ICAD Inc (ICAD) 2011 Q3 法說會逐字稿

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

earnings conference call.

My name is Francine and I am your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's conference, Ms.

Anne Marie Fields with LHA.

Ma'am, proceed, please.

Thank you.

Good morning, this is Anne Marie Fields with LHA.

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 of Finance and Chief Financial Officer.

Following the market close yesterday, iCAD announced financial results for the third 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 LHA in New York at 212-838-3777 and speak with Caroline 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 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, October 27, 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 thank you for joining us for a discussion of our third-quarter results.

As indicated in yesterday's earnings press release, we had a very strong third quarter with double-digit revenue growth, both sequentially and year over year, in both our cancer detection and brachytherapy businesses.

We are pleased with this solid performance which we achieved largely on strong US sales in both business categories.

In brachytherapy, we believe that our growing revenue reflects the increasing interest in and demand for the use of the Axxent eBx system for breast intraoperative radiation therapy, or IORT, as an alternative to external beam radiation in the treatment of early-stage breast cancers.

We remain very enthusiastic that this breakthrough procedure will continue to gain rapid adoption.

I will expand on this later in the call.

In addition to the strong top-line results, the cost savings measures we implemented at the end of the second quarter significantly lowered operating expenses in the third quarter and reduced our cash burn.

We believe we are well-positioned to continue to demonstrate strong growth through the remainder of 2011.

We also feel that our strategy to offer a broader range of solutions to the oncology market will allow us to drive growth well into the future.

I will provide more insight during my business update after Kevin Burns reviews the third-quarter financials in greater detail.

Kevin?

Thank you, Ken, and good morning, everyone.

To follow on to Ken's comments, I am also pleased with our third-quarter performance including the top-line growth and our movement towards profitability.

So let me start by walking you through the financials for the third quarter and year to date.

Starting with revenue, total revenue for the third quarter of 2011 was approximately $8.1 million, representing an increase of $2.5 million, or 44%, from the third quarter of 2010.

For the first nine months of 2011 total revenue was $22 million.

This is an increase of $3.8 million, or 21%, from the prior-year period.

As we have discussed during prior calls, we break revenue out into four categories -- digital and MRI CAD product sales, film-based product sales, Xoft product revenue, and service and supply revenue.

Starting with the first component, sales of digital and MRI CAD products for the third quarter was $3.8 million, an increase of approximately $500,000 or 15% from the third quarter of 2010.

For the first nine months of 2011 we experienced an 8% growth in the US digital and MRI CAD sales.

However, this growth was offset by a decline in international markets, resulting in total digital and MRI product revenue decreasing by $700,000, or 6%, year-to-date for the same period last year.

Moving on to the second component of revenue, our film-based products continued to contract with the ongoing transition to digital technology.

Third-quarter revenue in this category was $616,000, a decrease of approximately $132,000 or 18% versus the prior year.

Year-to-date 2011 is down approximately 34% over the same period in 2010.

The third component of revenue relates to our Axxent electronic brachytherapy technology, and third-quarter revenue for this platform was approximately $1.8 million, which consists of $1.35 million in product revenue and $441,000 in service and supply revenue.

We were pleased with the strong performance in the third quarter with sequential product revenue growth of 77% over Q2 and 44% growth over the first quarter.

In addition, we made significant progress in further developing a robust pipeline going into the fourth quarter and next year.

For the first nine months of 2011 total Axxent revenue was $4.3 million, consisting of $3.1 million in product sales and $1.2 million in service and supply revenue.

Moving on to the final component, service and supply revenue includes ongoing CAD service fees as well as Axxent service and supply revenue that I just mentioned.

Third-quarter revenue for this category was $2.3 million, an increase of $772,000, or 51%, from the prior year.

Looking at just the CAD service and supply revenue, this revenue continues to grow nicely as we are seeing new customers signing up for support agreements.

As a result, Q3 CAD revenues were $1.9 million, an increase of 22% from last year.

For the first nine months of 2011 total service and supply revenue of $6.6 million increased $2.4 million, or 56%, over the same period in 2010.

Again, just looking at CAD, the service and supply revenue increased 27% year-to-date from last year.

Before I move on to the rest of the P&L, I would like to remind you that effective with the filing of our first quarter 10-Q we reclassified certain expenses related to cost of 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 service expenses for the current and all prior periods.

