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iCAD, Inc. (NASDAQ:ICAD)

Q4 2007 Earnings Call

March 6, 2008 10:00 am ET

Executives

Anne Marie Fields – Investor Relations, Lippert-Heilshorn & Associates

Ken Ferry - President and Chief Executive Officer, iCAD, Inc.

Darlene Deptula-Hicks - Executive Vice President of Finance and Chief Financial Officer, iCAD, Inc.

Analysts

John Putnam - Dawson James Securities

Jonathan Block - SunTrust Robinson Humphrey

Matthew Scalo - Canaccord Adams

John Hickman – MDB Capital Group

Adrian Dawes – Hartwell

Operator

Good day ladies and gentlemen, and welcome to the iCAD fourth quarter and year-end 2007 financial results conference call. My name is Jen and I will be your coordinator for today. (Operator Instructions) I will now turn the presentation over to Ms. Anne Marie Fields, Senior Vice President. Please proceed ma'am.

Anne Marie Fields

Thank you. Good morning. This is Anne Marie Fields with Lippert-Heilshorn & Associates. Thank you all for participating in today's call. Joining me from iCAD are Ken Ferry, Chief Executive Officer, and Darlene Deptula-Hicks, Executive Vice President and Chief Financial Officer.

Earlier this morning iCAD announced financial results for the fourth quarter and full year 2007. If you have not received this news release or if you would like to be added to the company's distribution list, please call Lippert-Heilshorn in New York at 212-838-3777 and speak with (Sheryl Palazo).

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 of events to differ materially from those described in the forward-looking statements.

Furthermore, the contents of this conference call contain time-sensitive information that is accurate only as of the date of the live broadcast, March 6, 2008. 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 would like to turn the call over to Ken Ferry.

Ken Ferry

Thanks Anne Marie and good morning everyone. Welcome to iCAD's fourth quarter and fiscal 2007 financial results conference call.

I'm delighted to report that iCAD had an excellent year in 2007, fueled by record revenues in the fourth quarter and for the full year. We've begun to turn the corner on profitability, we've been cash flow positive for two consecutive quarters and as importantly, we strengthened every balance sheet metric critical to building a healthy and sustainable growth company. We're proud of our progress we've made and we look forward to sharing our outlook with you for the first half of '08 as well. After a brief overview of the business and industry, I'll turn the call over to Darlene who will review the financial results in greater detail.

As I said in my opening comments, iCAD has made significant strides throughout 2007, underscoring that our new management team's growth strategy and financial controls are on track and delivering results. Our strong fourth quarter and full year revenues were led by continued strong demand for products used in digital mammography, specifically SecondLook Digital CAD and TotalLook.

This growth reflects strong demand for full-field digital mammography technology in CAD. There is still considerable room for growth in the digital mammography CAD market as only approximately 30% of the mammography systems at the 8,800 certified mammography sites in the US have transitioned to digital technology from film-based technology.

In the US, CAD is considered the standard of care in digital mammography, and CAD purchases are running nearly one-to-one with full-field digital mammography systems, underscoring the clinical and workflow benefits derived from CAD. We expect to maintain a leadership position in digital CAD, and to capitalize on a growing global market opportunity. This was evident in Europe and Japan, as international sales grew at a rapid pace in 2007. And, as of today, our CAD systems are now connected to over 1,500 full-field digital mammography systems worldwide.

Our film-based products sales achieved solid performance for the quarter and full year. We saw substantial increased demand for TotalLook. Our film digitizing solution enables comparative reading with prior exams. Targeted marketing programs and channel focus improved film-based CAD sales in Q4 versus prior quarters as well.

In addition, we recently announced the introduction of TotalLook MammoAdvantage which converts prior mammography films to digital images for comparative review on a digital review workstation. This new version of iCAD's state-of-the-art film digitizing solution offers improved image quality, enhanced image customization options and workflow efficiency features.

As a result, this new system enables the most efficient comparative reading of current and prior mammograms, optimizing workflow in all care settings. With the high growth in the conversion to digital mammography we expect to see strong demand for this system as it plays a major role in creating an end-to-end digital workflow environment.

We expect continued overall growth in our film-based products, as I said earlier, as nearly 70% of the mammography systems in the US still use some form of film-based technology. So for example, if only 15% of the installed base converts to digital each year, it would still leave over 40% of the US sites that are at least two years away from converting to digital technology. These latter converting sites are excellent candidates for film-based CAD solutions. In addition, we are confident that the sale from TotalLook MammoAdvantage will continue to grow rapidly and continue to represent greater than 50% of all film-based product revenues in 2008.

Service and supply revenue continued to grow, posting a nice increase in the fourth quarter compared with the prior year's fourth quarter and full year 2007. We expect to see this growth trend continue as we increase our service contract penetration through focused efforts to enhance our service offerings and value to our customers in both the film and digital product areas.

International sales were strong in 2007, particularly during the second half of the year, due in large part to strong demand from GE and Siemens in Europe and from initiation of shipments to GE in Japan. During the quarter, international sales more than doubled. Moving forward we will continue to exploit new opportunities with additional global partners such as Philips, Agfa, Sectra and others.

