ICAD Inc (ICAD) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the iCAD first quarter 2015 earnings conference call.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference is being recorded.

And now I will turn the conference over to your host, Courtney Dugan with The Ruth Group. Please begin.

Thank you, Tyrone. Good morning. This is Courtney Dugan with The Ruth Group. Thank you all for participating in today's call.

Joining me from iCAD are Ken Ferry, Chief Executive Officer; and Kevin Burns, President and Chief Financial Officer. Before the market opened today, iCAD announced financial results for the three months ended March 31, 2015.

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 Form 10-Q, which identifies specific factors that may cause actual results or events to differ materially from those described in 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, April 30, 2015. iCAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I'd like to turn the call over to Ken Ferry. Ken.

Thanks, Courtney. Good morning, everyone, and thanks for joining us today. During the call I'll provide a brief review of our financial highlights from the quarter in addition to a business update. I'll then turn the call over to Kevin Burns, our President and Chief Financial Officer, for a detailed review of our financial results. Following Kevin's remarks I'll be back to recap our key initiatives for the remainder of the year and then we will open the call for questions.

We are very pleased with our first quarter results which build on a momentum from 2014 in both our radiation therapy and Cancer Detection businesses. This quarter marks the 11th consecutive quarter of revenue growth with total revenues up 55% compared to the first quarter of 2014. During the quarter, our recurring revenue increased to approximately 70% of total revenue, up sequentially from 65% in the fourth quarter. We also delivered solid profitability with gross margin improving to 70.8% and achieving adjusted EBITDA of $2.5 million or 19.2% of total revenue.

We remain well positioned at this time to achieve our guidance for the full year and we are reiterating our full-year expectations for revenue in the range of $55 million to $55 million and adjusted EBITDA in the range of 16% to 20%.

Turning to the business update, beginning with our therapy business, during the quarter, we continued to see the anticipated transition of more customers to our subscription model in the skin therapy solutions market. This confirms the benefit of our expanded service offering and positions the company to benefit from the strong high-margin recurring revenue streams associated with the subscription model along with its potential to accelerate adoption by dermatology practices.

In the breast intraoperative radiation therapy business, or IORT, we had a very good quarter and we continue to see positive year-over-year procedure volume growth. This was demonstrated by the increased sale of balloon applicators. During the first quarter, we sold 360 disposable balloon applicators of which 330 were sold in the United States. This compares to sales of 211 disposable applicators in Q1 of 2014, of which 205 were sold in the United States. This represents a 71% unit increase year-over-year.

For the full year in 2014, we sold 935 balloon applicators. So our first quarter volume is a real positive indicator that we are seeing increasing procedure volume from our growing customer base.

Given that we are still at the early stage of market penetration in the skin and IORT markets, we continue to have a strong focus on initiatives to drive physician adoption and increased patient awareness of the benefits of electronic brachytherapy. This includes strategic investments in targeted marketing programs and educational leverage in the field at major medical meetings. Our education leverage during the quarter included a highly successful live event at the 2015 Miami Breast Symposium attended by over 100 leading breast surgeons generating a significant number of sales leads as well as the pilot of a specialty program designed for schools offering breast fellowship programs.

We also recently launched the eBx Institute, an online educational tool designed to offer customers on-demand access to Xoft product training, certification, compliance and other modules. In addition to domestic customers, this tool also became available to our international business partners early in the second quarter.

In the first part of the year we participated in several key medical meetings, including the Winter Clinical Dermatology Meeting and the 73rd Annual Meeting of the American Academy of Dermatology. These meetings featured numerous posters and oral presentations on new clinical data and updates of existing clinical data supporting the clinical effectiveness of the Xoft system.

Dr. Ajay Bhatnagar presented an update to his study, electronic brachytherapy for the treatment of non-melanoma skin cancer, which now includes follow-up of patients up to four years at the Academy of Dermatology Meeting. The clinical data presented in the first part of the year also included positive safety, efficacy and cosmetic results in treating non-melanoma skin cancer patients with the Xoft system on a total of 848 patients being followed in three studies. We believe that as more long-term data is presented it will help drive physician adoption and greater interest from patients directly for this innovative non-surgical option.