As a result, gross profit for the third quarter 2011 was $5.9 million, or 73.1% of revenue, compared with gross profit of $4.5 million, or 79.8% of revenue, for the third quarter of 2010.

The decline in gross margin percent is primarily attributable to the acquisition of the Xoft business, which has a lower overall margin primarily due to the fixed costs of our manufacturing facility combined with additional amortization expenses of $233,000 per quarter.

We are especially pleased with the sequential gross margin improvement, which was up over 500 basis points from the second quarter of 2011 and 300 basis points from the first quarter of 2011.

This is largely the result of higher CAD and Xoft product revenues in the third quarter.

As we have discussed in the past, we expect our gross margin to be in the low- to mid-70% range as increasing revenue helps to absorb the fixed cost component of our manufacturing facility and the amortization expenses.

Moving on to operating expenses.

As Ken mentioned, we implemented a number of cost savings initiatives in the second quarter that are now being realized in our P&L.

Total operating expenses, excluding the non-recurring items which I will speak about in a minute and are outlined in the press release, were $7.6 million in the third quarter.

This is down 17%, or $1.6 million, from $9.2 million in the second quarter of 2011.

Moving forward, and in particular with respect to the fourth quarter, we do expect a modest uptick in spend due to our marketing efforts centered around our attendance at RSNA and ASTRO.

As always, we continue to evaluate and monitor all areas of our spend for additional savings and synergies while balancing this with additional investments required for the long-term growth of the organization.

Moving on to some of the other components of our operating expenses.

In the third quarter we recorded a non-cash charge of $26.8 million related to the impairment of goodwill, and we also recognized a $3.8 million gain on contingent consideration.

To be clear, we do not expect that these non-cash items will have an impact on our financial condition, cash flow, or liquidity.

In addition, we incurred approximately $238,000 of litigation expenses, primarily related to a Xoft patent matter, which is down significantly from the first half as we work to resolve this matter.

From a profitability standpoint, non-GAAP adjusted EBITDA was a loss of $868,000 for the third quarter of 2011 compared with a loss of $1 million in the third quarter of 2010, an improvement of $129,000.

Sequentially, our adjusted EBITDA improved by $2.7 million from a loss of $3.6 million in the second quarter of 2011.

On an EPS basis our non-GAAP adjusted net loss was $0.03 per share, a $0.01 improvement over last year and a $0.05 improvement over the second quarter of 2011.

As I mentioned earlier, I believe we made solid progress on both our revenue and profitability metrics.

Moving on to the balance sheet.

We ended the quarter with $5.3 million in cash and cash equivalents compared with $16.3 million at the close of 2010.

For the quarter we used approximately $2.4 million of cash, down from an average quarterly burn of $4.3 million per quarter in the first half of 2011.

During the first nine months of 2011 we used approximately $11 million of cash, primarily to fund the acquisition, integration, and investments in the Xoft business.

Our DSO increased to 64 days from 55 days at the end of the second quarter as we did quite a bit of business in the back half of the third quarter.

The growth in AR is not a reflection of the quality of the accounts receivable, but was driven primarily by the timing of business in the third quarter.

In addition, we grew our deferred revenue balance by approximately $600,000 in the quarter.

So those are the financial highlights for the quarter and hopefully a little insight into the business as we move forward.

To bring it all together, for the fourth quarter we have confirmed our previous guidance and expect fourth-quarter revenues to be between $8 million and $10 million and fiscal year 2011 gross margin percents to be in the range of 71% to 73%.

Taken all together, we think this is a very solid quarter.

We posted solid revenue growth, improved our gross margin, and significantly lowered our ongoing operating expenses.

We are beginning to see the benefits of the investments we have made for the Xoft business, the investments we have made to expand our product offerings, as well as the benefits of the cost-cutting measures implemented throughout the year.

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

Ken?

Thanks, Kevin.

Let me begin my prepared remarks with a review of our digital mammography CAD product line.

We saw a strong uptick in US demand for digital mammo CAD products in the third quarter.

This was consistent with the MQSA data which showed the third quarter to be the strongest of the year so far.

Third-quarter sales were positively impacted in part by a successful introduction of SecondLook Digital Multivendor CAD, which allows hospitals and imaging facilities to process cases from digital mammography systems manufactured by GE, Siemens, Agfa, Planmed, Sectra, Fuji, Hologic, Giotto, and Phillips using a single system for all input devices.

