ICAD Inc (ICAD) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 iCAD, Inc.

earnings conference call.

My name is Chanel, and I will be your operator for today.

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

Later we will conduct a question-and-answer session.

(Operator Instructions).

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

I would now like to turn the conference over to your host for today to Ms.

Anne Marie Fields.

Thank you.

Good morning.

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

Thank you all for participating in today's call.

Joining me from iCAD are Ken Ferry, Chief Executive Officer, and Kevin Burns, Executive Vice President, Finance and Chief Financial Officer.

Following the market close yesterday iCAD announced financial results for the second quarter of 2011.

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 past and future filings with the Securities and Exchange Commission, including without limitation, the Company's Form 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 this live broadcast, July 28, 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, Anne Marie.

Good morning, everyone, and thanks for joining us for our Q2 conference call.

We are pleased to report our second-quarter and six-month financial results, which showed 9% and 11% revenue growth, respectively.

We achieved this growth despite operating in a somewhat challenging environment, as the international CAD business continued to remain weak for the second quarter in a row.

This was partially offset by a stronger sales environment in the domestic market overall and particularly for MRI, service and supply products.

In addition, the temporary effects resulting from the FDA recall of the shielding product for the Axxent electronic brachytherapy system also slowed progress towards reaching even stronger topline growth than the 9% that we achieved compared to Q2 of 2010.

Consequently, we were quite pleased to receive FDA clearance of a new family of shielding products on Friday, July 22.

We see this accomplishment as quite significant as we now once again have a complete product offering for the breast intraoperative radiation therapy segment of the business, which we believe to have the greatest market potential over the years to come.

So while this business was essentially on temporary hold for new breast IORT customers in the first half, the funnel for the third quarter and beyond continues to grow very nicely.

Also, to demonstrate the broader potential of this innovative radiation therapy platform, we were successful in selling two Axxent systems to the dermatology market in the quarter as well as one to the veterinary market.

We believe we have additional growth catalyst for the second half of the year and for the longer term, that I will come back and provide more detail on after Kevin Burns, our CFO, reviews the second-quarter financials in greater detail.

Kevin?

Thank you, Ken, and good morning, everyone.

Total revenue for the second quarter of 2011 was $6.6 million compared with $6.1 million for the second quarter of 2010, an increase of $500,000 or 9%.

For the first half of 2011, total revenue was $14 million versus $12.6 million in the first half of 2010, an increase of $1.4 million or 11%.

As you know, we break revenue out into four main categories.

First, revenue from sales of digital and MRI CAD products for the quarter were $3.2 million, a decline of $800,000 or 20% from the second quarter of 2010.

In the first half we experienced a decline in digital revenues, primarily due to continued weakness in the international markets.

The softness was somewhat offset by strength in MRI CAD sales, which have promising growth, increasing nearly 21% over the second quarter of 2010 and up 88% over the first half of 2010.

The second component of our revenue relates to film based -- the film-based segment.

And for the quarter, revenue in this segment was $537,000, a decrease of approximately $188,000 or 26% versus the prior year.

As we have discussed, this was expected as demand for film digitizers continues to decline with the transition to digital technology.

Our third revenue category relates to product sales of electronic brachytherapy or the Axxent solution.

And for the second quarter of 2011, product revenues were $760,000.

As we completed the Xoft acquisition at the end of the fourth quarter of 2010, our financials do not reflect any brachytherapy product sales for fiscal year 2010.

Finally, we have service and supply revenue, which includes ongoing service fees as well as Axxent's sourcing agreement.

For the second quarter of 2011 this revenue was $2.2 million, representing an increase of $771,000 or 56% from the prior year.

When you back out the $407,000 of service and supply revenue related to the Axxent solution, we reported CAD service and supply revenue growth of 26%, related to our growing installed base of digital CAD and TotalLook MammoAdvantage System's transition from warranty to service contracts.

Moving onto the rest of the P&L.

First of all, I would like to mention that effective with the filing of our 10-Q for the first quarter of 2011, we reclassified certain expenses related to product installation, training and customer support from sales and marketing expenses to cost of services.

As a result, all of our financial statements reflect this reclassification of expense from operating expenses to cost of services expenses for the current and all prior periods.

As a result, gross margin for the second quarter of 2011 was $4.5 million or 68% compared with $4.9 million or 81% for the second quarter of 2010, a decline of $400,000 or 13 basis points.

As we discussed last quarter, the year-over-year decline in gross margin percentage is primarily related to the acquisition of the Xoft business, which has a lower overall product margin due to the fixed costs of our manufacturing facility, combined with additional amortization expenses of $233,000 per quarter.