Earlier this month we presented positive clinical data for the Xoft system for IORT at the American Brachytherapy Society or ABS annual meeting in Orlando. Early results from our expert trial suggested that this short course of full dose radiation in a single treatment delivers good to excellent cosmetic results in 94% of cases and very few low-grade adverse events in select patients with early stage breast cancer.

As a reminder, the purpose of the expert trial was to assess the safety and efficacy of IORT using the Xoft system at the time of breast conserving surgery or lumpectomy for early stage breast cancers. We are encouraged by these results and the treatment potential to improve the patient's quality of life by greatly reducing the number of treatments patients receive when compared to whole breast radiation therapy the current standard.

In addition, up to four year data was also presented at the ABS meeting supporting the treatment of non-melanoma skin cancer with the Xoft system. Again, we are confident that this data will help to generate further physician adoption, direct patient awareness of the Xoft system in the treatment of breast and skin cancer.

Just last week at the European Society of Radiotherapy and Oncology or ESTRO meeting in Barcelona, Dr. Paul Costa, a radiation oncologist at the Institute CUF Porto breast surgery unit in Portugal presented an update on his clinical research examining patients who underwent IORT treatment using the Xoft system during breast reconstructive surgery between April of 2012 to November of 2013. With a median follow-up of 18 months, Dr. Costa ascertained the safety and efficacy of the Xoft system as he has seen minimal side effects and low morbidity among study patients.

This positive data presented is supporting the increasing momentum of our technology in Europe, as evidenced by the first Xoft system installed in Spain, the hospital Miguel Servet. We will have a strong presence at numerous additional medical meetings planned in the second quarter and throughout the rest of 2015 to continue to increase awareness of our technology with key opinion leaders and practicing physicians.

In addition as discussed on our last call, this year we plan to initiate an IORT boost clinical study assessing IORT as a boost to standard whole breast radiation in higher risk patients. We plan to enroll a total of 500 patients across multiple sites with a primary endpoint of cancer recurrence at five years. We also are continuing our increased investments in skin brachytherapy studies to help further adoption as well.

As we continue to see momentum from a clinical standpoint, it is in turn building broader awareness for the Xoft system. As you may have seen earlier this month, a story in the Wall Street Journal covered the use of the Xoft system to treat patients with non-melanoma skin cancer including very positive patient and clinician endorsement of the technology. Following this article we received a significant increase in phone and website inquiries about our system from physicians and patients around the country, which we believe will help to build increased awareness for the use of this painless non-surgical option in the dermatology office setting.

Switching to developments in cancer detection, our business continued to perform well, particularly with 2D mammography upgrades and MRI sales which were key drivers for the quarter. We also had a good quarter with breast density sales and earlier this week we announced the acquisition of an FDA-cleared breast density software product from VuCOMP, Inc. We are in the process of integrating this breast density interpretative software onto the PowerLook advanced mammography platform with the release expected next month.

PowerLook is our second generation mammography system that we are building our tomosynthesis software workflow tools on. We expect our first cancer detection product for 3D tomosynthesis to be available by yearend in international markets and sometime in mid-2016 in the United States market.

The combination of breast density and cancer detection tools for the interpretation of 2D and 3D mammographic images represents a considerable growth opportunity for us for years to come as the current worldwide market of 2D mammography machines migrates to 3D technology. We believe our software tools will play a key role in helping radiologists read and interpret the images more accurately and productively.

So overall I'm very pleased with the first quarter and our ability to sustain our momentum from 2014. We have demonstrated our ability to execute on a compelling business strategy resulting in positive revenue and adjusted EBITDA.

While we continue our focus on further market penetration and expansion in the United States, additional regulatory approvals are in the works in international markets which will also provide for new growth opportunities over time. We look forward to updating you on our progress over the next several quarters.

So with all that said, I'll now turn the call over to Kevin Burns who will give you a much more detailed revenue of our quarter's financial results. Kevin?

Thank you, Ken, and good morning, everyone.

