ICAD Inc (ICAD) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the iCAD, Inc. third quarter 2014 financial results conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder, this conference call is being recorded.

I'll now introduce your host for today's conference, Anne Marie Fields, Senior VP at LHA. You may begin.

Thank you, Ashley. Good afternoon. 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, Chief Operating Officer, Executive Vice President, Finance and Chief Financial Officer.

Following the market close today, iCAD announced financial results for the three and nine months ended September 30, 2014.

If you have not received this news release or if you'd like to be added to this company's distribution list, please call LHA 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 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 28, 2014. 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'd like to turn the call over to Ken Ferry. Ken?

Thanks Anne Marie. Good afternoon everyone and thanks for joining us. We were quite pleased to report our third quarter and nine months year-to-date financial results after the close of the market today. These strong results underscore the considerable progress we have made with our solutions for Radiation Therapy and Cancer Detection.

Also the acquisitions of DermEbx and Radion in mid-July contributed significantly to more than doubling recurring revenue in the quarter when compared to the same period last year. We are executing well on our strategic plan and as a result are raising our financial guidance for the second half of the year.

I'll now turn the call over to Kevin Burns, our COO and CFO, who will provide you with a detailed review of the third quarter and nine months year-to-date financial results for 2014.

At the conclusion I'll provide a business update and then we'll open up the line for your questions. Kevin?

Thank you Ken and good afternoon everyone. This is an exciting time for iCAD. Our Q3 results demonstrate that we remain on track with our long terms plan to drive top line growth and realize operating leverage as we continue to execute on our plan.

This is clearly another milestone quarter for the company when you look at where we have been and the impact of the work we have done to drive improving results.

As we have many new investors recently, I would like to take a moment to remind our shareholders of the progress we've made over the last few years.

First of all, this is our ninth quarter of year-over-year revenue growth and during this time period we have grown quarterly revenue by over 100% to an annualized run rate of $50 million.

We've grown recurring service revenue to 63% of total revenue from the low 30% range. We've delivered a 260-basis improvement in gross margin to approximately 73%. We've delivered positive GAAP earnings per share in the third quarter. We've improved non-GAAP EBITDA to over 20% of revenues from a loss of 15% of revenues and finally, we've solidified our balance sheet with secondary offerings and dramatically improved our cash-generating abilities.

With respect to the third quarter, we are once again pleased with our financial and operating performance with solid contributions from both our Therapy and Cancer Detection businesses.

The initiatives we've undertaken have enhanced our financial performance and provide a significant upside for growth in revenue and profitability. Specifically, in the quarter, our acquisitions of DermEbx and Radion have provided immediate contribution, specifically in recurring revenue and profitability.

Now let me turn to a review of our quarterly financial performance. Total revenue for the third quarter of 2014 increased 52% to $12.6 million. This was driven by a 92% increase in Therapy revenue and a 15% increase in Cancer Detection revenue.

Total revenue for the first nine months of 2014 increased 29% to $30.8 million. Importantly, recurring services revenue grew by 110% for the quarter and by 61% year-to-date, driven by a growing installed base combined with the acquisitions of DermEbx and Radion.

This last element is key as it represents an important foundation for our continued growth and accelerating market adoption.

For the third quarter Therapy revenue increased 92% to $7.6 million. Therapy product revenue declined $1.9 million, while Therapy service and supply revenue increased 234% to $5.8 million. Recurring service revenue was 76% of the total Therapy revenue for the quarter and it has been trending up as a percentage of total Therapy business and we except that this trend will continue.

Shortly after we announced our acquisitions, we indicated that the recurring revenue run rate associated with DermEbx and Radion would be between $16 million to $20 million after all locations are on boarded. We are tracking to the mid to upper level of that range as we look to bring the balance of the acquired backlog locations live over the next several months.

Also please keep in mind that when you look at our revenue for the quarter, we only recognize revenue related to these businesses for the period from July 15 through September 30, and as a result we did not recognize the revenue for the first two weeks of July in our financials.