Now, I will address the issue of our Fuji supplement with the FDA. I'd like to provide an update on our efforts to obtain FDA approval for SecondLook Digital CAD with Fuji. We believe we are very close to completing an administrative appeal on our PMA supplement with the Center for Devices and Radiological Health. During the fourth quarter we submitted an appeal document to the director of the Office of Device Evaluation. We met face-to-face with the agency on December 3 to discuss the key issues.

We believe our position was clear and compelling and we are confident that it provided the information to support a favorable decision, maybe as soon as the end of March. And hence, we have included revenue from Fuji on a global basis in our first half guidance. The Fuji plan post FDA clearance is to launch SecondLook Digital and TotalLook MammoAdvantage in early Q2 and work with Fuji to immediately begin shipments and installations to their priority customers.

We continue to be impressed with Fuji's success in penetrating and expanding this market and remain encouraged by the significant market opportunity for iCAD, both in fulfilling the backlog of customers awaiting SecondLook Digital, and as Fuji continues to gain traction in the market for digital mammography equipment.

Shifting topics, on the strategic side, our strategic growth plan includes expansion of iCAD's market leadership beyond mammography. CAD as a category is under-penetrated and we plan to use our platforms in core algorithm technology to develop and market cancer detection products for other disease states. We believe CAD has significant potential in areas where there are established or emerging protocols for screening as a standard of care, it is clinically proven that screening has a significant impact on patient outcomes, there is an opportunity to lower healthcare costs, the screening is non-invasive or minimally invasive and public awareness is high or growing.

CT colonography or virtual colonoscopy, as it is often referred to, meets all of these criteria. Importantly, positive results from the American College of Radiology Imaging Network national CT trial, or ACRIN, as it's referred to, is expected to drive the adoption of virtual colonoscopy as a screening modality for colorectal cancer.

This 2,600 patient trial found virtual colonoscopy to be comparable to the optical, or traditional, colonoscopy which is the gold standard for detection of intermediate to large polyps. In the trial, virtual colonoscopy achieved a 90% sensitivity, an 86% specificity for adenomas or polyps 1cm or larger, and 84% sensitivity was noted in lesions 7mm or larger. Specificity remained 86-89% across all relevant lesion sizes.

In anticipation of this development as an accepted international screening tool in the battle against colorectal cancer, we are developing CT Colon CAD software which automatically identifies polyps on the CTC image. Working in conjunction with state-of-the-art 3D image visualization software partners such as Vital Images, TeraRecon and Viatronix, our CAD solutions will highlight polyps' location to the interpreting physician much the same way our SecondLook automatically identifies and clearly marks suspicious areas of the breast for radiologists today.

Our current development program for our Colon CAD software is to initiate our planned clinical trial in association with the American College of Radiology subsidiary ACR Image Metrix, some of the same individuals that conducted the earlier CT Colonoscopy trial I just referenced. We expect the trial to last four to six months. This would put us on track for an FDA 510(k) submission around the beginning of the fourth quarter of 2008.

Also, it was announced yesterday that the American Cancer Society will include virtual colonoscopy in their next updated guidelines for cancer screening, and hopefully the American College of Radiology will formally petition CMS for screening reimbursement in the near future, especially as the data suggests that most patients undergoing CTC would not need subsequent colonoscopy, sparing them the cost, risk and inconvenience of a second test.

We believe reimbursement for virtual colonoscopy as a screening tool could be obtained by the late 2008, early 2009 timeframe, although the actual timeline is dependent entirely on the ACR and CMS. This would open up the clinical use to more than 80 million Americans eligible for screening for colorectal cancer. Today, unfortunately, we believe that up to 50% of the population over 50 has not had a colonoscopy. In addition to CTC, we're actively investigating additional CAD solutions on the CT and MR platforms as well.

Now, I'd like to take a moment to talk further about some additional growth strategies. In addition to building out our CAD offering beyond mammography to colon and other potential areas, we're looking for other opportunities to provide broader solutions targeted at the radiology market. These solutions could be in the areas of workflow, image data management, and diagnostic of therapeutic intervention to name just a few areas under consideration. We've successfully built out our management team during the past 18 months and have had exceptional sales and marketing efforts, talented people whose skill-sets and expertise certainly can leverage into new areas.

Over time, our goal is to transition iCAD to a company that provides a portfolio of solutions to the radiology healthcare market. In order to be in position to strengthen our competitive position and move nimbly on potential acquisitions last quarter we filed a $75 million shelf offering with the SEC. This was strictly a strategic initiative. It was not intended for use in funding operations as our strong financial momentum demonstrates our ability to fund operations moving forward.

We began this process of filing the shelf registration when our stock price was around $4. Given the direction it has moved in the last two quarters, in spite of great progress, we've slowed this endeavor down and will continue to proceed cautiously until our share price is more reflective of our financial performance. We'll continue to provide updates to the strategy on future conference calls as things develop.

And with that review of the business I'm going to turn things over to Darlene that will give you some color on our financial performance in greater detail.

Darlene Deptula-Hicks

Thank you Ken and good morning everyone. We were especially pleased with the company's strong fourth quarter and full year financial performance and we are delighted to share this with you in greater detail today.

