ICAD Inc (ICAD) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 iCAD Inc.

earnings conference call.

My name is Marisa, and I will be your Operator for today.

At this time all participants are in a listen-only mode.

We will be conducting a question and answer session towards the end of the conference.

(Operator Instructions)

I would now like to turn the conference over to today's host, Anne Marie Fields.

Please go ahead.

Thank you, Marisa.

Good morning, everyone.

This is Anne Marie Fields with Lippert/Heilshorn & Associates.

Thank you all for participating in today's call.

Joining us this morning are Ken Ferry, iCAD's President and Chief Executive Officer, and Darlene Deptula-Hicks, iCAD's Executive Vice President of Finance and Chief Financial Officer.

Yesterday after the market closed, iCAD issued a news release announcing financial results for the 2010 fourth quarter and full year.

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 Carolyn Curran.

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 Securities & 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, March 24, 2011.

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

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

Ken.

Thanks, Ann Marie.

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

2010 was a transformative year for iCAD.

We entered the year as a leading provider of image analysis and workflow solutions for the detection of the most prevalent cancers.

And with a new product introduction in MRI and CT strengthened this leading position considerably by year end.

And with the acquisition of Xoft, we transformed the Company further into the oncology space as a leading provider of targeted detection, diagnoses, and therapy solutions.

We now have an even more robust offering of targeted solutions throughout the continuum of cancer care from detection to diagnosis to treatment to therapy monitoring.

We believe there is significant value proposition in these offerings and we remain very confident we can create meaningful synergies over time.

But, first, let me begin with our core CAD product portfolio.

Our digital mammography CAD business remains challenged as the domestic market is still slow to rebound.

The MQSA data showed sales of digital mammography systems down 16% in 2010 versus 2009, and our digital CAD sales essentially tracked those numbers.

That said, we are seeing some signs of improvement in the US market and remain confident of the opportunity, as there is still approximately 25% of the market that is yet to transition from film to digital technology and there is strong OUS opportunities in Europe and Asia, as well.

We also expect significant growth opportunities for our domestic installed base of more than 4,100 systems as we introduce product upgrades and enhancements.

Towards that end, we are in the process of executing a reader study in the US with regulatory submission of our next generation mammography CAD solution.

We expect to complete the study around mid-year, with regulatory submission in the third quarter.

Our goal is to launch the enhanced SecondLook Premier in the United States sometime in 2012.

SecondLook Premier is available outside of the United States today.

While we're on the talk of the FDA, we recently received confirmation that we can now file all mammography CAD submissions at the same time that our OEM partners file for the regulatory approval of their full field digital mammography systems.

This is, in part, because the regulatory process has been declassified to a 510-K so we will no longer have to wait for the digital system to be approved before we can submit for clearance of our CAD system.

This should allow us to be in the market with new digital mammography system partners significantly sooner than we have in the past.

We are already working with Fuji, Phillips, Sectra, Giotto, and Carestream on plans for future submissions.

This is a welcome sign of progress with the FDA and shows their willingness to work with the industry to bring better solutions to patients sooner.

Moving on to MRI, we're very pleased to have launched a new family of products in the latter part of last year.

Having the ability to offer a true thin client architecture with a significantly enhanced viewing capability, user interface and enhanced applications positions us well for more significant growth in 2011.

In MRI we are seeing a number of distinct market dynamics.

The breast segment has slowed relative to new sales and the replacement or upgrade market is kicking in.

We see our offering here as very attractive versus longstanding competitors who continue to offer mature products.

We continue to be encouraged by the growing interest in prostate MRI.

We entered this new market recognizing adoption would require a significant amount of market education.

We're very pleased with the success of our educational programs in prostate MR, as they have generated considerable interest.

However, we still are in more of a market education mode at the moment.

We are hopeful, though, that our continued investments in education will begin to show a sharp increase in demand as the year progresses.

Now turning to VeraLook, our advanced image processing software that identifies polyps in CT images in the colon.

Following our late 2010 FDA clearance, we have finalized the interface requirements with a number of our OEM partners for CT colonography or virtual colonoscopy.

These partners are leading developers and marketers of 3D advanced visualization software.

We're in the final phase of completing our commercial agreements with several of these OEMs and expect to begin full commercial sales efforts in the second quarter of this year.

VeraLook offers significant opportunities as virtual colonoscopy gains traction in the US and overseas.

New studies continue to be published on virtual colonoscopy that support its use, and hopefully increased reimbursement will soon follow.

For example, at the recent European College of Radiology held in Vienna, there were two scientific posters presented that highlighted the use of VeraLook for virtual colonoscopy, both by Dr.

Abe Dachman, Professor of Radiology and Director of Fellowship Programs at the University of Chicago.

There was considerable interest in these studies, and we believe such studies will continue to assist in driving technology adoption and procedure volume.

Turning to our international business, we continue to view the overseas market as significant growth opportunities for iCAD.

Consequently, during the fourth quarter we added direct resources to augment our current OEM sales channels.

We are focusing these investments in a region of Europe -- Germany, Switzerland, France and Belgium at the moment -- in efforts to build a stronger European presence for iCAD.