Compared to the first quarter of 2011, which includes the Xoft business, our gross margin declined by approximately 2 basis points from 70% to 68%, primarily due to the lower revenue in second quarter compared to the first quarter.

As we move forward, we do expect gross margin percentage to increase in the back half of 2011 to the low to mid 70% range, as we are able to absorb the fixed cost of our manufacturing facility through the anticipated growth in revenues.

From an operating expense standpoint, we had total operating expenses of $9.6 million in the second quarter, an increase of $3.6 million over the same period last year, and an increase of $254,000 from the first quarter of 2011.

We continue to incur significant expenses related to ongoing patent litigation and in the second quarter we also made an $800,000 investment in a later study for SecondLook Premier, our next generation Mammo CAD products.

In addition, we incurred a severance charge of approximately $537,000 in the second quarter related to headcount reductions.

As a result of this action, we eliminated approximately 20% of our workforce, primarily in nonrevenue-related areas, with a majority of this reduction coming at the end of the second quarter.

Looking forward, we expect significant declines in our operating expense levels and the back half of 2011 and going into 2012, as our Reader Study investment winds down, with the FDA submission in the fall, anticipated reductions in patent litigation costs and the financial benefit associated with our headcount reduction as well as the benefit of other cost control initiatives established in the last 60 days.

Moving onto our profit metrics, our net loss for the quarter was $5.1 million compared to a loss of $736,000 in the second quarter of 2010 and $4.2 million in the first quarter of 2011.

Adjusted EBITDA, which is reconciled in our press release, was a loss of $3.6 million in the second quarter of 2011 compared to a loss of $119,000 in the second quarter of 2010, and a loss of $2.3 million in the first quarter of 2011.

Again, as I have discussed, we have taken significant steps to reduce our operating expense levels at the end of the second quarter.

And this, combined with the anticipated uptake and revenue in the back half of 2011, will enable us to significantly reduce our cash use in the next two quarters and we expect to be cash flow breakeven within three quarters.

Quickly moving onto the balance sheet, we ended the quarter with $7.7 million in cash, compared with $11.3 million at the end of the first quarter, reflecting a total cash burn of $3.6 million in the quarter.

In the first half of 2011 we used $8.6 million of cash, primarily to fund the acquisition, integration and investments in the Xoft business.

While we remain very confident about the future prospects of our business and the path to generating cash, we will continue to review a variety of options for raising capital and will be selective and opportunistic in our approach.

Now moving onto our updated guidance.

For the year our CAD business remains in line with our internal expectations.

However, the recall continued to have a greater impact on our revenues in the second quarter than previously anticipated.

With our new shielding cleared by the FDA starting to come back [down] line in a very healthy pipeline, we now have much better visibility towards revenue for the Xoft business in the second half of the year.

As a result, we now expect revenues for fiscal 2011 to be in the range of $30 million to $32 million.

This represents revenue for [H2] between $16 million and $18 million, up from $14 million in the first half of 2011.

In addition, we expect 2011 gross margin to be between 71% and 73% for the year.

We continue to believe that the Xoft acquisition will be accretive to iCAD in the next 12 to 18 months, and are confident that the investments we are making now will translate into solid revenue and profitability growth.

With that financial overview, let me now turn the call back over to Ken.

Ken?

Thanks, Kevin.

Let me start my business update with our core digital mammography CAD product line.

Our performance for the first half of 2011 was fairly consistent with the MQSA data, which was down approximately 9% versus the first half of 2010.

We are, however, hopeful of a much stronger second half internationally.

While the market overall has been soft in Europe, we have also been negatively affected by an unsuccessful sales program with GE.

Having of course corrected this program in the first half of 2011, we anticipate stronger volume from them in Europe, and China as well, in the second half of the year.

Also, as Kevin mentioned earlier, we were in the final phase of completing the US Reader Study for our next generation digital mammography CAD, SecondLook Premier.

We anticipate a US regulatory filing in the September/October time frame, with the hope of US regulatory clearance sometime in the first half of 2012.

When the regulatory approval occurs, we have the opportunity to offer this product to new customers and as an upgrade to our installed base of over 4,000 systems.

We believe the market opportunity for this upgrade alone to be between $75 million and $100 million over time.

Turning to our MRI product line, we are quite pleased with the favorable customer feedback with our new product platform.

Our sales in the first half of 2011 were nearly equal to all of 2010.

In the breast segment, we see continued growth in procedure volume, creating increased demand for new systems.

But we also see a replacement market developing for first-generation systems from our competitors.

In the prostate segment, interest continues to build and we are seeing the benefits of our investment in education.