Let me begin by providing a few highlights of the fourth quarter and full year of 2007 which include record fourth quarter revenue of $8.1 million, which is up 26% over the fourth quarter of 2006; record full year revenue of $26.6 million, which is up 35% over the full year 2006; record full year digital revenue of $16.4 million, a 60% increase for the year and a 42% increase for the quarter comparatively; record international revenue of $2.7 million, a 160% increase for the year from $1.0 million in 2006; continued strong growth margins of 80.5% and 80.2% for the fourth quarter and year respectively - the first profitable quarter since Q1 of 05 with net income of $525,000 or $0.01 per diluted share for the fourth quarter and positive cash flow for the last two consecutive quarters.

During the fourth quarter we recorded record revenue of $8.1 million, which, as I mentioned, was a 26% increase over the $6.4 million of revenue reported during the fourth quarter of 2006. Importantly, the fourth quarter of 2007 marked the company’s first profitable quarter since Q1 of '05.

During the fourth quarter we posted a net income of $525,000, or $0.01 per diluted share, including stock based compensation expense of $378,000, compared with a net loss, including stock based compensation expense of $567,000, of $1.4 million or $0.04 per share in the fourth quarter of 2006.

This growth in sales was lead by our digital CAD products, which for the quarter increased 42% to $5.0 million from $3.5 million in Q4 of last year. This substantial revenue increase underscores CAD’s growing acceptance as the standard of care for digital mammography.

Our film-based product revenues for the quarter increased by 4.4% to $2.2 million, from $2.1 million last year. As Ken mentioned, while this is an established product line, we continue to experience strong demand for our TotalLook MammoAdvantage products. Revenue from our TotalLook products in the fourth quarter increased almost 100%, over the prior year fourth quarter.

Our fourth quarter service and supply revenue also increased by 10% to $896,000, up from $815,000 in last year’s fourth quarter. Gross margins for the fourth quarter remain very strong, increasing by 1.3% to 80.5 % from 79.2% in the prior year’s fourth quarter.

We are also pleased to report that with a 26% increase in revenue this quarter, we’ve decreased our quarterly operating expenses by 8% to $5.9 million compared with last year’s fourth quarter operating expenses of $6.4 million, demonstrating our ability to scale revenue while controlling our operating expenses.

As Ken mentioned earlier, 2007 was a very strong year for iCAD, with a 35% increase in total revenue to $26.6 million as compared to $19.7 million in total revenue reported in 2006. Additionally, we met our previously communicated revenue guidance for the full year of $26 million to $27 million. The net loss for the full year of 2007, including stock based compensation expense of $1.2 million was $1.5 million or a loss of $0.04 per share. This represents a bottom line improvement of $5.1 million or $0.14 per share as compared with the net loss for 2006 of $6.6 million or $0.18 per share, which also included stock based compensation expense of $1.3 million.

Increased sales in 2007 were lead by digital CAD revenue, which grew 60% to $16.4 million from $10.3 million in 2006. Full year revenues for our film-based products advanced 4% to $6.8 million from $6.5 million in 2006. Full year revenue from our TotalLook products, which is included in our film-based products revenue, increased 187% over the prior year. Our full years service and supply revenue increased 17% to $3.4 million from $2.9 million reported in '06.

International sales for 2007 were also strong at $2.7 million, increasing almost 160% over 2006 international revenue of $1 million, attributable to increased traction in Europe with Siemens and GE and focused global downstream marketing initiatives in both Europe and Japan. We also made positive progress on gross margins in '07 increasing full year gross margins by 2%, to 80.2% from 78.2% in 2006.

Importantly, on approximately 35% total revenue growth in 2007, we realized only a 3% increase in operating expenses to $22.5 million compared with $21.9 million in 2006. Operating expenses averaged $5.6 million per quarter during 2007, and we were within the $5.3 million to $5.7 million range previously provided as guidance. Again, this demonstrates our ability to grow revenue, while effectively managing our operating expenses. Consequently, our bottom line continued to show strong improvement throughout 2007 with a reduction of $5.1 million in net loss to $1.5 million or $0.04 per share, down from a net loss of $6.6 million, or $0.18 per share for fiscal year 2006.

Product backlogs, which excludes service and supply backlogs, was approximately $1.7 million at December 31, '07, as compared to $2.6 million on the corresponding date in 2006 and $1.7 million at September 30, 2007. Backlog as of any particular period should not be relied upon as indicative of the company’s net revenues for any future period as approximately 75% of the company’s product is booked and shipped within the same quarter.

As of December 31, 2007, our headcount included 101 full time, part time and co-opt employees. This is an increase in headcount of seven from 94 employees as of December 31, '06. This headcount increase is primarily in the area of sales and marketing hires.

We are especially proud of the progress we have made in strengthening our balance sheet. We are pleased to share that we were cash flow positive for both the third quarter and fourth quarter of 2007. Our cash balance at December 31, '07 of $4.3 million shows a nearly 20% increase from the $3.6 million cash balance as of December 31, 2006, and a 27 % increase from the $3.4 million balance as of June 30, 2007.

We continue to improve all other balance sheet metrics during 2007 with inventory reductions of 41% to $1.8 million from $3.0 million at year end 2006 and an accounts payable reduction of 21% to $2 million from $2.6 million the previous year-end, and accounts receivable of $6.5 million, an increase of 76% from $3.7 million reported at year-end '06.