It also allows for up to four simultaneous connections per server.

This streamlined configuration eliminates the need to purchase a separate CAD system for each manufacturer's FFDM system.

We expect this to continue to be a popular solution for customers operating in a multisystem, multivendor environment.

In the core we also benefited from strong business from Siemens as they clearly gained traction with their new full-field digital mammography system.

Not surprisingly, we continued to see a weak European market as economic uncertainty has had a negative impact on healthcare spending.

We recently held a call with GE Europe in which they noted that the market in Europe has moved rapidly to mid-range priced systems, which has further softened the high-performance market where CAD is predominantly purchased.

Moving forward, we expect some improvement as we, along with GE, modify our go-to-market strategies to reposition CAD and hopefully increase business over Q4 and into 2012.

In the US we recently completed the final phase of the reader study for SecondLook Premier, our next-generation digital mammography CAD product.

We anticipate a US regulatory filing by mid-November with the expectation of US regulatory clearance and product launch sometime late in the first half of 2012.

Upon regulatory approval we will have the opportunity to offer this product to new customers and as an upgrade to our installed base of systems that are now connected to more than 4,000 full-field digital mammography systems today.

We believe that the upgrade alone will be a substantial opportunity for growth in our digital CAD business with a potential market of $50 million to $75 million over time.

Moving on to our MRI product line.

With the introduction of our new MRI product platform last year, we continue to receive favorable customer feedback which is translating into sales growth.

For the third quarter and the first nine months of 2011 our MRI sales have essentially doubled compared with the same period a year ago.

In the breast segment, procedure volumes are growing which should create increased demand for new systems, and we are beginning to see a replacement market developing for first-generation systems from our competitors.

With the new thin [pliant] architecture, additional workflow tools, enhanced viewing, and user interface we feel we are well-positioned to compete and grow in this market.

We are also seeing increased demand and growing interest in prostate MRI segment via our educational programs and growing centers of excellence.

The challenge to accelerating adoption continues to be building collaboration between urologists and radiologists.

We are working diligently to further these collaborations as we believe the patient benefit could be substantial, as well as the business opportunity as well over time.

During the quarter we continued discussions with other potential OEM partners that have considerable MRI system footprints and I am pleased to report the recent signing of a distribution agreement with Hitachi.

Additional expansion to other OEM partners in the MRI space will help foster more rapid market adoption and revenue growth.

Now turning to our brachytherapy business.

We are very pleased with the progress of our electronic brachytherapy solutions as they posted double-digit revenue growth, both sequentially and versus the prior year.

We were able to gain considerable momentum in the breast IORT market as we landed a number of new customers in the quarter.

Interest in IORT as an alternative to multiple weeks of external beam radiation therapy clearly is gaining traction.

We saw this at the recent annual meeting of the American Society of Therapeutic Radiology and Oncology, or ASTRO.

In contrast to prior years, more customers visited our exhibit with an active plan to build an electronic brachytherapy therapy system in the next 12 months.

Complimenting this growing interest in breast IORT, we believe adoption will be boosted by the recently announced reimbursement codes for IORT that were signed by the American Medical Association and by the announcement of reimbursement payment rates from CMS that are anticipated by November 1.

Providing surgeons and radiation oncologists with compelling clinical data in support of IORT is fundamental to driving its acceptance.

Equitable reimbursement is also critical to driving the commercial adoption of IORT.

And speaking of increasing commercial adoption, one of the key differentiating capabilities of the Axxent's eBx system is that it is a platform therapy with multiple indications for use.

It is approved for use in certain gynecological and skin cancers as well.

In addition, this is a mobile system that can be wheeled around to different treatment areas or transported easily from one site to another.

These differentiated capabilities should add to potential procedure volumes and adoption.

It should also expand therapy access to parts of the world where it may be more practical to bring mobile technology to patients in rural areas versus having them travel long distances for treatment.

Our international business for brachytherapy is making progress as we made several shipments to several key European distributors in the quarter.

We believe there is a significant opportunity for us to expand through distributors in Europe, Asia, and Latin America.