2015 is already proving to be a year of continued execution for ICAD as we delivered strong topline growth combined with adjusted EBITDA margins at the upper end of our full-year guidance range. The first quarter of 2015 was our 11th consecutive quarter of year-over-year revenue growth demonstrating our ability to drive adoption of our innovative electronic brachytherapy system complemented by solid performance in our cancer detection business.

As we have highlighted for the past few quarters, we expect recurring service revenue to continue to increase as a percentage of total revenue and we are pleased to report today that recurring revenues made up approximately 70% of total revenues and nearly 90% of our therapy business. Both our therapy and cancer detection businesses experienced healthy year-over-year revenue growth and both have significant market opportunities that we believe will enable further growth.

Given our strong first quarter results, we are reiterating our fiscal year 2015 financial guidance of $55 million to $59 million in revenue with 16% to 20% adjusted EBITDA margin. With that I'd like to review our first quarter 2015 financial results.

Total revenue for the first quarter of 2015 increased 55% to $13.2 million. This included a 94% increase in therapy revenue and a 15% increase in cancer detection revenue.

Revenue growth continues to be driven by strong trends in recurring services revenue which grew 115% in the quarter. The increased adoption and utilization trends we have been witnessing since the third quarter of 2014 have accelerated as a result of our acquisitions of DermEbx and Radion and continued in the first quarter of 2015.

For the first quarter of '15 total therapy revenues increased 94% to $8.4 million. Therapy product revenue declined 49% to $1.1 million due to a larger percentage of our customers opting for a subscription program.

Therapy service and supply revenue increased 234% to $7.3 million, a 15% sequential increase. This reflects the continued momentum we are seeing with our Xoft system in the skin cancer market where as I mentioned many customers are attracted to our recently introduced subscription based program in lieu of an outright capital purchase of the medical device.

Again the benefits to the customers include a faster time to treating patient as Xoft provides the oncology management software, physics support and general management services in partnership with the dermatologist and radiation oncologist. This drove the placement of 14 Xoft systems in the quarter, which is above the average new system run rate for the first three quarters of 2014.

Furthermore, we continued to see positive utilization metrics across our installed base, including strong volume from our dermatology practices where we can track procedure volume through their use of our Radion Hub software. For the sites that went live before 2014, procedure volume grew 20% sequentially and 31% on a year-over-year basis. For all of our sites utilizing the Radion Hub software in Q1 we saw procedure volume grow 139% year-over-year and a 36% increase from the fourth quarter. Altogether, recurring therapy service revenue was approximately 90% of total therapy revenue for the quarter.

Moving on to the cancer detection business, total revenue for our cancer detection business in the first quarter was $4.8 million, a 15% increase compared to the first quarter of 2014. Product sales of $2.9 million in the quarter increased 39%, which was due to a strong mix of new business from our MRI products, breast density and cancer detection product upgrades.

Service revenue decreased 9% in the quarter to $1.9 million. As previously discussed, we expect low single-digit growth continuing in this business moving forward with significant acceleration upon the availability of our 3D mammography solutions.

Overall, gross margins improved to 70.8% in the first quarter from 69.6% in the prior year. Our product margins were 76.2% in the first quarter, up from a year ago due a higher mix of cancer detection product revenue. We continue to see healthy service margin driven by the growth in our recurring service revenue with our first quarter service revenue gross margin of 75.4%, up from 75.1% in the same period last year.

G&A categorized as cost of revenue in the first quarter was $639,000, an increase from $331,000 in the first quarter of 2014. The increase was primarily due to depreciation and amortization expenses associated with the acquisitions in the middle of 2014.

Overall, as we have mentioned, we continue to expect gross margins to be in the low 70% range for the next few quarters.

Total operating expenses increased to $8.9 million in the first quarter from $6.4 million in the first quarter of '14. In the first quarter operating expense numbers we had two one-time expenses worth noting. The first was an $87,000 loss on a disposal of an asset and the second item included severance payments totaling $275,000 as we made some headcount adjustments during the quarter. Excluding these items, operating expenses were approximately $8.6 million.

We mentioned last quarter that expect operating expenses to increase in 2015 from the fourth quarter's normalized run rate of $8.5 million due to investments in several key initiatives to drive further adoption of our electronic brachytherapy systems. As Ken discussed we will be making investments in clinical studies that further support the safety and efficacy of our electronic brachytherapy product and we will also be making incremental commercial investments in the sales and marketing program.

