms of the numbers and the opportunity for this technology to become pervasively adopted.

We're seeing significant increased interest.

We're seeing significant increase on our funnels.

But again, it's still early in terms of really seeing material revenue.

The new release we have clearly will help from a standpoint of a Thin Client approach, 3-D and 4-D image visualization, an enhanced user interface.

So we think that for both breast MRI and prostate MRI, since really both of those products will benefit from these changes, we're going to have a more competitive product that will allow us to take share from the more traditional companies we deal with in breast MRIs today that have been in the market much longer, and to establish further a leadership position we think we've already made really good momentum on, as it relates to prostate MRI, with this release.

We're hopeful to have this release completed again in the early part of the third quarter.

It is also gated by FDA approval.

So most certainly, there are some risks that you have to encounter in the final phase of this.

But clinical feedback from customers has been excellent.

And from our field, as well.

So we think this is a real growth opportunity for the Company, over time.

Lastly, I would mention that we've been working on, as I mentioned, a new digital algorithm for the mammography space.

We have an algorithm today that performs extremely well, but as in any case, you want to create one that will always have better performance.

We've been working on this for several years, and we have now been able to really demonstrate with standalone testing significant improvements in detection accuracy, combined with reducing false positives.

And so I think that that, along with some very important measurement capabilities around breast density, breast composition and so forth and some other features will allow us to really bring a next-generation algorithm into the market.

And since we don't have the regulatory barriers OUS, it's very likely by the beginning of Q4, we would be able to introduce this product to the international market.

And we have a sizable install base; particularly with GE, internationally, and we've been testing with customers the value of this new release, and we've been pleasantly surprised at what customers have told us they're willing to pay for it.

So I think initially OUS, there'll be a recurring revenue stream going out to the install base.

We'll also have a higher-performing product that we could sell on new systems, as well, OUS.

And it's given us the excitement if you will, the motivation, to begin a reader study later this year in the United States so that we can get this into the United States' market hopefully in the 2012 timeframe.

And since 80 to 90% of our CAD installations are in the United States, we're now approaching something on the order of 3,000 systems in the United States.

That could be a material source of recurring revenue when this is approved in the States.

And so we're very excited about this phase of our business as the first wave if you will of digital placement of new mammography systems kind of reaches that peak.

And then you get into a market that is either going to be a replacement market as the detectors age, with new technology, or Tomosynthesis becomes a standard of care and 3-D systems are installed, which also creates more opportunity for us for new CAD products in the future.

So all of those products combined, with the confidence that we will at some point in the second half have them available, combined I think with a stronger economy, with pent-up demand in the capital budgeting world, gives us some cause for solid optimism that the second half of the year could be a much stronger year, in light of all of the factors I just mentioned.

And in the colon product, is there -- are the economics?

I know you have to work with your AV partners.

But are the economics approximate or I mean are they -- is the mammo model instructive for this model or would the colon model be a different model altogether?

I think it's difficult to compare them, given some of the stark differences between the products.

But what I would say is that in some respects, it is a similar OEM solution that becomes part of a broader interpretive capability.

So you can certainly see some common elements.

I think quite frankly, we think the size or the number of placements that we could provide, colon is quite substantial on a global basis.

And I do think that we have been looking to be innovative on pricing, so that we're not in what I'd call this "traditional mode," where you sell it, the customer owns it for life, and other than service agreements and new releases, you don't have a recurring revenue stream.

So what I would say is, we're exploring some more creative ways of providing this capability, and then ultimately over time, reaping the revenue benefits along with traditional sales.

So we'll have to see, once it's released.

Because I think it's been difficult at this point in time, without a released product, to get let's call it the "economics," really firmly established.

But I do think as we get to the point of a released product over that final call it clinical and technical validation period, we will validate and establish the economic model more firmly.

Very good.

Thank you very much.

At this time, there are no further questions in queue, so I will now return the call to Mr.

Ken Ferry for closing remarks.

Okay.

Thanks, Operator.

I want to thank everyone for joining our call today.

And while as I commented earlier, the first quarter was not to our expectation, we also certainly are extremely confident and enthused that we will see stronger performance going forward, combined with significant opportunity, whether it be the organic plan that we're very excited about or potentially down the road inorganic opportunities that get through our fairly stringent filter and make sense for us at a strategic level.

We continue to strengthen our balance sheet, which I think is extremely important to sustain ourselves over the longer-term, and through a challenging economic environment.

And we really believe we have a compelling strategy which, over time, will bear out and allow us to get back into a very strong growth mode, which we experienced in 2007 and 2008.

So we're excited about our future.

We're very disciplined into our approaches going forward, and we're looking forward to an improving economy where this more robust set of products is clearly going to benefit us over a period of time.

So thanks everyone, for joining us on this call, and we look forward to speaking with you again at the conclusion of the second quarter.

Have a good day.

Thank you for your participation in today's conference.

That concludes the presentation.

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Have a great day.