ICAD Inc (ICAD) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 iCAD earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to Ms.

Ann Marie Fields of Lippert Heilshorn.

You may proceed.

Thank you, [Grace Ann].

Good morning, this is Ann Marie Fields with Lippert Heilshorn and Associates.

Thank you all for participating in today's call.

Joining me from iCAD are Ken Ferry, Chief Executive Officer, and Darlene Deptula-Hicks, Executive Vice President and Chief Financial Officer.

After yesterday's market close, iCAD announced financial results for the second quarter of 2010.

If you have not received this news release or 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 [Alexis Miletgo].

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 Security and Exchange Commission, including, without limitation, its 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 29th, 2010.

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.

The second quarter of 2010 was one where we made solid financial progress versus the second quarter of 2009.

In what could still be described as a challenging environment for health care capital spending, we were able to sustain strong operational discipline, which is reflected in our record gross margin, modest growth in operating expenses comparatively, and the nearly $1 million increase in cash that we generated during the quarter.

Top line revenues were negatively affected by two distinctly different dynamics.

First, Siemens, one of our largest OEM partners for digital mammography CAD is still waiting FDA clearance of the new digital mammography system.

As initial projections were for a mid- to late- '09 clearance, they essentially ran out of inventory of their current system.

To illustrate how this has affected iCAD, our business with Siemens in Q2 was down nearly 70%, compared to Q2 of 2009, and is down 50% for the first half of 2010, versus 2009 as well.

The FDA clearance is now anticipated to be in the second half of the year, hopefully this quarter, and may provide some upside revenues for iCAD for the second half as we believe Siemens has pent-up demand for the new system.

The new system has been shipping outside of the United States for some time and we hear that customer feedback on its performance is excellent.

Film-based revenues were also soft in the quarter.

Today, these product revenues come mostly from TotalLook MammoAdvantage, a digitizing and comparative reading solution used in conjunction with the transition to an all-digital workflow.

We've seen a combination of softer demand and significant pricing pressure in this area.

We intend to launch aggressive programs with our OEM partners and our direct sales team, shortly, with a goal of increasing sales in this area for the second half of the year.

Even with our strong gross margins, we feel this is a prudent move.

We were quite pleased with the continued strong growth of our service business.

This has largely been driven by the continued increase in service agreements for SecondLook Digital MammoCAD and TotalLook MammoAdvantage as the installed of these systems continues to grow.

MRI product sales improved in Q2 versus Q1 of this year, however, as our field and customers have been anticipating a new version of the product to be available in late Q2, some customers have held off on purchases of VividLook and SpectraLook until the new version is available commercially.

We expect to ship the new version in the mid-August timeframe and anticipate that this will be a significant catalyst for stronger MRI product sales in the second half of the year.

Lastly, our international business was off compared to last year.

We attribute this in part to a drop in business in Canada as the national health system made significant purchases of digital mammography systems and digitizing solutions in 2009, and the business this year has been weak in comparison.

European interest for digital mammography CAD continues to grow and is being driven largely through our OEM partner, GE.

Our business with GE in Europe grew nicely in the first half of the year versus '09.

We recently launched a new program with GE Europe, for the second half of the year, that we believe will further increase the digital CAD attachment rate and growth trajectory.

Historically, due to the double reading protocol, meaning that two radiologists read every normal mammogram in Europe, digital CAD attachment rates have in the 25% range, where in the United States, it's nearly one-to-one with digital mammography machines.

The goal of the recently launched GE program is to double the attachment rate for CAD in Europe for digital mammography systems for all second half shipments.

So in summarizing our performance and outlook, we delivered improved comparative performance in Q2 versus Q2 of '09.

For the first half of 2010, although records were essentially flat with '09, we significantly increased gross margin, had modest growth in operating expenses, resulting in a much improved bottom line comparatively versus the first half of 2009.