From the commercial standpoint, we've rolled up the new solutions and integrated offerings to our sales team the same day we acquired the businesses and our team has been out actively selling the solution for over 90 days now. Our typical sales cycle in this space is three to five months and we have grown our Therapy sales team by adding another representative in the Midwest.

Moving on to the Cancer Detection business, total revenue for our Cancer Detection business in the third quarter was $4.9 million, a 15% increase compared with last year's third quarter. Product sales of $2.7 million in the quarter increased 22%, which was due to a strong mix of new business from our MRI products.

Service revenue increased 6% in the quarter to $2.2 million. Cancer Detection revenue for the first nine months of 2014 increased 9%, with product revenue growing 16% and service and supply revenue increasing 2%. As previously discussed, we except single digit growth to continue in this business moving forward, with further acceleration on the availability of our 3D mammography solutions.

Shifting to our margins, overall our gross margin percent improved sequentially to 72.9% from 70.7% in Q2 and it improved 140 basis points from last year's margin of 71.5%. More importantly, total margin dollars improved to $9.2 million or 34% sequentially and 55% year-over-year.

On our line item basis we saw the largest improvement in our service margin, driven by the growth in our recurring service revenue, resulting in a margin of $6.1 million, which is an improvement of 87% sequentially and 118% year-over-year. We have seen a little bit of leverage here to do the recent acquisitions and manufacturing improvements that have resulted in our service gross margin percent increasing to 76.7% in the quarter, 300 basis points year-over-year and 190 basis points sequentially.

From a product margin standpoint, year-to-date our gross margin was $10.5 million or 74.6% of revenue compared to $10.3 million or 75.8% of revenue for the same period last year. Our product margin continues to fluctuate primarily on the mix of business between Therapy and Cancer Detection.

Finally, I would like to point out that we did reclassify all depreciation and amortization expense in the quarter to a separate line item and cost of sales, and this represented $527,000 of expense in the quarter, with the sequential and year-over-year increases driven by the technology acquisitions in the quarter.

Moving down to operating expenses, our total operating expenses increased to $8.2 million in the third quarter. For the quarter if you remove one-time transaction cost of $316,000, add back approximately $125,000 of expense related to R&D work in the quarter that was classified as a cost of service revenue, and make adjustments for having DermEbx and Radion personnel in for an entire quarter, our normalized operating expense level is approximately $8.1 million to $8.2 million.

In addition, our depreciation and amortization categorized as operating expense increased to $425,000 in the third quarter, primarily as a result of the acquisitions of the customer relationships from DermEbx and Radion. We believe the current quarter operating expense represents a reasonable run rate for us. But please keep in mind there are some period-to-period volatility in areas like sales and marketing.

Over the next few quarters we do expect to make some modest investments that may grow our OpEx in the low single digits, which is obviously well below our internal growth targets.

Looking at other income and expense during the quarter, interest expense was $647,000, of which $248,000 was cash payable related to financing the capital lease obligation. The balance of $399,000 represents non-cash amortization of financing cost and settlement obligations.

Turning now to our profit metrics, adjusted EBITDA for the third quarter was $2.6 million or 20.3% of revenue. This is up from $545,000 or 6.6% of revenue in the third quarter of last year. For the first nine months of 2014, adjusted EBITDA was $3.9 million or 13% of revenue, compared with $1.6 million or 7% of revenue for the first nine months of 2013.

During the third quarter we returned to profitability with earnings per share of $0.02 and non-GAAP adjusted net income of $0.04 per diluted share. This is in comparison with non-GAAP adjusted net loss of $1.2 million or $0.11 per share last year.

Moving onto the balance sheet, we ended the third quarter with $33.4 million in cash and this compares with $11.9 million as of December 31, 2013. Since the end of the last fiscal year, working capital has improved dramatically to $25.3 million. From a debt perspective, we have $15 million of debt with an interest rate of 5.75% and principle repayment terms of 25% at the end of December 2014, 25% at the end of December 2015 and the balance of $7.5 million at the end of 2016.