We look at the international market in terms of four growth drivers.

First, MRI.

Breast MRI is growing in the EU with less entrenched competition in breast MRI CAD compared to the US.

We expect this to provide steady growth opportunity.

Second is SecondLook Premier, our next generation mammo CAD was introduced in the fourth quarter of 2010.

And with approximately 500 systems OUS for our current CAD product, we believe this could be a strong opportunity for upgrades as well as new system sales.

Third is CT.

As mentioned, we are finalizing agreements with CT software providers that will allow us to expand sales into the EU.

Following the posters on VeraLook at the European Congress of Radiology, we received very positive feedback and considerable interest in the product.

And fourth is Xoft.

We expect our direct salespeople also to support our developing distributor relationships in Europe for the Axxent system.

Although IORT market today is actually larger in Europe than the US, Xoft was resource constrained to provide support to channel partners to drive adoption of Axxent in IORT until now.

In addition to these market drivers, our joint regulatory filing with GE for digital mammography for CAD in China was just approved in the last several days.

We expect to be selling into China with GE in the very near future.

Now moving onto Xoft, our new acquisition.

As many of you know, the portable Axxent brachytherapy system delivers radiation therapy directly to cancer sites with minimal radiation exposure to surrounding healthy tissue.

It is cleared for the treatment of early stage breast cancer, endometrial cancer, skin cancer and for treatment of other cancers or conditions that radiation therapy is indicated.

The Axxent technology is approved for accelerated partial breast radiation, as well, which can be delivered twice daily for 5 days or for intraoperative radiation therapy, or IORT, which is delivered immediately following a lumpectomy procedure in only minutes, with one course of treatment.

The alternative is the traditional course of external beam radiation administered 5 days per week for 6 to 7 weeks.

Traditional external beam therapy also requires a substantial investment in a shielded bunker due to the radioactive components involved in the treatment.

The Axxent business model has 3 major sources of revenue -- the mobile controller which delivers therapy through the miniaturized x-ray source, the disposable catheters and applicators for the different applications and procedures, and service and therapy source contracts.

Adoption drivers for the Axxent system continue to be a combination of scientific studies and growing reimbursement in the United States.

Let me start with the TARGIT study as a major scientific study example.

As with all new medical technologies, validation comes from the continuing growth of positive clinical trials showing the benefits of the new technology, typically improved patient care and savings and of time and/or money.

One of the catalysts for increased interest in IORT in the Axxent system was the TARGIT A study.

This landmark trial was published in The Lancet in June of 2010.

It showed that a single dose of radiotherapy delivered at the time of surgery should be considered as an alternative to the 6 to 7 week regimen of external beam radiation therapy for certain early stage breast cancer patients.

This study involved over 2,200 women who were enrolled and followed for over 10 years.

The publication showed with a mean follow-up of 4.2 years that with IORT there was substantial equivalence to external beam radiation therapy in cancer recurrence rates.

As we continue to invest in this market, we are evaluating prioritizing studies going forward that will continue to demonstrate the strong differentiated value proposition for patients, clinicians and payers.

This will continue to be key to increased market penetration globally.

Regarding reimbursement, as with any new modality in the United States, reimbursement will be a driving force for meaningful adoption.

Healthcare reform continues to place a strong focus on increasing access to care and decreasing costs.

When you compare the value proposition of Xoft's isotope-free brachytherapy with traditional radiation therapy option, the Axxent Ebix provides a reduced treatment paradigm with significant benefits to patients and a substantial reduction in overall costs to the system.

Following on the positive data from the TARGIT study, ASTRO, or the American Society of Radiation Oncology, filed a CPT1 code with the American Medical Association and ultimately CMS for IORT reimbursement.

When CMS publishes their new coding decisions in July of 2011, we are very hopeful of receiving a CPT1 code with more favorable reimbursement for the radiation oncologists.

Thereafter the new code and payment schedule will go into effect on January 1 of 2012.

We expect a favorable reimbursement decision to be another important driver for the adoption of IORT and the Axxent system, and particularly sales in the back half of this year and well into 2012.

A review of other products and technologies that have received favorable coding and payment schedules have typically shown very positive uptake in adoption, and have been significant events for companies that developed and marketed those products.

Now I would like to bring you up to date on a recent product recall.

On February 3, 2011, in cooperation with the FDA, we voluntarily recalled the Axxent FlexiShield Mini after we were notified in January of the presence of microscopic particles of tungsten found in the breasts of certain IORT patients during follow-up imaging exams.

These tungsten particles are believed to have originated from the Axxent FlexiShield Mini, an optional accessory patient shielding device to the Axxent system.

Based upon our analysis to date, we believe that the particles are nontoxic, especially as tungsten is widely used in implantable medical devices such as hips and knee replacements today.

We will continue to offer support to the affected patients, as well as their care providers as we work through the recall.

We are also in the process of identifying replacement shielding options so as to be able to offer this accessory to those customers that need them.

This recall does not diminish our enthusiasm for the Axxent technology.

We remain confident in the long-term opportunities for this technology to change the treatment paradigm for a significant number of cancer applications.

We will continue to update you on our progress in this area.