As we look to the second half of 2010, we hope to benefit from an improving environment for healthcare spending as evidenced by the recent revenue growth in the imaging sector as reported by several of our large OEM partners.

In addition, we anticipate increased digital CAD volume from GE in Europe and from Siemens in the United States, after they receive FDA clearance of their new system.

We also anticipate a solid increase in MRI sales, as our new release is only weeks away from shipping.

And last, but not least, we hope to begin to see sales traction from our colon CAD product, which is currently under review by the FDA, and for which clearance is anticipated any day.

So before turning things over to Darlene for more color on our financial performance, I'd like to provide an update on our key product pipeline.

Beginning with VeraLook, our CAD product for virtual colonoscopy, or CTC.

We launched this product OUS earlier this year at the European Society of Radiology in Vienna, March 6 through 10 and now have several commercial installations in Europe and Canada.

In addition, we announced the new enhanced version of VeraLook on May 27th of this year in conjunction with our attendance at the European Society of Gastrointestinal and Abdominal Radiology, or ESGAR, which was held from June 2nd to June 5th in Dresden, Germany.

We're pleased with the development progress that we've made with this important technology.

As to the US status, we have been in weekly contact with the FDA since our last earnings call.

At this moment, we believe that the review team has completed its analysis of our submission and has made a recommendation to management.

I personally spoke at length on Tuesday of this week with the senior FDA manager, who is very engaged in the process.

I was assured that we will have an answer any day and, hopefully, we will have a favorable outcome very soon, as interest in this technology is growing.

It has been well publicized that President Obama had a CTC as part of his annual physical, and as new US healthcare reform legislation puts more emphasis on preventive care, increased colorectal cancer screening may play a major role in those additions.

Now, a few comments on our MRI products.

We recently announced our enhanced product suite for MRI, which now includes SpectraLook for breasts, VividLook for prostate, OmniLook for other organs and VersaVue Enterprise.

These solutions offer the radiologist new powerful image analysis and workload tools with enhanced user interface and thin client architecture.

The potential benefits of this expanded offering include consistent quantitative analysis of cancer detection, staging, localization, treatment planning and serial monitoring.

We will showcase these new products in September at the Chicago International Breast Symposium.

In addition, we will continue to invest in educational initiatives and advocacy efforts to support the use of prostate MRI in prostate cancer screening, diagnosis, treatment staging and monitoring as well.

And last, but not least, we're making great progress in the development of a new second generation 2D digital algorithm for mammography.

While it will be some time before we enter the US market with this product due to regulatory requirements, we are targeting an international release sometime in the fourth quarter.

Our intention is to market this product with premium performance to new customers as an upgrade, as well, to the greater than 500 systems that are in place in the international environment.

And obviously, we would have this as a product that would replace our existing version for those customers.

Shifting gears, I'd like to mention in June, iCAD was named to the Medical Device and Diagnostic Industries list of 50 companies to watch.

I mention this because it speaks to the success of our talented and dedicated team, which has continued to deliver solid results throughout the challenging business environment these past 18 months, and because we agree that iCAD is indeed a company to watch.

We are confident that, as the economy continues to stabilize and our marketplace improves, we are well positioned to benefit from our broadened footprint in the CAD marketplace.

We will continue to develop enhanced and new product lines that over time should offset the maturation of a digital mammography business as we build a substantial recurring revenue streams from our installed base, as well as from the growth associated with new CAD radiology workflow opportunities.

In addition, we will continue to evaluate acquisition candidates that are accretive and synergistic with our strategy to increase our footprint in the oncology space.

With that, I'll turn things over the Darlene, who will give you more detail on our financials.

Thank you, Ken.

And good morning, everyone.

During the second quarter of 2010, we made good financial progress, versus the second quarter of 2009, and we continue to strengthen our cash position while investing in future programs and new product development.

As a result, we believe iCAD is in a solid position to take advantage of a stabilizing economy and improvement in the US marketplace for our products.