Now, I’d like to move on to our introduction of financial guidance for the first six months of 2008. As stated in our press release, we have introduced financial guidance for the first six months of 2008. We expect total revenue for the first six months of this year to be in the range of $15 million to $16 million. As for Ken’s earlier review of our position with regard to Fuji in the US, this guidance includes revenue from the sale of our SecondLook Digital and TotalLook products to Fuji in the US beginning early in Q2.

We expect to realize gross margins consistent with fiscal 2007, and anticipate operating expenses to be between $5.6 million and $5.9 million per quarter for the first two quarters of 2008. The slight increase in operating expenses, to a large degree, reflects the cost of clinical trials of our Colon CAD products.

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

Question-and-Answer Session

Operator

Thank you, Ma’am. (Operator Instructions) The first question comes from Stephen Dunn with Dawson James Securities

John Putnam - Dawson James Securities

Thank you very much. It’s John Putnam for Steve today. I was wondering, was there a change in the way you recognized the revenue from GE in the quarter, and what kind of impact did that have on the revenue for the quarter?

Darlene Deptula-Hicks

No. No, John. There has been no change in revenue recognition policies at all.

John Putnam - Dawson James Securities

Okay.

Darlene Deptula-Hicks

It’s been the same all year.

John Putnam - Dawson James Securities

Okay. Can you tell me what your international sales were this quarter?

Darlene Deptula-Hicks

This past quarter?

John Putnam - Dawson James Securities

Yeah. I’m sorry.

Darlene Deptula-Hicks

Let me just grab that. Hang on.

Ken Ferry

592K?

Darlene Deptula-Hicks

Sounds about right, yeah.

Ken Ferry

It was 592K.

John Putnam - Dawson James Securities

Thanks very much. That’s all I have. Thanks, and great quarter.

Ken Ferry

Thanks John.

Darlene Deptula-Hicks

Thank you.

Operator

The next question is from Jonathan Block with SunTrust Robinson Humphrey.

Jonathan Block - SunTrust Robinson Humphrey

Hey guys. Good morning.

Ken Ferry

Good Morning, Jonathan.

Darlene Deptula-Hicks

Good Morning Jonathan.

Jonathan Block - SunTrust Robinson Humphrey

Just first question. Could you just estimate for us what you believe the total backlog is at Fuji, and then I know you mentioned you have shipments beginning in 2Q, but maybe, out of that total backlog, what you’re estimating goes out the door in 2Q?

Ken Ferry

Well. From the standpoint of Fuji, John, first I’d start with, Fuji signaled that the RS& A to investors and to their colleagues, that they would have about 300 systems installed by the end of December. And so with a go forward run rate of another 75 to 100 a quarter, which is what they signaled, we would obviously assume that as we get to the end of March, they’re sitting with about 400 systems installed, plus or minus, and then again that ongoing demand continues.

We went out to our field and, in conjunction with the Fuji field, did a pass in early January. So this data is probably about two months old. We basically asked the question, which customers will buy immediately and which customers have funds that they could use immediately versus which customers would probably budget for this once they know it’s available?

So it’s a bit of a moving target, but, what was very encouraging is that we found about 90 customers out of the, say, 300 that are installed, that had verified - and this 90 customers, some of them have multiple sights. So the actual number of sites is north of 100 that had money already budgeted in their hands and were ready to place immediate orders. So, we were very, very encouraged by that. Also what we found was that in most of these settings, almost half, they had put in multiple, CR machines. And what we’re finding though Fuji’s data is that 80% of their installations are dedicated mammo.

So this notion that their product is being used only in the community or rural environments on occasion is not really true. And because they were putting the systems into such substantial volume environments, we actually found that, on an average, about, let’s just say, of these 100 or so sites about 40% had multiple installation, which means we would be selling servers and licenses. So it’s a pretty attractive environment when you go and do an installation.

So with all of that said, we are hoping to be in the installation mode by early April, and we will take a cautious approach initially. And when I say that, it’s because a lot of the installations involve PACS systems, and what we’re finding with our experience with Fuji is that there’s more complexity to installing Cad with PACS systems attached than standalone, and so we want to make certain that we really get the installations right. The several that we’ve done, on the international front, have gone very, very well. We have two systems installed with Fuji in Singapore and we have obviously Beta sites as well.

But we’re going to try to ramp it slowly, maybe something on the order of five or six installations a week in the first month, increasing that steadily each month after that. And I think that if we are getting the initial traction in early April, it’s obviously going to have a significant impact on our revenues for the second quarter, and by, probably, month two of our installation experience, or maybe four to six weeks out, we should be close to what I would call a high capacity to really install based on the demand. And that will be a pretty exciting position to be in given that we’ve been working at this for greater than 20 months and are finally seeing some very encouraging feedback from the FDA as we try to bring this to closure over the next several weeks.

Jonathan Block - SunTrust Robinson Humphrey

Okay, Perfect. I guess the next step with Fuji, you mentioned you’re hearing some positive feedback from the FDA. Ken, is there any more information that they are requesting, or is it basically in a mode now where they have what they need and they’re pretty much in review mode?