We see this quarter's progress in early evidence of the growth potential of the Axxent platform and are confident that the combination of compelling data and growing reimbursement will drive revenue growth moving forward, particularly in the United States.

In closing my opening comments, while the first half of 2011 presented us with a number of market challenges that we believe we weathered well, the back half of the year is shaping up to be stronger as we had expected.

We are realizing the benefits of our investment in the Xoft acquisition as well as in cancer detection, new product enhancements, and educational efforts.

Our strategy to deliver targeted technologies throughout the continuum of the cancer care cycle is gaining momentum and will enable us to drive revenue growth for iCAD as a broader solutions provider to the oncology market.

With those opening comments I am going to turn it over to the operator and we are ready to take your questions.

(Operator Instructions) Brian Marckx.

It's Brian Marckx from Zacks.

Great quarter, congratulations.

The digital MRI CAD business was particularly strong this quarter.

Do you think you have kind of hit an inflection point, or you think this business may grow from here on out on a year-over-year basis?

That is a good question, Brian.

The way we are seeing the market, if you look at the United States as an example, the total units versus last year, if you look at the MQSA data, it is down about 6%.

We are also down to about 2,500, or 20% of the market in the United States, that is still using film technology.

So we probably don't anticipate unit growth, even though the third quarter was actually the strongest quarter of the year.

If you look at the MQSA data there were 316 systems placed versus 287 in Q2 and 313 in Q1.

So it was a strong quarter, but we really don't anticipate, beyond this run rate, any growth really in the United States as you essentially begin to run out of real estate.

What we are really hoping for is our new product, SecondLook Premier, to be a material opportunity for growth in this space.

We had mentioned in the opening remarks that we will have a submission to the FDA in a couple of weeks.

Initial data from our reader study and stand-alone testing is very encouraging.

And given that the installed base is now greater than 4,000 connections to digital mammography machines, combined with the fact that our current product was introduced in 2006, we think the opportunity to sell the new product into the installed base to be the biggest catalyst for growth.

So our opportunity to grow in, say, 2012 is very much dependent upon the new product gaining traction late in Q2 and in the back half of next year.

I would not be surprised if the number of systems sold new in the United States is relatively flat to maybe minus 5% relative to what is going on this year.

Internationally there is more opportunity.

We need a better economic environment, we believe, since the penetration of digital mammography internationally is less than the United States.

And I talked to about the multivendor solution that we introduced.

What we have found is that for all the customers that are standardized in mammography that have multiple systems on a site there is quite a few customers that have a mixed breed, if you will.

They have a GE system, they may have a Siemens system, they may have a Fuji CR mammography system.

Really it had been very clumsy for them to have CAD in a [logical and] consistent manner.

What we are seeing some very nice growth in is this multivendor server which really allows us to connect different manufactured products to one server and run the software algorithm that is specific to that vendor from one server.

That has been very popular and that did have a fairly significant impact on our growth in the third quarter as well as it has year-to-date.

So we see these different segments adding to grow.

But for next year we are certain that we will need the new product in the market to get year-over-year growth in this particular segment.

Okay.

Can you give us what the international sales were in Q3 of that category, digital and MRI CAD?

The digital and MRI international business was about $150,000 in the third quarter, Brian.

And what was that on a year-over-year growth basis?

Can you give us that?

Year over year we were down about 80%, so down rather significantly.

Yes, okay.

The dichotomy, Brian, that we have is that the US business for iCAD is actually up 9% year over year.

So obviously our largest business being the US is growing very nicely.

The contrast would be the sharp decline on the international front.

We just came from the French Radiology Society meeting in Paris, just literally ended -- I think it ends today.

We had meetings with all of our OEM partners and probably spent the most time with GE really trying to devise market strategies to turn this trend around.

And I think we have some good plans in formulation that should allow us to strengthen international business.

I think we understand more depth around the dynamics of what has held us back.

Some of them are macroeconomic and are not going to change, but some are within our control.

We are working on programs that we would like to have ready to during the course of this quarter that should have maybe a modest impact on the quarter, but may be a more significant impact on 2012.

Okay.

Moving to operating expenses.

You guys have done, obviously, a great job in whittling out costs there.

Do you think on a percentage of sales basis that you can maintain what you have done in Q3?

I know you mentioned that you expect to maybe beef up sales and marketing a little bit with the brachytherapy business.