During the third quarter we generated $2.2 million in cash from operations. Cash used by operations during the first nine months of 2014 was approximately $148,000, an improvement of $3 million as compared to a use of $3.2 million for the first nine months of 2013.

In addition, we saw DSO decrease to approximately 81 days at the end of September, from 91 days at the end of June.

From an acquisition standpoint, we acquired DermEbx and Radion for approximately $12.6 million, which consisted of approximately $4 million in cash plus 1.2 million shares of our common stock worth approximately $8.6 million. We paid $3.5 million during the third quarter and the balance of $500,000 is due in the fourth quarter pending final working capital adjustments.

Looking to our financial guidance for the second half of the year, based on the strength of our third quarter we are increasing financial guidance for the second half of 2014 and now expect revenue to be in the range of $25.5 million to $26 million, with an adjusted EBITDA margin in the 18% to 22% range. This compares with our previous guidance for second half revenue to be in the range of $23 million to $25 million, and an adjusted EBITDA margin to be in the range of 10% to 15%.

We are very pleased with our results, which showed improvement in many important financial and operational metrics. We expect to build on the momentum we've achieved in our businesses and look forward to ending 2014 on strong footing.

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

Thanks, Kevin.

Let me begin the business update with some comments on Therapy solutions.

Momentum continues to increase in this segment driven the growing use of the Axxent system for the treatment of non-melanoma skin cancer. In order to further accelerate market adoption and grow in this segment, we acquired DermEbx and Radion to expand our Xoft Electronic Brachytherapy offerings to include the components to enable dermatologists and radiation oncologists to develop, launch and manage their eBx programs for the treatment of non-melanoma skin cancer.

Let me give a quick recap of the market need and opportunity. In the US alone, over 3.5 million basal and squamous cell skin cancers are diagnosed each year affecting over 2.2 million Americans. We believe that approximately 1 million of these lesions meet the clinical criteria and are excellent candidates for receiving Electronic Brachytherapy as an alternative to most surgery or other forms of treatment.

These patients typically have early stage non-melanoma skin cancer with lesions no greater than 5 cm in width and 4 mm in depth.

Also, the majority of these lesions are located on cosmetically sensitive areas such as the face, ears and head. Patients tend to have elevated concerns about scaring that may result from surgical procedures. Today there are multiple published clinical studies with data on over 1,000 lesions treated, with up to four years of follow up data using the Xoft Axxent system.

Overall clinical outcomes have been excellent, with very low recurrence and good and excellent cosmetic outcomes. While our system has been used to treat over 7,000 lesions to date and is growing rapidly, we are still only at 1% to 2% of the addressable market penetration. To further enhance adoption, we will continue to increase investments in additional studies and educational initiatives.

In addition, we believe our strategic acquisition of DermEbx and Radiaon will further accelerate market adoption. Establishing a Radiation Therapy offering within a dermatology practice can be challenging and requires multi disciplinary collaboration.

Capabilities we can now provide include SaaS based Oncology workflow software, professional services agreements, non-melanoma skin cancer program development, operational logistics, physics support, source calibration, training and access to radiation oncologists and radiation therapists. This comprehensive approach, including the ability to provide the Axxent system as part of the offering enables dermatology practitioners to be treating patients far more quickly compared with trying to pull all of these components together on their own.

Finally, in order to further increase market adoption, we will continue with investments to further awareness and education targeting dermatologist, radiation oncologists, and potential patients.

Turning to Breast Intraoperative Radiation Therapy, we've seen a steady increase in procedure volume, particularly United States, which represents over 90% of the total volume. In the US disposable balloon applicator sales year-to-date are up 44%. At this run rate we'll exceed 1,000 units sold by year-end.