Finally, and importantly, customer reception to iCAD's acquisition of Xoft's technology has been very positive.

There is significantly more confidence in iCAD Xoft as a partner as a result of our strong reputation in the healthcare industry, combined with the strong financials of our Company.

We conducted a considerable amount of diligence in making our decision to acquire this exciting disruptive technology, and we believe it is one of the most promising advances in cancer therapy today and represents an ideal strategic fit for our oncology strategy.

Now with that said, I will turn things over to Darlene who will give you much more detail on our 2010 financial results.

Darlene.

Thank you, Ken.

And good morning, everyone.

2010 was both a challenging and a rewarding year.

We continued to employ operational excellence in financial discipline to achieve increased gross margin, and when adjusted for transaction related expenses, slightly reduced operating expenses year-over-year.

We also recorded slightly positive cash flow in the face of softer revenue and transaction related expenses.

Importantly, we were able to do this while at the same time investing in new product development and in the acquisition of Xoft.

With the Xoft acquisition, we have become a fully integrated player in oncology, and we are very excited about the prospects for our entire product portfolio, and look forward to realizing its full potential.

Now turning to our fourth-quarter results, I would like to begin by reminding you that the consolidated statement of operations does not include the financial results of Xoft for any period.

Having said that, the total revenue for the fourth quarter of 2010 was $6.4 million, a decrease of 21% when compared with the fourth quarter of 2009.

This reflects a 30% decline in sales of our digital and MRI CAD products to $3.9 million, largely due to challenging macro economic conditions, as well as the general absence of Siemens from the market as they awaited their FDA approval for their new digital mammography system.

Siemens represented approximately 10% of the revenue shortfall in the fourth quarter.

However, we are pleased to report that they did receive FDA approval in mid-November.

We expect to see our business with Siemens pick up in the coming quarters as they enter the market with their new detector and fulfill their backlog.

International revenue for the fourth quarter of 2010 rose 35% to $1.3 million.

As we've said in the past, our overseas business tends to be a bit lumpy as it is harder to gauge when orders will be placed.

When viewed though, over time our international business shows a nice growth trajectory, and we are making modest but very focused investments in these markets.

As expected, our film based revenue for the fourth quarter 2010 showed a decline of 34% to $815,000, reflecting the decline in demand for film based products and accessories as the marketplace transitions to digital technologies, as well as softer demand for total MammoAdvantage, our comparative reading solution.

This decrease is anticipated, although it happened perhaps faster than we projected.

Over time we expect these declines to be offset by increases in new products as they gain traction and market adoption.

We do continue to see strong growth in our service and supply revenue which increased 29% to $1.6 million, largely due to higher service contract revenue as digital CAD and TotalLook MammoAdvantage systems transition from warranty to service contracts, underscoring the significant growth opportunity inherent in our growing installed base.

We continue to expand our margins, reporting a gross margin of 86.4% for the 2010 fourth quarter compared with 84.8% for the 2009 fourth quarter, primarily due to reductions in costs of materials.

Operating expenses in the fourth quarter of 2010 increased to $8.4 million from $6.6 million in the prior year.

This was due primarily to an increase in transaction related expenses of $1.9 million associated primarily with the acquisition of Xoft.

While we did see increases in subcontracting costs associated with the SecondLook Premier reader study and professional and consulting fees, these costs were offset by reductions in compensation related expenses, including stock-based compensation and legal costs.

For the fourth quarter of 2010, we posted a net loss, including stock-based compensation expense, of $255,000, up $2.9 million or $0.06 per basic and diluted share.

This compares with net income including stock-based compensation expense of $499,000, up $317,000 or $0.01 per basic and diluted share in the fourth quarter of '09.

Adjusting for transaction related expenses, the Company's non-GAAP adjusted net loss for the fourth quarter of 2010 was reduced to $638,000 or $0.01 per basic and diluted share compared with non-GAAP net income of $118,000 or $0.02 per share in the fourth quarter of 2009.

Moving onto our full-year 2010 financial results, which again does not include any financial results of Xoft.

Our total revenue for 2010 was $24.6 million, a 13% decline from 2009.

Revenues from our digital and MRI CAD solutions in 2010 declined 16% to $15.4 million, essentially tracking the decline in sales of digital mammography systems as reported in the MQSA data.

Our Siemens business is also down approximately 63% year-over-year.

2010 sales of film based products declined 43% to $3.3 million.

And our service and supply revenue increased 45% to $5.8 million.

International revenues increased 7% to $4 million as compared with 2009.

Our 2010 gross margin expanded to 87.2% from 83.6% in 2009.

The net loss for 2010 including stock-based compensation expense of $1.5 million was $6.2 million or $0.14 per share.

This compares with a net loss for 2009 including stock-based compensation expense of $2 million or $0.04 per share.

Adjusting for transaction related expenses for the full year, the Company's non-GAAP adjusted net loss for 2010 was $2.8 million or $0.06 per basic and diluted share as compared with the 2009 full-year non-GAAP adjusted net loss of $1.5 million or $0.03 per basic and diluted share.

We exited 2010 with product backlog excluding service and supplies of $561,000 compared with $856,000 as of December 31, 2009, and $483,000 at September 30, 2010.