But in general, do you think the level that you did in Q3 is somewhat sustainable on a percentage of sales basis going forward?

I think I would answer it by, our expense level going into Q4 will pick up a little bit just because of some of the marketing initiatives we are doing in the quarter.

Going into 2012 we don't expect the current dollar spend rate based on the Q3/Q4 numbers to be dramatically different going into 2012.

So as a percentage of sales, we certainly hope that they will be declining.

With that said, our OpEx from where we are today may increase a few percentage points.

But we do not need to make dramatic investments in 2012 to hit some of our revenue objectives.

You know, Brian, the fourth quarter historically is a little challenging because of RSNA.

That is for the radiology space the largest meeting of the year and comes with it a fair amount of expenditures, so it tends to spike our operating expenses in that particular quarter.

But to sustain the growth trajectory we have established we are now looking at material investments beyond what we have already made.

Okay, okay.

That is all I had.

I appreciate it, guys.

Thanks a lot.

Jonathan Block.

Thanks, guys, and good morning.

Ken, maybe if you could just speak a little bit to what is going on with IORT.

It looks like throughout the quarter the clarity to the code certainly increased and became pretty apparent.

What is the buzz from your sales force and what are they hearing?

Was that just the tremendous gating factor that you expected?

And now you have got pretty much this code in hand, how do you think the channel looks, the sales channel, as we approach 2012?

Thanks, John.

I think what I would say is that the growing momentum is from a number of different areas, not just the code.

I think the growing clinical evidence in the target A trial is one component.

Not all components, but one component of that.

Really has become a catalyst for interest and growing interest as well as adoption.

I think the need to have data somewhat longer-term follow-up was critical to this space.

We knew this when we made the Xoft acquisition that the ability to follow patients for, let's say, four to five years post-procedure and to test for cancer recurrence versus traditional external beam was going to be extremely important towards the adoption pace.

So I think that the targeting study combined with other studies has reinforced the potential of this technology.

I think that is number one.

I do think, number two, the notion of the reimbursement code, which makes it far less complex, has also been an enabler, if you will, of more adoption.

So I think you are seeing dynamics around both clinical studies as well as dynamics around reimbursement.

The fact that the codes have been published, their very specific IORT delivery -- x-ray, single-treatment session or IORT management, which is ultimately treatment planning -- are crisp and clear, and that the rumor mill, if you will, on the reimbursement levels sound favorable.

So we are very encouraged by all of that.

What we are seeing is we have spent a lot of time with our field is the need, if you will, or the demand is for a variety of reasons.

If you are a large hospital, it could be that your linear accelerators are at capacity and this is a very cost-effective way to add additional capacity.

Secondly, a lot of the larger hospitals in major centers want to be on the leading edge of offering services around new technology.

No different than when digital mammography became popular.

And so we are seeing a lot of different motivations, if you will, for the adoption of the technology in large centers.

What is interesting is smaller centers in more of the community or the rural areas are looking at this as a very cost effective way to offer a radiation therapy service when they might not have offered any at all prior to this.

What they really are looking at is how many patients are they sending up the road or have traveling 30 to 60 miles to get to a treatment facility, and they are looking at all the lost revenue associated with that.

So what we are seeing is, it's interesting, at the high end of the market there is interest in adoption for different reasons than obviously at the low- to mid-range of the market.

But the net of it is that our salesforce feels that the acceptance of the technology from a clinical standpoint, as well as more clarity around reimbursement, are really driving very strong interest.

When I went to the ASTRO meeting in Miami Beach about a month ago what was interesting is, for a number of us, it was our first time at this meeting.

When I spoke with our colleagues from the Xoft side that had been to multiple ASTRO meetings what I heard was that the volume of customers coming in to our exhibit were very well versed on IORT, very well versed on breast IORT.

A number of them have said either our breast surgeons are demanding this, quote-unquote, and we need to get onboard, or administration has begun a process to procure a system in this space and I need to get educated because we are going to be making a decision sometime in the next 12 months or so.

Very, very different than, as I understand it, prior years when this was more of an educational discussion at this important radiation oncology meeting.

So we are very encouraged by the momentum.

The reimbursement code certainly accelerates, along with the clinical data, the acceptance of the technology so we are very excited.

Our salesforce is busy.