Going now to our second quarter financial results, total revenue of $6.1 million for the second quarter increased 6% from $5.7 million in the second quarter of 2009, primarily due to increases in our core digital CAD business and strength in service and supply revenue.

This offset by a decline in our film-based revenue.

Though top line revenues were up comparatively for the second quarter, they were negatively affected by Siemens' inability to ship their new digital mammography system and depleted inventory of their current system.

As Ken mentioned, our Siemens business is down nearly 70% compared with Q2 of last year.

More specifically, digital CAD and MRI revenue of $4 million increased 29% compared with $3.1 million in the second quarter of 2009, which, at the time, was particularly soft, due to the weakened economy and budget decreases in healthcare capital spending.

Sales of our film-based products were off by 58% to $725,000 from $1.7 million in the same quarter last year.

This can be attributed to the softer demand for digital mammography systems which affect sales of the Total Look MammoAdvantage, our comparative reading product, as well as the expected continued decline in the demand for film-based CAD products, as the marketplace continues to transition to digital technology.

Our service and supply revenues continues to strengthen, increasing 52% to $1.4 million from $908,000 dollars in the second quarter of 2009.

As Ken mentioned, this is the result of our ever-growing installed base, that continues to transition from warranty to service contract agreements and to renewals of expiring service contract agreements.

International sales of $868,000 declined 28% from $1.2 million last year and can tend to be lumpy on a quarterly basis.

New US markets continue to offer an attractive opportunity for CAD products as less than half of the installed systems have transferred -- has transitioned to digital technologies in Europe and less so in other parts of the world.

Additionally, we should benefit from the new releases into these markets, such as the recent launch of VeraLook in the EU for CTC and the expected introduction of our next generation SecondLook Digital CAD product in Europe sometime towards the end of next year.

For the quarter, we achieved a record gross margin of 88.1%, which showed a continued and significant improvement versus our gross margin of 81.6% for the second quarter of 2009, primarily due to cost reductions and optimized pricing.

Second quarter operating expenses of $6.4 million compare with $6.1 million in the prior year second quarter.

This $300,000 or 5% increase was primarily due to increases in compensation related expenses and consulting expenses, offset by reductions in depreciation expense, legal costs, travel expense and various administrative expenses.

Also, during the 2010 second quarter, we received a one-time payment of $275,000 related to the sale of a non-core patent.

This patent was acquired as part of the CADx acquisition in 2003 and was a totally unrelated technology outside of the healthcare space.

This payment was recorded in other income.

For the second quarter of 2010, we recorded a net loss of $736,000 or $0.02 per share, including soft face compensation expense of $498,000.

This compares with the net loss for the second quarter of 2009 of $1.4 million, or $0.03 per share, including stock-based compensation expense of $503,000.

Reviewing results for the first half of 2010, total revenue for the six months ended June 30, 2010 was $12.6 million, a 2% decrease from the $12.9 million for the first half of 2009.

The gross margin for the first six months of 2010 expanded to 87.6% from 82.1% in the prior year period.

The net loss for the six months ended June 30, 2010 was $1.9 million, or $0.04 per share, including stock-based compensation expense of $981,000.

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

We entered the second quarter of 2010 with product backlog, excluding service and supplies of $583,000, as compared with $958,000 at December 31st, 2009 and $511,000 at June 30, 2009.

Backlogs should not be considered as an indicator of revenue for any future period, as a significant amount of our products are booked and shipped within the same quarter.

Now, looking at our balance sheet, we continue to remain focused on operational excellence and fiscal discipline.

We are pleased to report that, in addition to achieving a record gross margin, we continue to reduce inventories and accounts receivable and to maximize cash flow.

As a result, we generated nearly $1 million in cash, ending the second quarter with $17.2 million in cash.

This compares with $16.3 million in cash at the end of the first quarter of 2010 and $16.2 million in cash at year end 2009.

We also continue to remain debt free.