Now turning to the balance sheet which does reflect the Xoft transaction, we maintained a strong balance sheet throughout 2010.

We ended the year with $16.3 million in cash and equivalents, which is modestly higher than year end 2009.

But our year end 2010 cash position also reflects approximately $2.9 million in payments made in connection with the Xoft acquisition, which includes both cash consideration and transaction costs and approximately $704,000 associated with a prior acquisition that was not consummated.

The increase in the various balance sheet accounts at year end reflect primarily the acquired assets and liabilities of Xoft, along with the valuation of intangible assets and the equity consideration at December 31, 2010.

On March 17 we filed the 8-K/A in which we submitted unaudited pro forma combined financial statements for iCAD and Xoft as of September 30, 2010.

The total purchase price reflected for Xoft is $17.9 million which includes the $12.9 million closing consideration plus a $5 million present value estimate for the contingent consideration relating to the earnout, which, if earned, is not payable until January of 2014.

The $12.9 million of closing consideration consists of 8.3 million shares of iCAD stock and approximately $1.2 million of cash consideration.

I encourage you to review the full filing which is available at www.sec.gov.

Now that the transaction is closed, we're working diligently on integration.

We've continued to maintain Xoft's facility in Sunnyvale, California, where the x-ray source is manufactured, and will continue to maintain their supplier relationships.

We have eliminated certain staff redundancies between the two companies, some of which are phasing out between the closing and mid-Q2.

And we continue to review the business for additional ways to reduce costs.

As a result of the acquisition of Xoft, the Company has approximately 45 new employees.

We believe that this acquisition will be accretive to iCAD in the next 18 to 24 months.

As with any new modality, reimbursement will be a driving force for meaningful adoption, and we are hopeful that we will see positive reimbursement news with the announcement of a CPT code in July of this year, and will begin to see traction in 2012 as the CPT code would go into effect the beginning of next year.

Importantly, at this time we do not believe we will need to raise additional equity capital to finance the integration of Xoft as we believe we can fund the business through iCAD's cash flow moving forward and through possible debt sources of financing.

With regard to guidance for 2011, on December 17, 2010, we announced that we expected total revenues to be in the range of $34 million to $38 million with a blended gross margin in the low to mid-70% range.

We are currently assessing the impact, if any, of the recall of the FlexiShield Mini on future operating results, and we plan to provide an update and possibly expand upon this financial guidance at mid-year.

With that financial overview, let me now open the call for questions.

Operator.

(Operator Instructions) You do have your first question from the line of Jon Block from SunTrust Robinson Humphrey.

Please proceed.

Thanks, and good morning, guys.

Maybe just a first question on guidance, Darlene.

You gave us some top line guidance and gross margin as well.

You alluded to additional head count of, I think, about 45 employees.

Is there a number in mind that you can point to from a cash burn perspective in 2011?

I don't know if you want to take it all the way down to the bottom line.

I am just trying to get my arms around cash burn in '11 as you work through a lot of the integration issues.

Sure.

Yes.

We hope to get into more detail on that at the half year mark here, Jonathan.

Again, I think what we would say is we believe we can fund the combined businesses going forward with our cash balance on hand, with cash generated from iCAD operations, and certainly streamlining the combined businesses and trying to take costs out of it.

Having said that, it will be an investment year, so this will not be a year that we will generate cash.

It will be a year that we will burn cash, but we don't believe we will burn through all of our reserves or even close to that.

Okay.

Great.

The thing I was going to add is obviously we will be reporting our first-quarter results at the end of April, and so obviously we'll be able to report obviously on the balance sheet where we are.

And there will be some one-time expenses that were in that first quarter, so by then Darlene will be able to give you probably a better sense of the burn when you take out some of these one-time items.

So we're probably four to five weeks away from being able to provide more detail, which I know you're looking for.

Okay.

Great.

Thanks.

And then to shift gears a little with bit, I know the international number is usually choppy.

But it was a good number.

And I look back to last quarter, Ken, when you talked about an initiative with GE on really trying to get CAD going OUS despite the double rating protocol.

So maybe if you could speak a little bit to the international number, what really drove it and how sustainable you see that going forward?

Right.

What drove it really was GE.

GE really made a stronger commitment to increasing the attachment rate of their systems.

And so we obviously had to put a more aggressive price point in place.

But we have seen some progress.

And I think we're looking at it from two angles.

One is how do we increase the attachment rate of new systems.

A second one is how do we get at the installed base that essentially largely is not using CAD today.

So I think that the comments Darlene made that the international volumes can be a little bit choppy, it is hard for us to say this is a trajectory that will go on indefinitely, so to speak.

I think really what we're looking for is a couple of things.

One is increased attachment rate on new systems.

We're putting programs together collaboratively with GE to go after the installed base.

And we have enough resources on the ground now in Europe to really try to drive installed base sales.

And then also I should mention, we got our first orders from GE for our new SecondLook Premier product, as well, just recently.

So they have now initiated some demand as it relates to the new product.

So we have in the mammography CAD space really three or four different angles now to see growth.

And so we are not so sure how Q1 will go but I think we would say in a forward-looking sense for the full year 2011 we're very optimistic about continuing this growth trajectory.