The number of qualified deals that they are working on is up two- or three-fold from where the year started, and we really hope that that is an enabler of much stronger growth, particularly as we go through the fourth quarter and into 2012.

Okay, great.

Then I apologize in advance, I was jumping around on a couple of calls, but I believe, Kevin, I heard you talk about the back half shaping up stronger than what you had anticipated maybe three months ago.

Yet I think the guidance is unchanged.

So maybe if you can speak to that.

Is this just sort of a higher level of conviction in the annual revenue guidance, or do you just feel that you will have stronger momentum as you enter 2012?

Then the second part to the question is was there any sort of an update just on possible funding?

Or do you think you will turn the corner from a cash flow perspective in the first half of 2012?

Thank you.

Sure.

I think that if you look at our guidance, after doing roughly $14 million in the first half of the year, a $30 million to $32 million full-year implied $16 million to $18 million.

So obviously we were anticipating and confident that we could increase business performance in the second half.

So having delivered $8 million in the third quarter certainly says that we are on pace to achieve or do well against the guidance.

I think Kevin said in his prepared remarks that that translates into an $8 million to $10 million fourth quarter.

So that is kind of a broad range, but that is certainly I believe where we are looking.

And I do think that it's a combination of factors.

First of all, I do think that the CAD business has shown more strength than it did in the first half and in the fourth quarter we certainly don't see that slowing down.

Whether that grows at a faster pace is to be determined really in the quarter, but we see it as stronger than the first half.

On the brachytherapy side, clearly see potential to have our strongest quarter of the year.

So when you put those factors together we are very confident that our momentum will continue.

And we certainly feel confident, as we reaffirm guidance, that we should be able to perform somewhere in that range.

So we are very enthused based on what we see as very legitimate momentum.

Kevin and I, a week or so ago, spent the better part of two days talking with our salesforces really trying to understand the underlying demand over the next 12 months or so.

And that has certainly factored into our thinking for both the fourth quarter as well as 2012.

Great, thank you.

If we transition over into the question about financing, I will put a little bit more information around where we expect cash to be at the end the fourth quarter.

If we assume a revenue number of about $9 million, margins in line with what we communicated earlier, and OpEx up slightly, our adjusted EBITDA would be a loss of around $200,000 to $300,000 in the fourth quarter.

Again, we ended the quarter with $5.3 million of cash, so based on the stronger revenue performance, reductions in operating expenses, we are obviously keeping a very tight eye on our cash and cash balance.

But our position has changed significantly in the last three to six months.

The first quarter we earned $5 million, the second quarter $3.6 million, third quarter $2.4 million, so we continue -- we will end the quarter down obviously a little bit from a cash standpoint.

We continue to evaluate options, but we also continue to evaluate the need for financing as well.

Okay.

Thanks, guys.

[Jarrod Goehn].

My questions have been answered, thank you.

And as we have no further questions -- one just came in.

This question is from Jeb Terry.

Yes, thank you.

Gentlemen, great progress, great progress.

Ken, can you talk a bit about what is happening in terms of your supporting existing Xoft installations for stimulating the number of procedures and a kind of what is happening on the procedure front?

Jeb, what we have tried to do is with our investment in additional application specialists is balance their time between working on new opportunities and trying to develop business from the installed base.

So I would say that we have seen some pretty good progress there.

If you look at our recurring revenue, which we didn't necessarily communicate on the Xoft side of the business, it is growing very, very nicely, and a lot of it has to do with increased procedure volumes.

Procedure volume growth really will vary by geography at the moment.

We have got a platform product that has two capabilities in breast, also has capability in GYN and skin, and so it really varies depending on what application you are using and what part of the country on what the reimbursement landscape looks like.

So we are seeing nice growth on the breast IORT recurring revenue side.

We are seeing particular growth in skin.

There are certain parts of the country where they have achieved very nice reimbursement on multi-fraction treatment for non-melanoma skin cancers.

And so obviously, as it relates to breast, we are largely providing consumables in the context of balloons and sources for the x-ray.

So that is where we get the most recurring revenue.

And those volumes are growing.

We are seeing more IORT done and we are seeing it done across more sites than we might have maybe three to six months ago.

As it relates to skin, it's really about sources because you have reusable applicators.

So it's kind of a mixed bag, so to speak, in terms of where the recurring revenue comes from.