Summarizing our performance, we delivered improved quarterly comparative performance and for the first half of 2010, although revenues were essentially flat comparatively, we significantly increased gross margin, had a modest increase in operating expenses, which would have been an approximately $447,000 reduction in operating expenses if adjusted for one-time transaction cost associated with a transaction that was not consummated, and a much improved comparative first half bottom line.

And finally, with regard to 2010 financial guidance, although our market was showing stability and improvement, giving us more confidence about iCAD's prospects for the second half of 2010, we will continue to defer providing financial guidance, at this time, until we can get a better window into the economic recovery and the improvements in the markets we serve.

We will revisit this decision again at year end.

With that financial update, let me open the files up to questions now.

Operator.

(Operator Instructions) And your first question comes from the line of Richard Deutsch of Robbin, Burke, Feldman.

Yes.

Hi.

Good morning.

Good morning.

Good morning, Rick.

Hi.

Assuming that you do get the FDA clearance for your virtual colonoscopy, could you explain to us what your plans are to turn sales out of that clearance?

Yes.

Well, basically, Rick, what we have to do is finalize the technical interface with the product and the advanced visualization companies that we're partnering with.

We have done that with some and not with others.

Although, we've done quite a bit of work.

So, as an example, Viatronics, one of our partners that we've sold several systems through in Europe and Canada, is ready to go.

With some of our other larger OEM partners, we're very close to finishing those interfaces and I would say that we probably need 30 to 60 days window, and it will vary by company, to get ourselves positioned commercially.

And then the sales process will be a collaborative effort between ourselves and our advanced visualization partners, but the sale will go through the advanced visualization company, because, obviously, it's either an upgrade to an existing application that can visualize the colon or it's a new sale where it would be bundled in as part of a total solution.

So if we're fortunate to hear something favorable in the next few days or next week, as we're somewhat hopeful we will, we're obviously at the end of July so end of September says that really by the beginning of Q4, we should be actively in the US market as we are gaining some traction OUS.

And I think overall our partners, for a variety of reasons, are getting more excited about the technology and the opportunity as they have fairly large installed bases of these advanced biz applications around colon or have some strong interest as the procedure interest has been growing.

So I would look to early Q4 for us to start registering sales in the United States based on the assumption of an approval in the next week or so.

We're quite frankly very disappointed we don't have that approval in hand today.

We, to be very blunt, were led to believe in April that we were only weeks away.

And, as we understand the status today, we're very, very close and there's been a recommendation to management.

We have a lot of confidence that we know that recommendation is favorable and it's an environment that we could spend a lot of time talking about it.

But it's an improving environment in the FDA in a very slow matter as it relates to CAD approvals.

But we're dealing with an environment that is somewhat outside of our control.

With all that said, we do think we're very, very close and we've been assured that we'll hear something definitive any day.

So we're then anticipating early Q4 is when we could start to see US revenues and hopefully even more traction internationally, since we've seen a lot of interest based on the two major shows that we were at in Europe back in March and May.

Okay.

Thanks, Ken.

I have one other question before I'll jump back in the queue.

I've been very, very interested in your MRI prospects, and yet, I'd like to see if you could tell us a little bit about where you have been with the quarter and what you're looking forward to in MRI, because they seem -- you've been licensed to do this for quite some time and yet, sales have really not shown up yet.

So can you give us a little color on the immediate outlook for MRI and what you're doing?

Sure.

I think what I would start with is, as a marketplace, MRI for breast has not had the sustained growth trajectory that it had one or two years ago and there's a variety of reasons for that, but in essence, we've not seen the demand increase as quickly as we thought as procedure volumes have been increasing.

So it looks like they're getting better utilization from procedure growth versus adding new systems.

So some of it has been affected by what I would call generally weak investment in new MRI systems and the coils and the software, obviously, to do the procedures.

Those that have invested are getting more throughput.

On the prostate side, which is still kind of slugging it out, so to speak, as it relates to education and advocacy.