Ken Ferry

Basically, we’ve been going back and forth since our meeting on December 3 with the Director of the Office of Device Evaluation, and her role is that she is above the CAD branch, and her role is to basically rule on these appeal situations as an important part of her responsibility, and we’ve had a very direct dialog with her directly, not with the branch since, December 3, with our meeting.

The dialogue has been very constructive. She has asked us for a lot of information over the last several months. But she has told us and she has told us via email that she is going to approve our device. We are in a position where we have to make certain deliverables that are satisfactory to her first, and what would happen is that we would need to get a labeling agreement in place, and then the written decision will be finalized as well as the approval order.

So basically we're working on labeling. We submitted to the FDA a little over three weeks ago our proposal on labeling. We got a marked up copy back from them this Monday and we owe them another response by next Wednesday, March 12. Nothing in the edits they put together are concerning to us. We think we can find some common ground and then it's really a function of whether that draft is the final one. And if it is, how long does it take to get all the signatures on the document and get to a final approval?

So, nothing's over until it's over, or official until you have the document in hand. We take the FDA process very, very seriously. We're not trying in any way to get out ahead of it. But we think based on the direct feedback we have received, that this is going to end up favorable and that sometime in the second quarter, maybe as early as April 1, we would be approved and in a shipping position. Had we not had such very specific feedback, we would certainly not be adding this sort of context to our guidance.

Jonathan Block - SunTrust Robinson Humphrey

Okay, great, very helpful. Maybe just a couple more if I may. On the international front the traction there is clearly increasing. What's getting the ball rolling over there? I know you had a management change that seems to have helped. But is there just a general sentiment among some of the FFEM guys that CAD is necessary, even under a double-reading protocol? Has there been new clinical studies that are getting in front of some of the customers? I would just love to hear your thoughts there.

Ken Ferry

I think that Europe is really catching on to full-field digital mammography in general, and in part because the screening programs in a lot of the major companies are becoming more well-established, so the volume of exams is growing. The European market in my health-care experience has always been keen on anything that enhances workflow - any sort of IT solution or device that really helps to optimize workflow. And there's obviously a growing private health-care sector as well, where reimbursement, and so forth, under certain circumstances does apply.

So basically we're seeing a conversion, as we do in the States, to digital mammography. We're seeing a strong interest in CAD. I can't say that there is a lot of studies, Jonathan, specific to CAD versus double-read. But the demand for CAD is increasing. What we're finding is that GE, our largest partner, has really put tremendous amount of effort, along with our own sales manager based in Paris, on the market together. And I think that as we work in the United States to transition GE customers away from the Hologic R2 product, and we had great success immediately, it took a little bit longer to do that in Europe, because we as a company were not as well-established.

We've now well-established ourselves in Europe. We're at the European Congress of Radiology this week, with a large presence for the second year in a row. We have meetings with all of our partners there. And so the market is growing. GE is aggressively promoting our product. The adoption rate for our product on GE is very high. We're also seeing some nice traction with Siemens in Europe. And we're seeing really good traction now in Japan, with GE as well. So the international growth is also in Asia in Japan.

Last year we got approval in late Q2 in Japan with GE. Really didn't start to see any order traction until the middle of the third quarter. And we actually shipped 11 systems in 2007 into Japan with GE. So all of that combined has given us some very nice momentum. And some of the new partners that we have are going to give us more traction in Europe. As an example, Philips. Philips, a very large imaging company, they're launching in the second quarter, we believe, and in the third quarter CR and DR solutions in Europe, and given their footprint in the imaging space, particularly in Europe, that could be a big opportunity for growth for us.

We're obviously working with other companies, such as Agfa. We intend to introduce a CR MammoCAD solution for Agfa, either late this quarter or early Q2. And also we are working with Sectra, another Scandinavian partner, to have a product available for them in that same time frame as Agfa. So we think we'll have solid solutions for both DR and CR in Europe, with companies that have a strong footprint and are based in Europe. That, along with the traction that we think will continue in Japan, all bodes well for a really sustaining good solid international growth.

Jonathan Block - SunTrust Robinson Humphrey

Okay, great. Just last one Darlene just specific for you. On the gross margin side, can you give us any granularity on the split between digital and film? I know you said it may be relatively flattish in '08. But, looking out, where do you think we can ultimately get to? Thanks, guys.

Darlene Deptula-Hicks

Yeah, I think Jonathan, as we move forward and we continue to increase our digital revenue. Digital products have a slightly higher gross margin than our analog products, primarily because the analog products have a little bit more of a hardware component. So I think going forward we will see some positive improvement on the gross margin line, again, particularly as we begin to increase that digital number.

Jonathan Block - SunTrust Robinson Humphrey

Okay, great. Thanks guys.

Operator

The next question is from Matthew Scalo, with Canaccord Adams.

Matthew Scalo - Canaccord Adams

Hey guys, I hope you can hear me okay. A very nice quarter. Hey, I wanted to just get some more clarification on the number of installations, Ken, that you talked about starting up slowly and then ramping up, and then your comment about Fuji placing roughly about 75 systems a quarter. That 75 systems is without CAD, correct? So their experience had always been hampered by not having a system with CAD on it in the marketplace. Is that correct?