Interest expense for the first quarter was $507,000 of which $340,000 represents non-cash amortization of financing costs and settlement obligations. Interest expense in the prior year was $817,000 with $320,000 of non-cash amortization. In the first quarter we terminated our debt facility with Deerfield and paid down the outstanding principal of $11.25 million and as a result we incurred a $1.7 million non-cash loss related to the extinguishment of the debt.

Assuming we do not enter into any new debt facilities, our quarterly interest expense going forward will be approximately $75,000 per quarter for various capital leases and amortization of settlement obligations.

Looking at our profit metrics, our non-GAAP adjusted EBITDA for the first quarter was $2.5 million or 19.2% of revenue, up from $447,000 or 5.2% of revenue in the first quarter of last year. Non-GAAP adjusted net income for the first quarter was $259,000 or $0.02 per share, compared to non-GAAP net loss of $1.3 million or a loss of $0.12 per share in the first quarter of '14.

We ended the quarter with $20.3 million in cash and cash equivalents compared to $38.4 million as of March 31, 2014, and $32.2 million at the end of the fiscal year 2014. The significant decrease in cash was the result of terminating our debt facility as I just discussed. In the first quarter, we used $183,000 of cash from operations compared to a cash usage of $1.7 million in the first quarter of 2014.

Turning to our financial guidance for 2015, we are reiterating our fiscal year 2015 revenue guidance in the range of $55 million to $59 million, which represents growth of 25% to 34% with adjusted EBITDA margins in the 16% to 20% range.

We expect the trends that we have been experiencing the past couple of quarters to continue with recurring service revenue continuing to have a larger contribution to total revenue. We continue to believe there is a strong opportunity for growth in our cancer detection business with our suite of offerings in MRI, breast density and the launch of our 3D tomosynthesis products.

Our disrupted electronic brachytherapy product is still in its early stages of market penetration relative to the significant opportunities that exist for both breast and skin cancer. With commercial, clinical and reimbursement initiatives in place to increase awareness and value to radiation oncologists, dermatologists and patients alike, we are confident that we are well positioned for growth.

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

Thank you. Kevin. This is already shaping up to be an exciting year for iCAD. So to summarize our key initiatives for 2015, they are; number one to achieve our revenue and EBITDA guidance through operational execution in our therapy and cancer markets.

Two, to continue to drive patient enrollment and follow-up in our three key clinical studies areas, Xoft eBx skin study, the Expert Study IORT study, and the IORT as a Boost Study. Three, to continue to invest in programs and events to increase awareness and adoption in the skin and breast therapy markets. And four, successfully launch our breast density product in May and integrate it into our broader plan to offer tomosynthesis software tools by yearend. And with those priorities communicated, I would now like to open up the call to questions.

Thank you. (Operator Instructions) Our first question is from Bill Bonello of Craig-Hallum Capital. Your line is open.

Good morning guys, and thanks for all the color. Just a question, can you give us some sense now of the percentage of your therapy customers that are purchasing a full suite of products versus those that are just purchasing the equipment and sources?

In the back half of 2014 Bill we saw probably two-thirds of the customers doing a capital purchase where they buy the system and then obviously buy service and source contracts and that was about $100,000 in recurring revenue and the other third obviously were buying what we call the subscription programs and those generate $400,000 to $600,000 per year.

Q1 we actually felt a little bit of a mix, so now it's probably about 60 -- two-thirds were the subscription programs and about a third were the capital placement programs. So we are starting to see a transition more to the subscription programs than the capital and that's what we had anticipated when we did the acquisitions of DermEbx and Radion in the middle of 2014.

And Bill, it's obviously reflected in our new product sales which were obviously just over a million from therapy but when you look at the dramatic increase in recurring revenue, it supports that trend in that mix and we think it will continue and it may even get higher in terms of the subscription model.

We had always felt that taking out the capital purchase barrier for dermatology practices was going to be important to accelerating adoption because writing a check for say $250,000 upfront can be a challenge for even a large group practice. So this is very much in line with the goals we had relative to the acquisition and it's playing as we pretty much expected it would.