And we have three or four different vectors now versus maybe just a traditional attachment rate with new systems, which is really where we were historically for the last couple of years.

Okay, thanks.

Very helpful.

And then moving over to the software part of the business, it seems like a large hidden opportunity here in the US, and I think you said complete the trial in mid-year, submit 3Q, and hopefully a nice opportunity for you in the US in 2012.

But it has been available OUS.

And so if maybe we look to OUS on how you rolled that out, how long has the updated software been available in international markets, how have you priced it?

And then what has been the penetration of that international base, in case we want to try to use that as a reference point to extrapolate here to the US?

We essentially released it very late in December into the international market, and got an order from GE in this first quarter of the year.

We have several installations.

Performance of the product has been really, really positive in the context of higher sensitivity, lower false positives, as well as a lot of lesion metric information as well.

So it has a lot of analytical tools combined with better performance.

We definitely have priced it at a premium to our current pricing.

If you look at our pricing strategy, just say for servers, servers typically sell for about 65% in transfer price for what they sell for in the US.

So what we have essentially done is picked a point somewhere in between the transfer price in the US and the transfer price of our current existing product, SecondLook.

So somewhere in between the current SecondLook and our US pricing is how we've priced the Premier product.

And what we're looking at is two things.

One is the customer that really wants a high performance product that is very sold on CAD.

And then we're looking at an upgrade market with about 500 systems out there that are using our current CAD.

And to be honest with you, it is still early.

GE, as you know, is a big, very powerful entity, but it can take time to really get measurable results in installations.

But they have seen the data on our performance and clearly see the delta between our current product and this new product.

And definitely, we together believe there's different segments of the market that we can go after.

So it's a little early to try to put firm projections in place, but we certainly did survey somewhere around 30 to 40 customer, as I recall, and we reviewed the feature set and asked them is it differentiable enough versus our current product and what would you pay for it.

And in the upgrade world we heard pricing anywhere from, say, $10,000 to $25,000 street pricing.

So I think that it will be, obviously, different price points depending on whether you're an upgrade or new customer.

So we're excited about it.

The reader study in the US has been kicked off.

We're confident we can finish it in the summertime.

And we're targeting the, call it, September timeframe to do a submission of our PMA supplement.

So given that we're still in a PMA world, we probably, at best, would be middle of next year to be in the US market.

But I will say this.

We have had noticeable improvement in cooperation with the FDA.

A lot of more collaborative effort, a lot of the changes in leadership and structural changes in the reporting of the CAD branch has really been noticed to be much more of a collaborative working environment.

So we're somewhat optimistic that, with our recent successes with a number of CAD products and the relationships we have built, we hope to move this along fairly quickly.

And we have over 4,000 systems in the United States, so that if we were fortunate enough to get an approval in the middle of next year, this could be material revenue from an upgrade standpoint with this large US installed base.

It is definitely very, very supportive of CAD and its use model and its workflow and so forth.

So that's probably where the big bang is, to be very honest.

In the international market, it is more for the users that want something of higher performance and the occasional user that's going to jump right to the new product versus our existing one.

So it is evolving but we're very excited about it.

And based on the results we've got in our internal testing, we really think there is going to be a significant market in the recurring revenue side with our installed base.

Keep in mind, our installed base in the US is using a very good product but the product has been out there for about four or five years.

And so in the software world that's quite a while.

So bringing something new to that market is a natural evolution to be purchased as an upgrade, either directly or through a service agreement.

So hopefully mid next year we'll have something exciting in the US market beyond our traditional new product sales.

Okay, great.

And then just last one and then I will follow-up with you off line.

On the revenue guidance for the year, certainly there is off component, at least.

Should we expect there to be very back end weighted predicated on the code coming out in July?

That's one question.

And then just the second part of that question is, is there a number in your mind that when we see this code come out that needs to be ascribed to it from a value standpoint to really go ahead and get the market going?

Thanks, guys.

Sure.

I would say from the overall performance, you're right, the back half of the year we're projecting to be much stronger, particularly for Xoft as it relates to this potential CPT code announcement which has been projected for July.

We're hearing very favorable chatter that the likelihood is high, although you can never be certain until it is announced.

And then, as well, that there is a lot of discussion now really on how much the reimbursement will be for the radiation oncologists.

So that we do think is going to be a major driver for Xoft demand.

As it relates to iCAD, we see a more predictable demand in that space.

And we are somewhat projecting growth.

If we look at our exit of this year, there is a number of drivers that could be, I would say almost more linear versus it being a back half loaded situation.

First of all, Siemens is back in the market so that should certainly give us a bounce in volume.

As Darlene said, their volume was down greater than 50% last year and that's a pretty significant number given how much business we had typically done with Siemens.

The other thing is the declassification of the full field digital mammography systems to 510-K is literally going to bring in four or five major new competitors.

And a lot of them are projecting approvals in the summertime.

We can't be certain of that, but certainly we would like to think in the back half of the year we will be selling CAD in the United States with a number of new players, which will really sharpen the competition and ultimately we hope take some share away from Hologics.

That's obviously our goal with all of our partners.