Ken Ferry

Yeah, they basically signaled that their range is anywhere from 75 to 100 systems per quarter, new systems being sold. And we've estimated, and we won't know this for certain until we get some experience, but we're estimating about an 80% attachment rate for CAD, which I think is reasonable because in the DR space it's probably 95%. And so you might see that it actually grows to 95. But we're kind of modeling 80% attachment rate out of the box. And there's probably 400 installed systems all without CAD today. And then on a go-forward basis there is 75 to 100 per quarter of new systems. And they're all specific to the United States, this is a US program.

Matthew Scalo - Canaccord Adams

Okay. So that's 75-100 rate would not increase with this approval. Is that what you're...?

Ken Ferry

I hope it would. I mean I know we've heard from a number of customers and salespeople that one of the hindrances in selling their form of digital mammography has been the lack of CAD. It has been a competitive problem for them in the market. So I would hope this would increase their traction in terms of their sales of total units. So we'll have to wait and see, but I would hope that at a minimum it gets into the upper range of 100 units a quarter, and it might go north of that, in light of the success they've had.

What was encouraging is the comment I made earlier, which is 80% of their installations are dedicated mammos. So the notion that this is for the occasional mammogram at a community hospital or a small radiology practice is not necessarily accurate. So we're encouraged that when you get into these higher-volume environments, CAD becomes that much more essential to detection and workflow. And hence, hopefully the attachment rate would even be higher than 80%.

Matthew Scalo - Canaccord Adams

Right. And I'm just trying to figure out - do you hire just a group of 50 to 100 consultants out there to begin the installation, not only of the existing installed base, but also kind of an accelerated ramp in per quarter installations from Fuji.

Ken Ferry

Yeah, we basically have our own core team, which will be doing a fair number of the installations. And we have a service partner company, that is national, that has over 100 service engineers. And they're doing work for us today. So they do installation and training work for us today. And they've all been trained on the Fuji product. The installation for Fuji is near identical to what we do with our other full-field digital mammography vendors. So the learning curve, if you will, given that these people have experience working on GE or Siemens equipment, is not going to be that big of a deal. And they will be able to give us all the resources we need.

So, we want to take a more methodical approach early to make certain we get it right and we have satisfied customers. And we don't think that that will take more than maybe four or five weeks of installations. So we'll work this thing quickly. But what we're encouraged by, is that if we can get going by the beginning of Q2, we think that over the course of 2008 we can address the pent-up demand and we can catch up to all of the ongoing new demand that is created each quarter. Had we not had a chance to get started until the third quarter that would be more difficult to do.

So we think that we have a good plan. We will move slotting around to address the customers that are urgent - we've got a number of customers that are very anxious to get started - in hopes, obviously, that we keep everybody satisfied and those that can wait will certainly try to do that.

Fuji has signaled that they would like to take on the responsibility of installation and training, but certainly not in 2008. So it's something we're working on, and would be happy to transition to them, probably in the 2009 time frame, and we've started the discussions on that.

Matthew Scalo - Canaccord Adams

Interesting. Is that the key reason why you haven't offered full-year 2008 guidance? And just offered the first half?

Ken Ferry

We started our guidance kind of slowly last year, because we had a pretty challenging turn-around situation on our hands, and a new management team. A lot of different market dynamics going. Just a lot of moving parts. And I think what we had wanted to do is to be very, very credible, and leading with what we felt we really could deliver on.

So our guidance began with operating expenses per quarter. And I think after we got a quarter or two under our belt, demonstrated we could deliver within the range, had a better handle on revenue, we put revenue out for the second half of '07. And I think that for now, at least, we feel doing this at a half-level is still the most appropriate way for us to deliver to the extent that we can.

With that said, the fact that Fuji has been a moving part as well, has made it really challenging to do guidance. And I think that we had initially been told that we would have had this wrapped up before the panel meeting, which was held this week in Washington. And that might have made it easier for us to do something on a quarter-on-quarter basis. The fact that it did not get wrapped up before the panel meeting - largely because they had to divert a lot of resources to prepare for the panel meeting - we decided to continue with our current guidance. Once we get Fuji approved and once we get through a full quarter, we will reassess whether we would move the goal posts to quarterly versus one-half at a time.

Matthew Scalo - Canaccord Adams

Okay. And I guess just the last two questions. As far as GE's concerned, were the majority of units domestic, this quarter, versus OUS? You had some kind of commentary about Japan in there. And then lastly, as far as GE's manufacturing update, any acceleration in the timelines there?

Ken Ferry

Right. Yeah, GE's performance was probably more skewed towards the United States. I actually think in Q3 they had a much stronger international quarter versus the US. What was exciting about GE in the fourth quarter was it was the first quarter in the United States that they exceeded their shipment plan. And so one of the reasons, of course that our numbers were as high as they were for total revenue was that GE had record shipments and exceeded their internal goal for the fourth quarter.

In the first three quarters we found them coming close to their goal, but was a little short each quarter, not by too many. They really exceeded their performance nicely in Q4. Didn't have quite as strong a Q4 internationally with us as they did Q3, but as you know the CAD attachment rate being so high in the United States, we'd much rather have them err on the side of domestic shipments, because of the higher CAD attachment rate.