Okay. And in terms of the legacy customers that you had, are -- have any of those decided to pick up some of the incremental services that came onboard through DermEbx?

We have a handful of customers that have added on the Radion Hub software build and we continue to go to market and pursue getting that into our existing installed base. So once these -- so what we call the legacy customers get their operations up and running they are reluctant to change because they have the physics in place and the [radons] in place et cetera, et cetera. So the added value really will be to our installed base, the Radion Hub software and all the benefits associated with that.

And then the last thing is just did you place any instruments into the breast market this quarter?

We did. We placed two actually and as I pointed out in my opening remarks, on one hand we are not pleased that the pace of adding customers is as brisk as we would like. We are extremely pleased with the volume of procedures that our patients are doing. To have sold 360 balloon applicators in the quarter, which reflects 360 procedures since they are disposable, and contrast that to just over 200 last year in the first quarter really shows, Bill, that our customers that are onboard are really gaining momentum with the program and we are hoping that that momentum can be translated into more customers.

And so we are going out with different sales programs thereto, where you can similar to skin acquire the system on a subscription or on a procedure basis really and that is possibly going to give us more traction with customers from breast. And we are also -- this is a important year as it relates to communicating data on breast.

We are in the first year now presenting data on our own expert study and with follow-up. So we've got a number of opportunities this year to present data and the data that has been presented so far has been very, very positive. So we're hopeful that the combination of the momentum in our installed base, growing clinical data which will be presented at and has been presented at key medical meetings around breast is going to be an accelerant to really see more system placements as the year goes on.

Okay, that sounds great. Thank you.

Okay, thanks.

Thanks.

Thank you. (Operator Instructions) And the next question is from Brian Marckx of Zacks Investment Research. Your line is open.

Hi, good morning guys, great quarter. If I could follow-up on Bill's first question on the unit sales and consult sales. Do you envision that that part of the business has potential to grow or is this -- do you envision it essentially as a move almost completely to the subscription model going forward?

Brian, the way I would look at it is that the skin market will continue to see a higher mix of customers on the subscription model. In the breast market for the most part it's still a capital sale. Keep in mind also in skin that we sell our product to partners but then offer a similar competitive model to our services or subscription model. So there is a blend out there and there's also international and in international we sell systems outright.

So I think we are always going to see a blend of capital and subscription and it really is that mix that I just referenced. But clearly when we're selling directly to a dermatology practice I wouldn't be surprised if 75% of 80% of those customers would go subscription. But then again the balance is our partners in skin are buying the systems outright and then offering the same model which adds capital sales to the mix.

IORT sales are primarily capital and all of our international transactions are capital. So we are hoping to have a healthy mix of -- I'm just using round numbers -- 50-50 in total. If the skin market continues to grow at much higher proportionate rate then sure more than 50% of our transactions would be subscription versus capital.

Okay. In terms of regulatory approvals in China and Russia, you guys had mentioned that in previous calls and that it might be -- I think that it might happen potentially in the current year. Is that still a possibility?

Yes, I mean currently the two we are most focused on is this summer we are hoping to get approval in Russia and we're hoping to have approval in China by the end of the year. And if we get it in China it's going to be late in Q4 but we are working through the process with our partner Chindex who is very well-versed with regulatory approvals in China. So we're confident we've got the right partner working through the process and our hope would be that by the yearend we will have the ability to market in China.

Okay. On to the M-Vu acquisition, can you talk about -- frame for us how significant a product you think that might be and how does this kind of fit into the clinical mammography workflow I guess?

Sure. So breast density obviously is an important measurement and there has been studies done that have shown that with denser breasts, two things; one is cancer is more difficult to detect in traditional mammography, and secondly, women with dense breasts particularly in the BI-RADS 4 category have a substantially increased risk of cancer.

So you have a dynamic out there where there is growing concern that breast density be measured as part of a mammogram, as part of a both screening and diagnostic workup because of the issues I just mentioned around detection and higher risk. So if you look at the trend, there's now 22 states that have legislation requiring the recording of breast density at the time a woman receives a mammogram.