So that could be opportunity for growth more in the second half.

In MR, as well as CT, we also think we will build momentum throughout the year.

So certainly second half could be much more promising with iCAD, as well.

But the first half could be some solid performance, with MR and CT being the opportunities if we see some real spikes in growth.

And that would be probably more on the prostate MR side, as we hope our education initiatives really start to get meaningful business traction.

And then on CT, we have been working very closely with several of the major providers of Advanced Visualization software and are pleased to say that we are within days or weeks of announcing commercial agreements with two of the major providers.

We fully expect to be selling into their installed base of the Advanced Visualization software for virtual colonoscopy in the second quarter.

And I will just mention, one of the major providers -- I won't get into the names -- has shared with us that they have 1,400 workstation applications of colon in place.

And of those 1,400, since about 80% of their customers are on a service agreement, probably 1,000 or 1,100 are terrific candidates for an upgrade to our colon CAD software.

And they are very interested in proactively marketing to that installed base our capabilities.

And that's just with one partner.

So we see a lot of potential out there.

I think because these are new and evolving markets, there's always going to be a timing issue, very hard to predict.

But we're very bullish on these opportunities and we are confident they will evolve over a reasonable period of time.

We would love to be able to put a pin in the map, so to speak, and pick a particular point of time, but that is hard to do.

So, thanks for the question, Jon, and we look forward to following up with you.

Thanks, guys.

(Operator Instructions) You have your next question from the line of Caroline Corner from McNicoll, Lewis and Vlak.

Please proceed.

Hi, guys.

Thanks for taking my call and congratulations on your progress.

I had a question about your gross margin, that 70% or low to mid-70%s number that you were mentioning in the guidance, is that change due entirely to the Xoft acquisition or is something else also affecting the gross margins?

Yes, you're absolutely right, Caroline.

It is a blended gross margin.

It drops a bit because there are slightly lower gross margins on the Xoft product.

As you recall, iCAD has very, very high gross margins because we tend to be more of a software based product.

We have some software only, and combination software/hardware which is why ours are in the high 80%s.

And so blended, because Xoft does have more of a material component to it, blended will bring it down to the low to mid-70%s range, which is still, combined, a very, very good gross margin.

Right.

That's helpful.

Thank you.

Trying to look at the guidance in a little bit more detail, and I heard the previous line of questions which hits on a lot of this.

But if you look at, try to figure out what's going to be going on the bottom line, you definitely showed financial discipline lately on your operating expenses, and that's definitely commendable.

I understand you've got new head count with the acquisition.

Can you talk a little bit about what the operating expenses, the big drivers on those lines are going to be as you go into 2011?

You have got the head count increasing, you've got studies ongoing, but given the financial discipline you have shown before and the revenue numbers you're talking about and the gross margins, it seems to me like it might be possible to be getting close to break even on that bottom line anyway.

Is that a reasonable speculation or can you comment a little bit about that?

I would say there's probably a couple answers to this.

I think we will drive our way to profitability in this combined business over the next 18 to 24 months.

Really, what is going to do this is we'll continue to, we've very good about taking costs out and being very fiscally responsible, and we'll continue to work that.

A lot of the expenses is head count related, 45 people.

We have a separate facility that's not inexpensive either out in Sunnyvale.

That facility lease expires at the end of next year, so we will be looking for smaller and less expensive facilities which will help drive some of the costs down.

This is really a volume type of situation.

When you think about the Xoft product, you sell a console, and it is very much a razor/razor blade business.

And so once you get that console installed and you can really help drive procedure growth, then you're driving this whole disposable business with respect to balloons, applicators and source delivery.

So that's really our focus, is getting as many consoles placed and doing whatever we can to help drive usage on this.

And so it is very much the profitability will happen in direct relation to how quickly we can get this business to grow.

And, again, around CPT code, if you look historically, CPT codes really do have a dramatic change in the inflection point of the business.

So, while I think we can take costs out and drive costs out to a certain degree, there is a certain base level of employees and expense you need to grow the top line.

So, again, over the next 18 to 24 months we'll see that crossover and hopefully hit the profitability level.

Okay.

And then my last question, the recent recall, how do you think that's affecting the Xoft business going forward as far as perception?

Or have you noticed changes in ordering patterns or anything like that?

Or is it something that, given that it is not something that looks to be a safety issue at this point, is it just something that's something that's being addressed with manufacturing and things like that?

Sure.

I think, obviously, any time you have a voluntary recall, it is a serious matter that you need to execute extremely well and responsibly on.

And as a result of that, and it being, obviously, public information, customers clearly want to know, whether they are existing users or potential new customers, exactly what happened.

So I think what we have seen is customers in our active funnel have wanted information and have wanted to study the circumstances further.

So I don't believe at the moment we have lost any business as a result of it, but I do think business has been delayed.

There is no question about that.

We certainly understand that and respect that.

So, we are trying to be very proactive in providing what we can provide to customers so that they fully understand the circumstance.

And it really depends on how they're using the product.

If they're using it for intra-operative radiation therapy in the United States, shielding, while an option, is used quite frequently as part of the procedure, and that could obviously have an impact on purchase decisions going forward, as we are very ambitiously working on a replacement product.