In terms of the '08 plan: They have solid double-digit unit growth for the year in their forecast. They are skewing a higher-percentage of their growth toward the United States market, which is encouraging. It's a challenge for them, because they are still somewhat capacity constrained, and they've historically done about 40% of their business outside of the United States. And their new factory, as we understand it, will be online either at the end of this calendar year or the first quarter of '09. So, I think we'll see solid growth with GE this year. It may be more dynamic in '09, as they have capacity to fully address what, as we understand it, is a nine or ten month backlog right now.

Matthew Scalo - Canaccord Adams

Okay, thank you very much.

Ken Ferry

Sure, thanks.

Darlene Deptula-Hicks

Thank you.

Operator

Our next question is from Jon Hickman, with MDB Capital Group.

Jon Hickman – MDB Capital Group

Hi. Just a couple of questions. Darlene, can you tell us what the depreciation was for the quarter?

Darlene Deptula-Hicks

Yeah Jon, it's not a big number, because this is not a very capital intensive company. So if you take a look at the balance sheet, you can kind of figure it out for the year - a few hundred thousand dollars, maybe.

Jon Hickman – MDB Capital Group

Okay. And then, could you comment on - you gave a fairly extensive plan for your CT colonoscopy product coming up, and you thought you might be able to file for approval by the fourth quarter of this year. Isn't that what I heard? When do you anticipate the FDA to be, I mean, you waited almost two years for the Fuji product. So what's going to happen with the CT product?

Ken Ferry

Right. That's a really good question Jon. You know, I was at the panel meeting this week in Washington, where they spent two days talking about CAD. And part of the reason, of course, is that all companies have been affected by, let's say, new individuals doing the reviewing with different points of view on what sort of testing paradigm would be appropriate for different products under different circumstances.

So while the panel meeting didn't have any profound summary, it certainly identified in different circumstances when you're doing a new product versus a supplement or doing a PMA versus a 510(k) what's a reasonable amount of testing such that you follow the statute for the least burdensome approach.

So, without anything being nailed down, what I would say is one of the reasons that we have delayed our clinical trial on Colon almost a year is because we’ve had ongoing on dialogue with the FDA to define the trial protocol. And what we didn’t want to do is get into another Fuji thing where we’ve got an application in and it just keeps getting rejected for all sorts of reasons that come up with each rejection letter.

So we have a worked on a protocol with ACR Image Metrix and the medical director there, Dr. Bruce Hillman, basically was the chairman of ACRIN for almost 10 years. So when you think about how you can convince the FDA of what the right protocol is, and then go do the study to give yourself a good chance of getting an approval, I don’t think we could’ve picked a better company and partner to work with.

Now, what we’re doing is, between now and the end of April, we are approaching the FDA to say here is the protocol we want to follow to do the trial, which is a fairly substantial clinical trial under a 510(k). It almost looks like a PMA quite frankly, and we’re showing them basically the size of the study cases, the number of normals and abnormals, how many radiologists we’d like to have reading, and we’re really going to work with them on our scoring methodology. While they can’t endorse your trial, they can certainly give us concrete feedback such that in the May timeframe when we go into the trial, which we said was four to six months, we should put ourselves in the best position possible so that when we file a 510(k) it should move quickly.

So, what’s that time frame? We’re hoping by the beginning of Q4 we’re in front of the FDA. It’s obviously going to be a 90-day versus the 180-day review cycle. If we can get through this in a couple of rounds with them, it would be very nice that somewhere in the first quarter of ’09 we’d have an FDA approved product, but it’s very hard to say, beyond the fact that we’re doing much more preparation and much more proactive communication with them than we had done with Fuji.

We’re also anticipating releasing this product in the fourth quarter outside of the United States. So we should see some traction, we hope, in Europe in the fourth quarter as we’re building out our go-to-market strategy now for that particular market.

So, we’re kind of chasing a moving target like all other companies. Part of the reason for the panel meeting is to vent the frustration of all the companies trying to get products approved, and we really hope this work with Image Metrix, and our proactive dialogue, will give us a far better and far more quick outcome with our Colon product than we had experienced unfortunately with Fuji.

John Hickman – MDB Capital Group

That’s it for me. All my other questions were answered. Thanks.

Ken Ferry

Okay, thanks John.

Operator

Your next question is from Adrian Dawes with Hartwell

Adrian Dawes – Hartwell

Congratulations on a great fourth quarter.

Ken Ferry

Thanks, Adrian.

Adrian Dawes – Hartwell

As we think about margins on the Fuji sales, can you talk a little bit about how that all compared to some of the other distribution channels as we look out over the next 12 to 18 months? Is there any reason why it should be different?

Darlene Deptula-Hicks

No Adrian, actually it’s quite consistent with what we’ve been experiencing with GE, Siemens and other partners, so it’ll be pretty consistent going forward.

Adrian Dawes – Hartwell

Okay. Great. All my other questions have been answered. Thanks.

Ken Ferry

Yeah. The other thing I would add to that is that unlike our relationship with GE and Siemens, where they do installation and training, we will get the benefit of both the good solid margin on the product as well as we will be doing the installation work. So we will get more revenue per installation because we’re on site doing the installations, so some of our service personnel will also add to the overall margin of that combined product and installation. So, we’re excited about Fuji and hopefully we can get started soon.

Adrian Dawes – Hartwell

Great.

Operator

Your next question is from (Joe Rudy) with Saxony Securities.