To expand market adoption further, we will continue to invest in education, including expanding our continued medical education webinar offerings, local symposium, providing education to breast fellowship program and participating in key medical meetings such as the American Society of Breast Surgery and the Miami Breast Care Conference. We'll also continue to build awareness through sharing the best practices from the increasing number of sites that are continuing to treat more patients, while building their IORT programs.

In September we had excellent showing at the American Society of Therapeutic Radiation Oncology or ASTRO, the largest radiation oncology event in the world, where we saw a 25% increase in sales lease versus the prior year, and we hosted a well attended educational symposium with key luminaries presenting data and their experience with the use of the Xoft system.

So in summary, we are making significant progress with the treatment of non-melanoma skin cancer and certain breast cancers. These are both large market opportunities and we are still in the early stages of adoptions. We'll continue to make the proper investments to accelerate market penetration and are confident of our continued success.

Now, moving on to Cancer Detection. We had a particularly strong quarter with new MRI product and upgrade sales. Sales of MRI license to our strategic partner Invivo were particularly strong. We also saw continued strength of PowerLook sales to new customers as an upgrade to our growing installed base.

As to accelerate growth further over the longer term, we are quite pleased to see that GE's Digital Breast, tomosynthesis system received FDA approval clearance during the quarter, continuing to make good progress with the development of workflow tools and will assist radiologists to read data intensive tomo images quickly and accurately.

We anticipate the first release of these tools to be in the first half of 2015 internationally; with a US launch hopefully later in the year. We believe this opportunity will be considerable and liken into the market transition from analog to first generation digital marketing of the 2006 to 2008 timeframe. Our cancer detection business grew considerably during the peak years of this first generation digital system conversions. We are optimistic we can gain considerable traction in this growth area starting in mid-2015.

So in closing the opening remarks, we are very pleased with the significant progress we've made from both commercial and financial perspectives, due to the acquisitions of DermEbx and Radion and provide the catalyst for an up-tick in the skin market adoption and are making a meaningful contribution to our bottom line. We have strengthened our balance sheet, significantly improved our cash flow and returned to profitability.

Moving ahead, we look forward to another strong performance in the fourth quarter, as indicated by our decision to raise financial guidance. Looking forward to 2015, we also expect to continue the growth momentum we have demonstrated in both business areas.

With that overview operator, please open up the line to questions.

Thank you.

(Operator Instructions).

Our first question comes from Bill Bonello of Craig-Hallum. Your line is open.

Good afternoon guys. Great quarter. Thanks for taking my questions. Just a couple of follow-ups here. Can you give us a sense of, as you're on the skin eBx side, as you're out approaching new accounts, what you are seeing in terms of those accounts wanting to add due to the full line of services that you now offer, including the Radiance software versus accounts who want to add just the Xoft equipment and sources.

Hi, Bill.

I guess the way I would characterize it is the transaction initiation in a dermatology setting, which I'd say 90% plus of them do, they are very receptive to signing up for the entire range of services to really essentially outsource the practice.

When the opportunity comes from the radiation oncologist side, that's when it's a little bit different, because obviously radiation oncologists typically are very understanding of the technology. They have the technology. They can easily acquire it and add to what they already have.

So the services really are pretty much acquired in a comprehensive fashion, when the transactions are driven from the dermatology environment and then it's more a la carte if they are coming from the radiation oncology environment. But all in all the trend has been more towards the dermatology setting and in that case as we've talked about. Bringing in radiation therapy, bringing in another specialty radiation cause is not a common phenomenon.

So I think having the ability to provide these services versus asking the customer to follow, to get it for themselves has been a really big difference in the interest level from a dermatologist stand point.

So we think we really have something that will accelerate market adoption, as opposed to offer a customer a circumstance where they have to pull all these different expert resources together on their own and also could be faced with the need to spend whatever it takes to buy the capital equipment right up front. Our ability to include that as part of the solution offering also I think will help to enhance the pace of market adoption.