The continuing challenge to more rapid adoption is getting the urologists onboard as a collaborative partner with the radiologists.

We will continue to further this effort as this opportunity longer term may be quite substantial.

Our goal, simply put, is to get the urologists to support a contrast enhanced MRI study for the symptomatic patient prior to doing a prostate biopsy.

It is estimated that 1.5 million prostate biopsies are conducted each year in the US alone, only a small percentage of having the benefit of an MRI first.

The MRI study, in conjunction with our software, will help with the interpretation of the prostate, so as to determine if the biopsy is required at all, as well as when indicated, provide reasons of interest to better focus the diagnostic workup of the patient.

We are also making progress in developing strategic partnerships with major MRI equipment manufacturers.

This progress should result in increased market opportunity over time as well.

Moving onto VeraLook, our colon CAD product for use with virtual colonoscopy, during the quarter we were pleased to announce the commercial availability of our VeraLook CTC CAD solution integrated with the Vital Images products.

Vital Images is a Toshiba medical systems group company and a leading provider of advanced visualization and analysis solutions for health care providers.

With this agreement, iCAD's VeraLook CTC CAD solution is now available as part of Vital Images products on a worldwide basis.

CTC screening reimbursement is now mandated in 22 states in Washington, DC, and is also covered nationally by private payers such as UnitedHealthcare, CIGNA, Aetna and many Blue Cross Blue Shield chapters.

We believe that the improving reimbursement for virtual colonoscopy, combined with the commercial availability through Vital Images at a minimum at this time, will be catalysts for growth in VeraLook product sales.

In addition, we recently conducted evaluations with other potential OEM partners.

And as these companies have a considerable MRI system footprint we see the potential of landing one or more contract agreements as catalysts for more rapid market adoption and revenue growth in the future.

Finally, moving to the electronic brachytherapy business, as I mentioned earlier with the FDA clearance of a new family of shielding products recently received on July 22, we are well positioned to regain considerable momentum in the breast IORT market.

Adding to this momentum, we anticipate that a CPT I reimbursement code for single fraction therapy delivery will be enacted as part of CMS's annual updates to existing and new codes in the October time frame of this year with new rates effective on January 1 of 2012.

We believe this event should enable a radiation oncologist to be paid at a higher level than today and on a dramatically more consistent level nationally versus today's status under the CPT degree code that is currently in place.

We are also seeing progress as a result of establishing a dedicated sales manager in Europe to cover the international market.

We recently received new orders for the Axxent eBx system in Taiwan and Portugal.

All in all, we feel we are just beginning to see the tremendous potential of this exciting breakthrough technology that provides radiation therapy across a number of significantly sized addressable markets.

So, in closing the opening of our call, we see a number of positives from the second half of the year.

We look forward to receiving a CPT I code for IORT in October, which will be a major catalyst for sales through the end of the year and into early 2012 as the code becomes enacted.

We expect the second half to be much stronger as well in the CAD business with our OEM partners, particularly on the international front.

MRI CAD sales should continue to be positive as the sales trajectory has been strong.

Colon CAD sales should start to evolve more than we have launched the product with Vital Images and are close to launching colon CAD with other significant OEMs.

We also expect to see the benefit from additional sales of the Axxent system from a recurring revenue standpoint with the strategic distribution partners that we recently completed in the dermatology and the veterinary markets.

Finally, we have taken significant initiatives to reduce their operating expenses with a goal to be cash flow breakeven by year-end or early in 2012 as well.

So despite some short-term market and product challenges, we are extremely optimistic about the long-term growth potential for iCAD as we leverage the opportunities in bringing targeted therapies across the entire spectrum of cancer care from screening to diagnosis to therapy to treatment monitoring.

With that overview, Operator, we are ready to take questions.

(Operator Instructions).

Jonathan Block, SunTrust Robinson Humphrey.

This is actually [Maggie Lovatt] on for Jon.

Thanks for taking my questions.

Just the first one real quick, what was the international revenue number, if you don't mind?

For the quarter?

Yes, please.

The sales for the quarter.

International is about $745,000, I believe.

I am sorry, that is year-to-date.

The international revenue was about $400,000 in the second quarter.

Okay, great.

Thanks.

Then can you maybe explain a little bit more about -- you briefly mentioned that the GE effort has been unsuccessful.

Maybe just more details on that and what you expect going forward.

Sure.

What we basically did is we collaboratively worked with GE, really in the first quarter of last year on how we could increase the attachment rate of CAD in Europe.

And historically, the CAD attachment rate has been about 25%, where it is nearly 100% in the United States.

Basically we devised a plan where we would have a goal of increasing the attach rate to 50%.