We're extremely bullish on that market still, but it is still early in its development and what we're seeing is a fairly largely funnel overall which is at least 50% or more prostate.

So that tells you that, where breast has been an established for quite awhile, prostate has tremendous interest.

So I think what we're seeing is a pent-up demand, a very strong interest, but when it comes to the actual funding being released, it's still a cautious environment and, even for these great technologies, the economics are getting a lot of scrutiny as it relates to hospitals being willing to spend money.

I think the biggest overhang we have is more macro and it's all about the $500 billion cuts in Medicare over some five or seven year window.

The lack of specificity is really hurting our industry, because there is a tremendous amount of caution in spending for things that are not absolutely essential and I think it is still an overhang that has to have more clarity before a lot of these traditional and new markets open up.

As it relates to our position in the market, we had modest growth in the first half of the year, over the first half of last year, with our products and we really were, to a certain degree, hurt because we are introducing a major new version of the product and we clearly signaled to our customer base as recent as last year's RS&A, through the second quarter of this year, that something was coming.

And so given the significant changes, whether it be thin client architecture, a new product for whole body or other organs, if you will, combined with the user interface and software changes that we've made in the current product, a lot of customers have held back and want to see the new version of the product.

So there's no question that Q2 was stronger than Q1, and overall, we had growth versus the first half of last year, but we're not hitting the numbers we had hoped to.

We're very, very excited about the new release.

We have had extremely positive customer feedback in clinical trials with this new release.

We think it is extremely competitive with the other companies that are in the marketplace.

So we will have the opportunity on two fronts.

One is to take share from the companies that are in that space today.

And then, secondly, to generate new business as the growth, particularly in prostate, starts to mature.

So we're counting on this for a significantly increase in business in the second half over the first half.

A lot of dynamics have held back what I think we have anticipated in performance, some of which are outside of our control.

Some of them are within our control.

The ones most in our control, quite frankly, was the execution of the new release and we are very, very confident.

We're several weeks away from shipping that release and that should have a significant impact in the market for us in the second half.

Okay.

Thank you, very much.

Sure.

Thanks.

(Operator Instructions) Your next question comes from the line of Jonathan Block of SunTrust, Robinson, Humphries.

Hi, guys.

This is Maggie Lovett in for John Block.

I've just got a couple of questions for you.

If we could start with first on the international market, it looks like those sales are pretty lumpy.

Just maybe some general thoughts there and then also, I believe, you spoke to a potential for 100% attach rate in the international market if I heard that correctly, and just kind of how you're thinking that's possible?

Sure.

Relative to the international, Maggie, what I would say is that it is a bit lumpy and, as you look at the comparison of the quarter in the first half, a number of dynamics.

I mentioned in our opening comments that in Canada in 2009, a significant investment was made in digital mammography and digitizing solutions such a TotalLook MammoAdvantage.

And this year, 2010, we've not seen nearly the sales volume as this was a, obviously, a national health program.

So that certainly had an impact on our sales.

Simples things, like we had an order last year in Saudi Arabia for almost $200,000 and that, obviously, did not occur again this year.

That's a rather unusually large order in that part of the world.

And so we had some dynamics that clearly affected us and so it was a bit on the lumpy side.

With that said, the one bright light, if you will, was GE's performance in Europe.

GE had very nice growth with us in the first half of this year versus last year, somewhere in the mid teens.

So we had very good growth with one of our largest partners and someone that actually represents close to 50% of our international business.

So that's very, very encouraging.

What we did with GE was we got together and we talked about how could we substantially increase the attachment rate of CAD with digital mammography and to break through this paradigm where two radiologists have to read every single exam, even the normal exams.

You could obviously never get away with that in the United States based of the dynamics around reimbursement and the workflow and so forth.

And so, basically, we worked up a program where what we're trying to do is to take the historical attachment rate, which is about 25%, where in the United States, it's near 100%, and double the attachment rate in Europe.

So, not to 100% but to 50%.