But the other thing that we are seeing with new purchases is customers are buying multi-year source agreements that in many cases they pay for upfront and predict out over a period of time with us how much utilization they will need.

So we are banking, if you will, a fair amount of deferred revenue based on the size of these large multi-year source agreements that have been purchased as part of a large system configuration.

So that, we hope, will have somewhat of a flywheel effect combined with the fact that as procedure volume grows in certain areas you will have consumables, like balloons; in other areas you may expand into additional applicators.

So we are definitely, as you look at our growth, particularly in the third quarter, the recurring revenue as it related to procedure volume played a major role in that.

And as I understand it have the California clinics, are they back up to speed, the ones that have been impacted by the shield issue?

Yes, the one account that was affected, which is Hough Memorial, I am pleased to say, literally since the middle of September, has been back treating patients for IORT and they are using our new shielding product as well.

So that is very, very good news.

As I understand it they have had very successful procedure experience as well as good experience using our new shielding product.

And other than RSNA are there -- and ASTRO are there other kind of events or milestones or industry issues that might be catalysts for Xoft?

I think November 1 is right around the corner next week and the actual reimbursement rates are supposed to be published no later than November 1.

So I think once we get the rumor mill to a real defined value we think that could be a very positive catalyst.

There are also ASBS, which is the American Society of Breast Surgeons, is coming up in the next few months, so that would be another major meeting opportunity.

Really, to that end, what we are seeing is that our effort to really target the breast surgeon is really paying off in this space.

I think the Company historically spent a significant amount of emphasis with the radiation oncologist and as we know, the breast surgeon really is in control of the patient.

I do think, while we have to work both of these specialists very importantly, what we are seeing is that the benefit of calling on the surgeon is having a huge impact.

And just anecdotally, whether it's the radiation oncologists saying that the surgeons are going to drag us into this whether we like it or not whether it's a surgeon basically going into administration demanding this capability for their patients, the surgeons have really been key.

So as it relates to kind of trends in the future, I would say our funnel, our pipeline for business is pretty significant.

When we did a review of this quarter's deals, if you will, we saw about three times as many highly qualified transactions out there as we did at the same time last quarter.

I do think if we invest at all it will be in expanding our commercial sales team at the right time.

The expression we are using is we will chase demand as opposed to make additional investments anticipating demand.

And the reimbursement will come out November 1; how fast will that be adopted?

I know there is a big disparity by region and by payer as to what reimbursement is.

What could be expected; how soon will the payers adopt those guidelines?

That is a good question.

You know, if you think about where reimbursement today is already strong it's on the West Coast.

I look at the map and where we have positive policy it's in state of Washington, Oregon, and California, Nevada, Utah, Arizona, the Dakotas, Wyoming, Montana, Ohio, West Virginia, South Carolina.

Where we have kind of neutral is down south -- Georgia, Florida, Alabama, Mississippi, Tennessee -- New England, Pennsylvania.

Where we have really negative policy is really in the middle or the heartland of the country -- Texas, Colorado, Kansas, Oklahoma, Arkansas, Minnesota, Wisconsin, parts of Virginia, North Carolina, and New York.

So it's really a patchwork quilt in terms of where we are today.

So what I would expect is that the regions that have what I would call a neutral policy we would expect -- and that would be the south and the Northeast to a great extent -- should see traction fairly quickly relative to the coast.

The middle part of the country and the states I talked about that had a negative policy will probably take a little bit longer.

So it's very hard to say.

Our reimbursement consultants, we have both an external and internal expertise, really believe this is a one- to two-year process to get uniform reimbursement, but they do believe we can make considerable progress in the first 12 months.

We are working very closely with our customers, because as part of their ROI evaluation they really want to understand, based on their mix of patients and payers, how this would be handled once they make this significant investment from their standpoint.

So we are going to kind of do this in a blocking and tackling manner I guess -- one customer at a time, one payer at a time, one region at a time.

But the general consensus has been that the CPT1 codes are going to be strong enablers of pervasive reimbursement over a reasonable period of time.

And our projections into 2012 reflect a very ambitious growth rate for the business in part because of the growing reimbursement in this space.

And I am assuming that the implied reimbursement would be an increase to what would be the average that is being paid today?

I mean, those that are --?

It should be, although I would also say that when you look at the parts of the country where there is either a neutral or a negative policy, just to get reimbursement at the established levels relative to the map today, would be a huge win.