Okay. So I just want to make sure I'm understanding that last comment, because I think it's pretty interesting. So it sounds like it's sort of having two benefits if I understand it. Not only are you generating more revenue per Derm customer, you think that it's actually making it easier to get new customers.

No, absolutely no. We are providing the turnkey offering, I would also add to that when there are instances when the dermatologist says, I'm going to do this myself and they buy the capital equipment from us, what they are buying is our Radion Hub software, and from a financial standpoint, the beauty, the nice benefit to our company is that increases our recurring revenue per location for that system from $100,000 maybe up to $150,000, because that's a SaaS based offering.

So this is the workflow automation software that helps them manage their practice when they want to set up these services themselves.

So we are getting additional market acceptance and penetration by selling the solution and the service when customers want to do a little bit themselves. We are also getting added benefit by selling them the Radion Hub software.

Okay, that makes sense. And then just as a follow-up on that, one of the things I think that you were going to eventually try and do was go to your installed base that had not been DermEbx or Radion customers and try and sell maybe not the broader suite of services, but certainly the software. Any update on sort of where you're at in that process and what the receptivity has been?

I think we definitely are making that effort Bill. At this point to be honest the new opportunities have been pretty considerable when you combine the active funnel that DermEbx had, or other partners in this space as well. So since we are still very actively supporting our other partners and then if you then access some additional resources, it's like Kevin mentioned we just adding another person in the Midwest. There's a very healthy funnel out there.

So not to say we are not going to that installed base to try to add the Radion Hub, but what I would say is that we are very focused on new transactions and that that will certainly happen. It has in certain examples, but probably not as pervasively as we will get to in the next maybe six to nine months.

One other thing I just want to clarify a little bit. When Kevin said that when a Derm wants to do this on his own, what we meant is the source of the radiation oncology services. I don't want to imply in any respect that we would support Derms using our technology without their supervision.

Sure, great. And then if I can just add two more, just on reimbursement on the skin side, and I know you probably can't yet talk too much about this, but I think there was some discussion of establishing a separate CPT code for Skin eBx at the last CPT editorial meetings. I mean just in general, kind of what are your thoughts about reimbursement on skin as we head into 2015.

Sure, yes we did and this is public information back in July. We submitted for a dedicated skin eBx multi fraction code. Up until then we have been billing in what would be a more general multi fraction eBx code, including Breast APBI and GYN procedures.

And we felt since the momentum had been so significant in terms of the volume of procedures that we are doing in skin, that we would be best served for the long term, by having a dedicated code that would be able to stand on its own and whether it's clinical data, cost data, outcome data and so forth, we would be in a position to generate a reimbursement consistent with that particular procedure and not cloud it potentially with other procedures.

There was a panel meeting in October, which we attended. Had very, very constructive interaction with the American Medical Association and the appropriate societies and I would say we are very optimistic as it relates to the future and how this whole process will play out with that said until the meds are published, probably sometime in November. We'll just have to wait to see if our optimism is validated.

As it relates to going forward, we have since July 2013 gone from 10 positive Medicare states to 21. We continue very significant resource efforts to increase that number. Now we are targeting a lot of the silent stage. We are also targeting some of the larger negative policy states, trying to get the growing positive clinical data in front of the medical directors of these different regional Medicare providers, as well as the private payers are really trying to get key opinion leaders in front of a lot of these key medical directors and really make sure they fully understand the benefits of our technology.

And I think as we get them more familiar, they see the benefits, they are more comfortable with it. Our hope is to see reimbursement continue to grow well beyond the 21 states and we'd like to think in 2015 we will make some important progress in that regard.

Great, and then one last question on the Cancer Detection side. You cited a couple of the things that boosted growth in the quarter. Particularly with regard to the MRI benefit, I mean, should we think you've had two really good growth quarters in a row now from a year-over-year basis. I mean is this a sustainable growth rate or is it still kind of a lumpy enough business, that for now it's safer to think of it as more of a low single digit rather than, you know, a teens grower.