And they had agreed they would aggressively market this and, in turn for that, they would give us minimum quantities at a special pricing point to really motivate the customers as well as to provide sufficient motivation and margin for them.

We designed the program.

We put this pretty much in play.

And, unfortunately, they had some personnel changes and the champion for the program left the company.

So basically the program did not really get what I would describe as the proper attention for the rest of the year.

And what that ultimately ended up in was not an increase in the attachment rate and an inventory bulge at year-end.

So they have had to come I think, in combination with a softer European market this year, also work down the inventory they had promised to work through as part of the program, largely in the first half of this year.

I think had the market been stronger as it was last year, that inventory would have been worked down in the first quarter.

As a result of a softer market as well as the program having been dropped, unfortunately, it has taken them two quarters to work off the inventory that they purchased as part of the program.

So part of it is market dynamics; part of it is for program execution.

We believe that inventory has substantially been depleted and for that reason, along with what we believe to be a stronger market condition, we would expect to have a much stronger second half.

If you just look at our first-half international sales compared to last year, last year we did about $1.9 million in the first half of the year.

We are at about $750,000 plus or minus this year.

So if you look at the iCAD business in the first half of the year, we actually had slightly positive growth in the United States over the last year.

And the entire shortfall of about 9% or 10% for the worldwide business was all attributable to Europe.

Okay, thanks.

That detail is very helpful.

Then if I can move on to the Xoft product.

I am just a little confused and not that familiar with the CMS getting new codes.

But can you help us understand why we thought that we could get a preliminary code in the summer and now it seems like it is more going to be in the October time frame?

Sure.

The way it works is in CMS is around July 1 what they do essentially is they update the reimbursement, relative to the codes for a comment period of roughly 60 days every year.

And typically what you would expect to see is changes in reimbursement in existing codes, and you would also see new codes with reimbursement in both the CPT I and CPT III category.

Then you would go on and have a 60 day comment period where payers and providers and industry can all comment on whether they believe that the reimbursement levels that are in a proposal stage are fair and equitable.

Then CMS comes back in the October time frame and finalizes with that input all of the reimbursement basically, and that allows for a 60 day window between November 1 and year-end for whatever changes to be ready so that on January 1 of 2012 the new reimbursement levels for existing codes, as well as decisions on new codes, all have been implemented.

What has happened, unfortunately, now is three of the last five years CMS, as we understand it, has had bandwidth resource issues and for three of the last five years they have not addressed the new code proposals in the preliminary July communication.

That, as we understand it, is exactly what happened this year for the third time in the last five years.

They have, however, every year addressed the new codes in the October time frame of each of those years, even than when they did not address them in July.

So it was a little disappointing that we did not get the news in July; but from all of our intelligence we are very confident that the CPT I code for the delivery of radiation therapy relative to brachytherapy technology will be included and approved in this October time frame.

The slight drawback might be that you don't get the benefit of a 60-day comment period if you are not happy with the rate.

If the rate comes out satisfactorily, then this window, if you will, will not have had any negative impact.

So we are confident that this will be approved.

It will be implemented on January 1.

We are very, very hopeful of that.

We will just probably not find out what the level of reimbursement is until sometime in the October time frame.

Great, thanks.

Then can you give us just a sense of what a satisfactory rate might be for you guys?

Well, there is a whole host of different codes.

It is a very complicated process.

So let me just try to do it in a broader sense, and say that the surgeon that does the breast conserving surgery, the lumpectomy, today does get reimbursed under a CPT I code for all of the work that they do relative to the procedure.

As it relates to the hospital facility or freestanding center and so forth, there are codes that are established under a CPT I category as well, for the reimbursement of radiation therapy.

So, really, the ingredient that has really been missing is the delivery of radiation therapy by the radiation oncologist, which has been under the CPT III code for electronic brachytherapy.

So the hope, of course, is now we will have a very consistent implementation of reimbursement where with this new CPT I code, radiation oncologists will be reimbursed at a very fair level, and it will also be implemented on a national basis based on CMS's decision.

So today where the reimbursement is occurring basically on average, we are seeing something in the range of about $600 reimbursement.

The hope is that the reimbursement will be somewhere in the range of about $750.

Then, also, I think, as important is the implementation on a national basis versus today, which is reimbursement is done on a region by region basis, payer by payer basis.

So this should certainly facilitate the radiation oncologists being paid very promptly and consistently on a national basis in 2012 with this code approval.

The other thing, I think, which is equally important to mention is the reason why the American Society of Radiation Oncologists applied to the American Medical Association for a CPT I code is because of significant growing clinical evidence that this is a very, very effective procedure.