So essentially, what we're trying to do is to collaborate with GE and aggressively market CAD as part of the bundled solution in Europe to hopefully move this market away from double-read protocol and ultimately see a significant increase in attachment rate.

If we're able to do that, we also think it's going to pull in other business with all of our other partners that GE competes with.

While that wouldn't help us necessarily against Hologic, it would help us to get more business with the other people that are mostly European based like Sectra and PlanMed and [Giotto] and so forth, possibly AGFA and Phillips, to get more business overall as we, with the market leader, GE, really try to pull this market into a CAD as a standard of care so to speak as it is in the United States/

We have agreed on some minimum volumes with GE as it relates to this program, which really shows they're committed to it.

And those volumes are substantial enough that it should provide us, through the guaranteed minimums, with a nice increase in business with GE overall in the second half of the year.

Thank you.

That was very helpful.

And then, I guess, more to the US side, with the Siemens deal, I was just wondering if you could maybe help us think about that in terms of revenue impact?

I know you said down 70%.

Is that a million lost in the quarter or $500,000?

If you'd maybe give us some sense of that.

And then, you said that it's delayed.

So is Siemens not really losing share or it some share is going away, but you think the majority is going to get delayed and you'll be able to get that business?

Yes.

First of all I would is that in the first half of the year, the business was down just under $1 million with Siemens and that's a big number when you look at us and look at our revenue number for the first half at $12.7, versus $12.9 last year, something close to $1 million is a big number.

So that was pretty dramatic in terms of its impact on our business.

If you look at the MQSA data, we think that the numbers are artificially down because Seimens' shipments are so significantly down, it might be something in the order of 40 or 50 systems a quarter that are not going out into the marketplace.

In terms of how it's impacting the business, I would say, quite frankly, it's a blending of probably losing some business to their other competitors and some very loyal customers holding on, waiting for the new product.

They had communicated to us in the second quarter that their original hope was for a June FDA clearance.

The amount of systems they intended to ship in June was a pretty dramatic number, which reflects the fact that they significant pent-up demand and loyal customers waiting.

With that said, the longer you go, the more those loyal customers may decide to choose a different vendor.

So I think they have a dynamic that they're trying to work through to hold onto customers, but essentially running out of the older system, which really was obvious in Q2 and, to somewhat of a lesser degree in Q1, has really hurt them in the market.

In discussions with their regulatory team, the hope is that it's this quarter, but certainly in the second half of this year.

We all know the FDA has been an extremely difficult environment to predict timing, but this product has been shipping OUS for quite some time and they have received outstanding feedback from customers.

So it's nothing on the order of a tomosynthesis or something.

It's a 2D digital detector, a nice enhanced performance from the product they had been shipping for years and, for all practical purposes, should be in the market right now.

So that's how we see things with Siemens and given how much business was down significantly in the first half, we can't help but believe there's some real upside with Seimens provided that the clearance comes in a reasonable time frame so that we have enough runway to really capture the revenues in the second half.

Okay.

Great.

Thanks, Ken and Darlene.

(Operator Instructions) And you have no questions at this time.

I would like to turn the call back over Mr.

Ken Ferry for closing remarks.

I want to say thanks again very much to everyone who joined us on the call today.

We feel that our performance in Q2 in the first half, in light of a challenging economic environment, was very, very respectable and we appreciate all the efforts of all of our employees because we know how hard they're working in this very challenged environment.

We're poised for a much stronger second half and beyond as a result of a very robust product pipeline and, hopefully, a much stronger market.

Our new products for MRI, CTC, new digital mammoalgorithm as well as the program with GE internationally really bode well for us to have a much stronger second half and to sustain that into 2011.

For the longer term, we're very excited about our strategy.

We're very much focused on the oncology space and looking where we can add significant value in the care cycle where detection, diagnosis, intervention and follow up are critical to patient care.

And with that, I again thank you all for joining us and we look forward to speaking with you again after the close of the third quarter.

Good day.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.