Sure. What's interesting, Bill, was we had two different phenomena in Q2 and Q3 that drove the number higher than Q1. Q1 was a little under $4.2 million.

In Q2, we had a very large single mammography CAD order from a large national imaging center company. And so that was a very big order that was in a range of about $650,000 and they don't come along every day.

So we were pretty conservative about what we thought would happen in Q3. Ironically what happened is in the MRI side, Invivo our partner commercially had a blowout quarter. They did more business in the third quarter than they did combined in the first two quarters relative to licenses. That was a nice pleasant surprise. We expected that business to be stronger but not near to the degree it was. So it almost compensated if you will for the larger order we got in Q2.

So now in Q4 we are probably thinking of a little bit more conservative number than what we saw in Q2 and Q3. We don't see that large single mammography order or a large Invivo MRI core coming in, although I think and maybe we'll still have a strong quarter. So we are probably tampering the number you saw in Q2 and Q3 a little bit and what I would probably describe it as a single digit, but mid-single digit business, not really low single digit business going forward.

And then the key of course as you know is next year as we get products to support the whole workflow with digital breast thermosynthesis, we really believe that will be the catalyst to get us from this mid-single growth to much higher growth rate again.

Okay, that's excellent. And I assume on that, you start to see the acceleration even before you have those workflow products. I mean I assume as people add new GE instruments, they perhaps take that as a time they at least upgrade the PowerLook.

Yes. I mean the nice thing about PowerLook is our second-generation digital mammography detection product, is that its tomo ready and we designed an architecture in PowerLook that essentially when the tomo workflows are available; it's a software upgraded.

So a lot of our customers have proactively upgraded to PowerLook. That actually did drive revenues higher in the third quarter. We had our strongest sales of PowerLook in terms of upgrade sales in the quarter. It was a very, very strong quarter and some of that is customers proactively getting ready.

What we are hoping to see happen over the next few quarters and on is that as customers are buying GEs, new tomosynthesis system, they will also buy PowerLook and potentially Volpara, which is our breast density operating from Medicare.

So what we are really hoping to see is the upgrade pace move from just customers that have had our prior generations and were ready to move forward into something new with a tomo ready platform, someone who is actually buying a tomo system and says "I want to fill up the entire mammography suite." So I want to have a tomo ready CAD platform and also want to add breast density capability, which, you know, is growing considerably in terms of legislative activity.

So we are hoping that the pace of the PowerLook will grow even faster, because GE now has approval and customers will try to budget, particularly in 2015, probably not so much in 2014 for that entire solution upgrade, including PowerLook and hopefully the Volpara software as well.

Thanks. Thanks so much for bearing will all our questions. I really appreciate it.

Thanks, Bill.

Thank you. Our next question comes from Brian Marckx of Zacks Investment Research.

Your line is open.

Hi guys, great quarter. Congratulations.

So in terms of revenue guidance, you guys increased it by say sort of high single digits. Can you talk about where the difference is coming from? In other words, sort of what parts of the business I guess surprised you on the upside.

I think Brian, the way I would describe it is that the Therapy business as we've talked about being in the early stage of adoption and having that meaningful traction is where the bulk of the additional growth will come from, and specifically it's a combination of things really.

It's -- let's call it the former business model before we acquired DermEbx and Radion, which was getting really good traction, particularly with recurring revenue and new system placements, and now adding on this larger installed base of DermEbx, adding the backlog that we inherited through the transaction and closing new customers using the solution model versus the capital model. Now when you just combine all those together, it allows us to feel that the Therapy business will grow even stronger in Q4 versus Q3.

The other point as Kevin mentioned earlier is we closed the transaction in mid-July. So when we said we are on the $16 million or $18 million annualized run rate, if you just took the bottom end of that, say $4 million per quarter, you obviously miss a couple of weeks of revenue.