So we are hearing rumors that reimbursement rates will be good and that it will be a very solid foundation for future endeavors.

So we don't have the exact numbers, but the rumor mill says that we all will feel good about the numbers as a starting point.

And each year they get reevaluated based on a whole host of things and including, of course, additional experience around procedures.

So when we made the decision on Xoft there was kind of a criteria which started with breast IORT and did we really believe that there would be clinical evidence that this could become a mainstream procedure.

Then, secondly, what did we feel from a reimbursement standpoint could be accomplished over a two- or three-year window.

I would like to say that nearly 12 months later we are seeing pretty much what we had predicted.

One of the reasons we used that to such a degree was that if you look at the established criteria for breast IORT -- and there is the American Brachytherapy Society, there is the American Society of Breast Surgeons.

And it's very specific.

Women on average 45 years and older, a uni-focal, single lesion no greater than 3 centimeters, lymph nodes are negative.

And post lumpectomy you are able to get pathology to the lab, do a verification that you have 2 millimeters of clean margins.

So it's very specific.

If you look at the number of patients per year that fit that criteria of all the new breast cancer patients in the United States alone, it's over 100,000 of approximately 260,000 or so new cases.

Our business model shows that if a site were to do three procedures a week, which is all of 150 per year, you could cost-justify the purchase of a system.

When you then look at the revenue opportunity just in balloons and in x-ray sources it is considerable.

At full market adoption, meaning 100,000 patients that fit the criteria getting breast IORT, the consumable market is $200 million a year alone for our balloons and sources.

All of those patients were on the Xoft system.

Again, it's breast IORT US only.

So our criteria for Xoft really centered on that.

The ancillary capabilities as a platform product in GYN and skin were a big plus as well, but we really made our criteria very heavily weighted in this area.

And I would stay close to a year later we are pleased at the progress.

We do believe that Q4 and 2012 will provide more material evidence publicly that this was a very good investment by us relative to our oncology strategy.

That is very encouraging and it's encouraging to hear also that you are getting traction in skin cancer, which I guess they already have reimbursement, or will the November reimbursement issues address skin as well?

Skin would be a multi-fraction or a multi-treatment process which would not be covered by IORT reimbursement.

The reimbursement that is coming is very specific to IORT delivery, x-ray, single-treatment session, so you need a multi-treatment session typically for skin.

But what we have seen is in parts of the country -- I will just give you an example of California and Arizona -- is really good progress with the payers on using our product in non-melanoma skin cancers.

There is a variety of reasons why they would use this technology in lieu of Mohs surgery or particularly locations of the skin cancers around the face or the scalp or nose or ears where the outcomes could be much, much better cosmetically.

We have heard of customers, as we were talking to our salesperson in Arizona, where they are getting reimbursement in the range of $950 per treatment with certain payers in his geography for the use in skin.

So that would be very compelling in terms of adoption.

The other thing is that we have signed on a strategic partner that has basically got a business model in the skin market where they do joint ventures between themselves, the dermatologist, and the radiation oncologist.

They are out there very, very aggressively marketing this business model.

And they also provide all the management services to get the practices is up and running for the use of the eBx system.

So we are seeing skin as a high potential market.

We are trying to stay as focused as possible on IORT, but what is interesting is, if you look at the hospital centers that have been buying the equipment, and we had good success in the third quarter, about half of them are buying strictly because they want to have a breast IORT program.

The other half are buying because they love the fact that it's a platform product and the next highest interest beyond breast is skin.

So we are clearly seeing that skin has become a catalyst, provided in many cases that breast IORT is the driving force behind the customer's interest.

That is exciting.

It has been a long pull.

Congratulations on this quarter and I very much look forward to hearing how fourth quarter goes.

That concludes the Q&A portion of our presentation.

I would like to turn the call back over to Ken Ferry.

Thanks, operator.

In closing, I would like to thank you for your questions, for your continued interest and support of iCAD.

We are proud of the progress we have made and continue to be very enthusiastic about our future prospects.

We look forward to speaking with you again when we report our fourth-quarter and full-year 2011 results.

Have a great day, everybody.

Ladies and gentlemen, that concludes today's conference.

We thank you for your participation.

You may now disconnect.

Have a great day.