But as a result of the need to thoroughly develop and test it and put it through a rigorous FDA process, it will take us some time to do that.

So we're working through it.

And it is a realtime circumstance that is very difficult for us at the moment to predict what that will have in terms of impact on the business.

Our hope is that it may have some slowing in the second quarter, but our hope is that by the third quarter of the year things could be back to what I would describe as the positive momentum that we see.

We feel very badly that this circumstance occurred, however it happened.

With that said, we still believe this procedure has enormous potential and enormous benefit to the patients.

And we believe the science is supporting that.

So we're going to assess it realtime, to be honest, in terms of the impact on our business.

It is probably a little early to fully understand the impact.

But customers clearly want more information, they want to understand the dynamics.

Certain programs were put on hold temporarily in looking at it.

But I also can say they have also gone back and begun to do procedures again in certain circumstances.

So it is all settling out in a realtime fashion.

And it will have some effect in the near term.

It is not clear it will have an effect in the long-term.

Our focus has been to really do the best possible job with the recall.

The highest priority beyond that, of course, is the patients, and being very, very supportive of the care providers, as well.

And hopefully we can get through this and come out the other end with a much, much higher quality product, as well as a stronger and loyal customer base.

Great, thanks.

That's helpful.

Thank you very much for taking my questions.

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

Please proceed.

Good morning.

Ken, Darlene, on the Xoft matter could you help clarify some of the data that was disclosed late last year on the acquisition of that -- what a console might go for, what an x-ray source might go for, and then what might be some of the expendable revenue to expect per procedure?

Sure.

In general numbers, a console can be sold for anywhere in the $250,000 to $300,000 range, as a general rule.

And then typically what we offer to customers is a one-year source agreement.

And so that will provide them with a certain amount of sources over the course of the year.

That could be on the order of $80,000.

Or certainly they can buy individual x-ray sources on an as needed basis, and those list out at about $6,000.

And then depending on what types of treatment they're doing, be it IORT or APBI or skin, then there is various applicators that they would -- various applicators of various sizes, typically three sizes per applicator.

And then they would procure whatever makes sense for what they're doing.

And then they would typically reorder this, as needed basis.

And those applicators can go anywhere from, I don't know, $2,500 to $10,000 maybe, on average.

And then also the whole system comes with a one-year warranty, so there is the whole post warranty service contract which typically is sold at point-of-sale, we're seeing.

I see.

So to be clear, then the applicators at $2,500 to $10,000, that's a single use product, I guess?

Correct.

Okay.

And you were going to build a sales team for Xoft.

Where do you stand in terms of that?

Jeb, just to go back to your last question, in the reusable component, if you will, there are the balloon applicators that are single use but there also are surface applicators that are multiple use.

So it's a combination on the accessories of single use and multi-use products.

We have made some good progress in hiring.

And we have a model essentially that has about six or so direct salespeople in play, as well as two to three applications people to support them, as well as support the use model of the product.

What we have tried to do initially is to target the areas of the US that reimbursement is already favorable through individual working with a local payer.

So we have got our areas outlined.

We think the opportunity when the CPT1 code is hopefully approved in July and goes into play in January of 2012, we could obviously field a much larger national team.

But for now we're really trying to focus on the pockets where there is some favorable reimbursement and really try to work those particular territories where the Company had already made pretty significant progress over the last several years.

So it is not a matter of throwing more resources at it.

It is putting resources where the reimbursement is today.

And making certain investments in large markets that, while there may not be favorable reimbursement today, we do feel based on the CPT code being active in, say, January, that, that investment of building funnel and relationships would be important.

So we're trying to do this on a sequential basis based on what makes sense, what allows us to get good productivities in the near term, and not put a lot of resources out there that may be spinning their wheels but hitting the wall, so to speak, on reimbursement.

We're hopeful, though, as that changes we will have an additional investment in head count and resource.

The other thing is we are going to cross train our iCAD team.

And while it is a little early for that because it is the first quarter of the year, we certainly will have the opportunity for our iCAD sales team, which is much larger than the Xoft team, to work in a cooperative fashion for lead sharing and so forth.

So hopefully we'll get a bigger bang for our buck as a result of the two sales forces working very cooperatively and it would not necessarily require us to continue to hire people specific to Xoft beyond where we have identified these six territories that we do firmly believe the reimbursement environment is favorable enough with or without the new code to get reasonable productivities out of these salespeople.

Thanks.

Could you refresh our memory about the delta in the reimbursement rate from where we are today to where we will be in 2012?

Yes.

It really varies quite a bit by payer.

So, really, when you think about reimbursement, there's two angles.

One is the surgeon that is essentially doing the lumpectomy, who is placing the balloon into the breast cavity, who would be also responsible for the cosmetic surgery post therapy.

And in that case, the surgeon is getting reimbursed under CPT1 for all of their work.

So this issue is really focused on radiation oncologists.

And essentially what you see today is that in traditional external beam radiation therapy, where they deliver a number of therapeutic doses, as an example, if you're in a traditional therapy where you're going in for six weeks and five treatments per week, one per day, they don't typically treat weekends, that's about 30 treatments, or 30 fractions, as they say.