One could argue that there was $500,000 or $600,000 worth of revenue out there that we didn't get in Q3, that as long as the customers we have and so forth continue at the pace they are at, it would immediately be added to the fourth quarter. So it's coming from the therapy business.

To be honest on the Cancer Detection side we don't think we probably will have a strong quarter in Q4 sale. It will be a offsetting impact not dramatically, but not necessarily in the very high four range. So probably good strong increase in therapy, slightly offset by a slight decrease in cancer detection.

Okay, so the Therapy business is stronger than you expected and you guys, I guess you had estimated that you might bring on another 10 customers I think in the next few months. So is that kind of related to the guidance I guess, that the adoption of the backlog of customers is quicker than you had expected. Is that part of it or not?

I would say first as you go through a transaction and you acquire a private company, the validation of the revenue can only go so far on the diligent stage. What I would simply say is we are pleasantly surprised or anticipated a positive surprise in terms of the actually revenue we recognize.

So let's say the overall revenue performance was stronger, probably at the higher end of the range we were kind of anticipating. That's probably driving it more than anything. We have had good progress relative to on-boarding additional customers, and we've also in the quarter, a shorter quarter as we mentioned, signed on new customers.

So yes, I think it's probably a combination, but as I think Kevin said, the actual business we acquired is performing from the beginning at the high end of the range that we have hoped. So that is probably the more important point, but we are making good progress on boarding or adding new customers to the solutions backlog as we speak as well.

Okay, great. In terms of gross margin, which was another highlight in the quarter, almost 73%, I think it was maybe the highest in about three years and it was strong in both products and supplies. Is that related to the acquisition and is that the level that you think that you can sustain going forward.

Hi Brian, it's Kevin. It is largely driven by the acquisition. There is high margin that we are recognizing now as a result of that acquisition. Remember there's a lot of software in there, there's a lot of source agreements in there, all those things are a high margin for us.

So we do expect further service margin expansion. Right now we are running about 76%, 77%. So I don't think it's going to bump up too much higher, but maybe a couple more points, which would drive our margin maybe into the 73% to 76% range over the next ...

I think, I lost you. 73% to 76% on the total gross margin did you say Kevin.

That's right. Our service gross margin in the quarter was 77% and again we will see some further margin expansion in our service business. I think our product margin will fluctuate where it has been for the last couple of quarters. So as a result our total gross margin may increase from 73% up to 75%, 76%, but that's over the next 12 to 18 months.

Okay, okay great. Yes, that's really good.

So in terms of, let's see -- when you bring on the new customers I guess, I think you were forecasting a run rate of $500,000 per annual recurring revenue. Can you talk about how long it would take to generate that annual run rate I guess in the DermEbx and Radion customers?

Right, well we are selling the DermEbx, the total solution offering to our customer, the total annualized run rate is anywhere from $400,000 to $600,000 per location. So we just take the midpoints, about $500,000 and typically those customers in about 45 days from the date that they go live, they are at that run rate.

So this is not a very long time to get up and running. These people schedule their patients usually 30 days in advance. So by the time they are live, they have a backlog of patients that they are ready to treat. So they are up and running and generating revenue for our organization very quickly.

Okay, all right. All right, great. Thanks guys.

Thank you. I'm not showing any further questions in queue. I'd like to turn the call back over to Ken Ferry for any further remarks.

Well, I'd just like to thank everyone for participating in the call today and for your questions and interest in iCAD. We are very excited about our future. We are very, very pleased of the progress as Kevin mentioned over the last nine quarters; very, very pleased with the quarter finished and we are optimistic about a strong finish to 2014.

So with that, I look forward to updating you again when we report our fourth quarter and full year results in early 2015. Again, thanks for joining us and have a good evening.

Ladies and gentlemen, thanks for participating in today's conference. This concludes today's presentation. You may all disconnect.

Everyone have a great day.