Unidentified Analyst – Saxony Securities

How you doing guys? Congratulations on the quarter, the profitability and congratulations on you and your team turning this company around. You guys have truly done a great job. I’ve just got a few questions Ken, and the first one, maybe you can clarify a little bit for me, and forgive me if I mispronounce what I’m going to ask, but can you give me an idea of what is stereoscopic mammography and how does that play a role into this market here?

Ken Ferry

You know Joe, you just stumped the bend. I don’t have any real knowledge. I have not heard the term, I will certainly go "Google it" when the call is over and try to give you some perspective. I mean, today, when you think about mammography there’s 2D, which is done today in the digital world with the FFDM products and there’s tomosynthesis, which will bring 3D mammography to the market. There’s growing use of MRI in breast imaging and included there’s some other technologies as well. People have talked about the ability to bring PET into the space, but I’m not familiar with the technology you’ve mentioned.

Unidentified Analyst – Saxony Securities

Okay. Whenever you have time Ken, nothing urgent. But it’s a name that I’ve heard from a couple different clients that are in the medical industry, and I just want some clarification on what exactly this technology and how it plays a role, how it may affect or may not affect iCAD as well. Can you also give me an idea of how much of the six month guidance is dependent upon us getting the Fuji approval early in the second quarter versus in the latter part of the second quarter?

Ken Ferry

Well, I would start out by saying we, with the agreement of our partners, don’t disclose revenues by company, but what I would say is it’s a reasonable amount of business. If we are shipping for a full quarter it most certainly could be a million – a million and a half of business based on the pace that we do installations and that would probably be just a rough estimate.

With that said, we put a range out there, so what I would say is I wouldn’t take the midpoint out of that range and subtract the number I just gave you and assume that’s the number we’re going to do without it. We think we will see some nice growth whether we have Fuji or not, and I think we wanted to put guidance out that we are confident we can perform to.

Unidentified Analyst – Saxony Securities

Okay. The last question is just something general on – this is something I’ve asked in the past and just want to see where you’re at. Can you give us a longer-term vision that you see for iCAD beyond Colon. Where do we go next?

Ken Ferry

Well I think we’re certainly looking at all of the major cancer categories, so when you look at the most frequent forms obviously breast cancer, colorectal, lung, prostate – those are the big ones. And the ability to provide CAD products across what would be largely CT and MR platforms, we think is a terrific opportunity and is something we have in our sights.

So, I think without question we want to maximize the CAD opportunity, where we think there’ll be large screening populations where there’s evidence that early detects really has a benefit, and really try to use that value proposition and not stray into places in the CAD world that, while they might be interesting, are really way-off in terms of producing revenue.

So, just an example, and not to say I’m an expert, but we aren’t looking at using CAD for skin cancer detection or orthopedics and things, even though I know companies are. We’re trying to be pragmatic about where we think the core volume of incidents of cancer and cancer deaths occur, and really tool our CAD strategy in a focused way.

With that said we’re in the radiology suite everyday and we see the opportunity whether it’d be work flow, whether it’d be diagnostic or procedure based to add additional products to our business and broaden our addressable markets. At a minimum, the call point we have with 19 or 20 US sales reps is one that we think our sales force could carry more products into that segment.

And so the organic plan is to move the CAD products through to a great degree through our own core competence in pattern recognition and algorithm technology. In a broader context, looking at this radiology suite, we would certainly look at an inorganic plan to achieve things over time in that space. But as I said in my opening comments, we’re not happy with our stock price based on the performance we’ve delivered and we’re not about to do any sort of transaction in the $2 range. We thought at $4 or so last summer when we were initiating the shelf registration there were some interesting targets out there that did not pan out to be of interest to us, and we’re moving cautiously until our demonstrated performance and our stock price are aligned.

And then over that time we would hope to see some interesting things that we could take a serious look at, but we at the moment feel confident about our organic plan and the kind of progress we can make this year, should we get fortunate with the Fuji approval soon. We can make dramatic progress with this company in ’08 similar or greater to than what we did in 2007. And if that's what we accomplish in 2008 and something inorganic doesn’t happen until the following year or sometime even further out, that’s okay too.

We want to do the right thing and I think sometimes the positive feeling too that our core business is strong, it’s got a lot of growth associated with this penetration of digital mammography, and with that kind of momentum giving us two to three years of high growth potential we’ll work very diligently through inorganic opportunities, but we’re not going to do anything reactive or highly dilutive.

Unidentified Analyst – Saxony Securities

Very good. Congratulations again guys. Thank you very much.

Ken Ferry

Thank you Joe.

Operator

(Operator Instructions) As there are no further questions in the queue, I will turn the call back over to management for closing remarks.

Ken Ferry

In closing we’d like to thank all of you that are on the call today for you’re continued interest in iCAD and your support. I would also like to thank all of our employees because without all of their hard work over the last year we could not have accomplished what we did in 2007. We believe it was really a profound turnaround and people worked awfully hard in this company, and we’re very, very thankful and very proud of you for doing that.

So, we think we’ve got a bright future, we’re excited about our prospects and we look forward to speaking with you again when we report our first quarter of 2008 results. So thanks for listening, and everyone have a great day.

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Source: iCAD, Inc. Q4 2007 Earnings Call Transcript
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