So I look at this as a large endorsement of the clinical utility and success of this procedure.

And there is a tremendous benefit to women, as we know, who fit the criteria for this procedure.

So there is a whole host of attributes, if you will, and dynamics around the code.

I would say this, that as we go to the various meetings in the radiation oncology community, intraoperative radiation therapy and specifically to breast is a very hot topic.

It is something that is being discussed.

It is lots of presentations and poster sessions and people are really, really getting excited about it.

Because the studies and the science are proving that this is effective as external beam radiation therapy and that the follow-up data, while in the most major study that is available, the Target A study had only 4 plus years of mean follow-up, it was still significant because it proved that the risk of cancer reoccurrence, which is the biggest concern of all of the clinicians, was very, very comparable with external beam radiation therapy over a very large population.

So the potential benefits people say quote, unquote, are a no-brainer, we just need to be certain we have the clinical evidence, which is growing very nicely and then, of course, a equitable reimbursement.

So we see the environment for all of those catalysts very much right in front of us and are extremely bullish that this is going to be a significant market opportunity for us as a company in the near future.

Great, thanks.

Then just a final question, Kevin, maybe for you.

Just in terms of guidance, I think we took down the guidance from the original number we got in March due mostly to the FlexiShield issue.

And then it seems like you're taking it down again by another about $2.5 million.

Just wondering what the reason for that is.

Has anything changed specific to Xoft or is it more on the international side?

Any clarity would be helpful.

Really, the biggest change that we have seen in the quarter from the last time we talked about the revenue for the year was the further impact in the second quarter on the Xoft business related to the recall.

So while we are viewing this as, unfortunately, it is another push on the breast, the IORT segment in the second quarter, which is impacting our revenues for the year.

So it's primarily Xoft-related in H1.

Great, thank you.

Brian Marckx, Zacks Investment Research.

Is SecondLook now available in China?

SecondLook is available through GE.

We have not had any material market traction yet with the product, but it is approved.

We are certainly, actually, working closely with the GE Chinese team, really trying to better understand the timing of orders and the market potential as we speak.

We are actually planning a trip to China in the fall, probably September/October, to better coordinate our efforts, as the approval is there, but the business itself has not really started to materialize yet.

Okay.

Relative to the product liability lawsuit, is there anything new that you can discuss?

It is Kevin.

Really no update.

Our attorneys are working on the matter right now.

As we have communicated in the past, we believe that we have significant -- enough product liability coverage to work through this issue, and, hopefully, in the next six to 12 months, this will be behind us.

Okay, great.

One on R&D.

There was a pretty substantial spike sequentially and I know you talked about the expenses related to the Reader Study.

Is that -- is the spike reflective mostly of those expenses?

That is right.

We incurred about $800,000 related to the Reader Study in the second quarter.

That was classified as an R&D investment.

So that jumped from Q1 to Q2 was the Reader Study.

We will have a little bit of expense in the third quarter related to the Reader Study, but not close to the $800,000 that we incurred in the second quarter so [that was behind it].

Great.

One last one.

So you had a $1.1 million gain from the contingent consideration and then the $537,000 severance expense.

Did those both run through G&A?

Yes, they did.

Okay, perfect.

Thanks, guys.

Appreciate it.

There are no further questions.

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

Ken Ferry.

Thanks, Operator.

In closing, we would like to thank everyone for their interest in support of iCAD.

While we have hit some challenging times in the near term in the second quarter, we are growing in our confidence that our strategy, our product programs and our product pipeline will really yield stronger growth and stronger results going forward.

We have also taken appropriate measures to take our cost structure down to reduce cash burn and to put ourselves in a better position for the longer term of the Company.

We are extremely excited about the opportunities in the electronic brachytherapy market.

We remain laser-focused on breast IORT as our highest priority.

In the CAD space we see significant growth opportunities in MRI as we have gained nice traction this year versus last year.

Our colon CAD product, while it has taken a little bit of time to get commercial traction, is now starting to see that with major OEM partners.

And then I think lastly, our new next-generation mammography algorithm, should we get this into the market in the first half, as we anticipate, in 2012, is going to be a significant potential catalyst for growth given the size of the installed base, as well as the remaining customers that would like to migrate or buy this product as an outstanding performing product for the first time.

So we are very, very excited.

Very, very bullish about our future.

We are mindful as to where we are, and we will remain extremely focused, relative to execution as Kevin talked about, with the goal of turning the Company back into a cash-flow positive state by year-end or early in 2012.

So thank you all very much for your interest, and we look forward to discussing future results at the end of the third quarter.

Have a great day.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.