So obviously what our customers are looking for is a standardized tool that has good technology and science behind it so that they can report breast density in a very consistent fashion. Traditionally Brian, it's really been done visually and the variation in the assessment can be pretty significant for radiologists.

So having a standardized tool is becoming more and more important to our customers. We have been offering an excellent product from Volpara, a third-party company that has a dedicated system; it's a very good product, and we plan to continue to offer that product.

What we realized though was that the opportunity is growing. If you think about it in the context of our installed base, we have our 2D mammography product attached to almost 5,000 digital mammography machines worldwide. And we think every one of those is a candidate to add a breast density capability. So when you look at that 5,000 you're looking at probably a $100 million market opportunity.

And while we had a great product and we have a very good partner in Volpara, what we also realized is that there is a strong correlation between breast density and tomosynthesis or 3D mammography and there will be a need to do breast density on 2D exams and there will also be a need to do it on 3D exams.

So what we came to the conclusion is that we really needed to have our own platform that we could work from a development standpoint closely with our tomosynthesis product development efforts to really integrate these very tightly into the workflow around 2D, 3D mammography and very tightly incorporate breast density as well.

So this was a decision that really had strategic implications for our future business. The market is big and we just felt being a leader in breast op we had to control our destiny, not to mention the obvious, which is obviously a substantial increase in gross margin in every sale since we no longer are going to pay a transfer cost to our other partner.

So the agreement we have with Volpara allows us to sell their product through June of next year, so we've got quite a bit of time. If our customers from all of our efforts in marketing want the product we've been selling, we'll certainly make that available. But obviously we're going to put a tremendous amount of focus in promoting our own product which we actually feel we would be able to release in early to mid-May. So we are within weeks of launching our own product.

And again, it's all part of the growth opportunity within our mammography business that really catches a lot of tailwinds we believe late this year when our first tomo CAD tools are available internationally and hopefully by mid-2016 those tools will also be available in the United States.

So the breast density really was an integral part of that strategy and the product that VuCOMP has developed, we did a lot of testing on it, we visited a number of their customer sites, this is an FDA-approved product that has been in the market. We did a lot of internal testing as well and we are very, very impressed with the accuracy and the consistency of how that product works. So we think it was a very nice acquisition, just really supporting and furthering our growth opportunity in mammography.

And when you go back to the days when film-based systems went to the first generation of digital technology, we grew very dramatically. We took a business from a $15 million run rate in the middle of '06 to $37 million to $38 million in '08, just selling digital mammography.

Now you take the 3D mammography or tomosynthesis opportunity and you think about our scenario. There is probably about 6,000 systems out there between GE and Siemens and Fuji and all of our partners that at some point we'll end up with 3D mammography. That's a very big opportunity for us and so now adding breast density to that opportunity gives us a greater than $200,000 million, maybe $250,000 million market between breast density and tomosynthesis workflow tools as a market for us over the next say five to seven years.

So the opportunity to grow as I just commented on in the '06 to say '08 timeframe feels very similar to where we may be in 2016 to say 2020. So it was a strategic move as part of what is really a growth opportunity again in our cancer detection business.

Okay. Great, appreciate it, thanks for all the detail.

Sure.

Thank you. This ends Q-and-A portion of today's conference. I'll turn the conference over to Ken Ferry for any closing remarks.

Thanks, Operator, and I want to thank everyone for joining us today. We are very pleased with our performance in the first quarter. We really got the year off to a very good start, consistent with the momentum that we demonstrated in 2014. We have two markets in skin brachytherapy and breast brachytherapy that we continue to see really strong progress; yet we are still at the early stage of market penetration so we have a lot of runway left. We are also excited about our cancer detection business because it really is starting to shape up to a growth story again, something we've been very patiently crafting and waiting to execute on and again the addition of breast density to tomosynthesis workflow tools just adds to the addressable market and the size of the opportunity we have going forward.

So we are excited about our future and mindful that we have to continue to focus and execute quarter on quarter. So thank you all very much for joining us today. We appreciate your interest and we look forward to updating you next quarter on our second quarter results. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.