In that case, the reimbursement to the radiation oncologist is around $700 or $800 per treatment.

So the challenge has been to not let that paradigm be established for intraoperative radiation therapy because now you're in a predicament where you're delivering one fraction to the patient and there is a lot of work in preparation and dose symmetry and so forth in preparation to do that.

So treatment planning has to occur and then they deliver the therapy.

So, ultimately what you would like to see is several thousand dollars, let's say, $2,000 or $3,000 reimbursement for the radiation oncologist to go up to the OR suite and deliver the radiation therapy.

If the current guidelines are used in the same single dose versus multi dose, that would not be necessarily a very fair number for the amount of work and effort that the radiation oncologist puts in.

What we're hoping is that since so much of the work is done in the planning for that first dose, and they don't get the benefit of multi-dose therapy, that this front end reimbursement will be substantially higher than what we would describe as this multi-fraction approach that is used today.

So obviously several thousand dollars, at a minimum, would be a very good number proportionate to the amount of work that has to be done to deliver one dose.

So we don't have any information at this point of what the reimbursement would be if the code is approved, but we're hopeful that that's the kind of range, which would make it more equitable for the radiation oncologist to go up to the OR and work cooperatively with the breast surgeon.

But the breast surgeon today, if they do all of their work and they put in the balloon in their office and they do the procedures in terms of the lumpectomy combined with the cosmetic surgery, they usually probably get somewhere between $8,000 to $10,000 in reimbursement for their work.

So the surgeons are okay.

It's the radiation oncologist that doesn't have equitable reimbursement.

And that combined with studies, of course, that show that the cancer recurrence is equal to or comparable to traditional external beam is really what the radiation oncologist is looking for.

They're not strictly looking for reimbursement.

They want to be confident that while this procedure, which we've had plenty of customers, as I have spoken to, say the value proposition is a no-brainer.

The notion, though, is that we do not want to risk our patients of higher recurrence of cancer.

So show us clinically that, that would be the case and we would be happy to move a certain percentage of our early stage breast cancer patients that fit the criteria to this procedure.

So the TARGIT study, with about four years of mean follow-up was a big step in the direction of showing equivalence in terms of cancer recurrence rate.

Following that, of course, needs to be equitable reimbursement.

We think the momentum in both of those circumstances is very compelling and should present significant opportunity.

Because if you have about 270,000 new breast cancer cases per year, and if you look at the category that would candidates for IORT, it is about 160,000.

And today it is just a handful that are getting the procedure.

So more scientific data, combined with equitable reimbursement for the radiation oncologist, has a lot to do with why we believe this is a very big opportunity and it's really going to evolve over time.

But over time could mean over the course of this year, and that's why we're looking at 2011 as an investment.

But we're looking at 2012 as a year that could provide for considerable top line growth specific to the Xoft technology.

And that also ties very nicely to Darlene's comments about an 18 month to 24 month window before this combined entity has such strong top line growth in margin expansion that we become a very nice cash flow positive and profitable entity.

So we're investing but we believe the horizon to see the progress is the second half of this year followed by meaningful financial performance later in the year and into 2012.

Given that, that 160,000 candidates for IORT, just thinking kind of gross addressable market opportunity, how would that translate into best case total market installations, if you will, of consoles?

I don't know how many treatments you might get in a given day or week or month.

Just in rough terms, there's probably 2,000 sites in the United States that are offering radiation therapy, plus or minus.

I think what will happen is, as you start to get considerable procedure volume, just about everybody is going to have to offer it.

It becomes a competitive thing as well as a clinical obvious benefit.

So I think you're going to see in the sites that have, call it a considerable radiation therapy practice, to preserve and to grow their business they're going to have to offer this because the competitor down the street is going to.

So let's say there may be plus or minus a couple thousand addresses that we would hope, as procedure volume grows, they have to offer this.

Jeb, we have seen this in our other businesses.

In the context of MRI CAD, you could argue that procedure volume for breast MRI is about 1 million per year, mammography screenings 30 million, 40 million mammograms a year.

But more and more sites have to offer breast MR for a competitive offering, not to mention a full offering for the benefit of the patient.

We think that the flywheel here will be, as you get the science in place, the supports, the patient, and then secondly you get reimbursement, as procedure volume grows, the majority of these sites, we think, are going to have to offer this to be competitive in the market.

Otherwise their competitor will steal patients, quite frankly, for both IORT and traditional external beam radiation, as well.

So the potential in the US is probably up to several thousand sites over some obvious period of time.

Sure.

Very good.

Thanks very much.

That concludes the Q&A portion of today's conference.

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

Ferry for closing remarks.

I would like to thank everyone once again for joining us this morning.

We're extremely excited about our prospects moving forward and trust that we have conveyed that enthusiasm in today's call.

Thank you for your ongoing support and encouragement as we continue to build iCAD into a major medical technology company that is helping to improve the cancer care cycle.

We look forward to sharing our progress with you in our first quarter call late April to early May.

Thank you all very, very much and have a great day.

Ladies and gentlemen, that concludes today's presentation.

Thank you for your participation.

You may now disconnect.

Have a great day.