iCAD, Inc.
Q1 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Good day, and welcome to the iCAD First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bob Yedid. Please go ahead, sir.

[Bob Yedid:]

Great. Thank you, Cody, and good afternoon. Thanks for participating in today’s call. Joining me from iCAD are Ken Ferry, Chief Executive Officer; and Richard Christopher, Chief Financial Officer. After the market closed today, iCAD announced financial results for the first quarter ending March 31, 2017. Before we begin, I would like to caution that comments made during this conference call by management that contains 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 and 10-K which identifies specific risk 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, May 2nd, 2017. 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, Chief Executive Officer. Ken?

[Ken Ferry:]

Thanks Bob. Good afternoon, everyone, and thank you for joining us today. I’ll begin with a few comments on our first quarter financial results and progress with the key growth drivers for our business. I’ll then turn the call over to Rich Christopher, our Chief Financial Officer for a review of our financial results. Following Rich’s remarks, I’ll be back with a more detailed business update and to review our key initiatives for 2017. And then we’ll open the call for questions. Revenue growth in the first quarter of 2017 was strong versus the first quarter of 2016, reflecting a significant increase in sales of our breast cancer detection and therapy products. These higher product sales were modestly offset by lower service revenues. We will provide more detail on these segments of our business later in the call. Based on a solid start to 2017, we continue to believe iCAD is well positioned for sustained growth over the coming years. First, we have considerable growth opportunity particularly in the U.S. and international markets with our innovative software that enhances the workflow in cancer detection in 3D tomosynthesis breast exams. We’re excited to receive PMA approval from the FDA for our PowerLook Tomo Detection product on March 24th, achieving an important milestone for the company. This is the first product of its kind in the breast health market and one of the first implementations of artificial intelligence in healthcare. And second, we continue to make good progress in our skin brachytherapy business which represents a billion dollar plus market opportunity. We’re currently at the early stage of market adoption in both of these large market segments with significant opportunity for increased penetration in growth for years to come. I’ll provide more detail on these and other areas of our business in a few minutes, but now I’m going to turn the call over to Rich Christopher for more detailed review of our first quarter financial results. Rich?

[Rich Christopher:]

Thank you, Ken, and good afternoon, everyone. I am truly excited to be on the call today to discuss our continued progress. I’d like to review the company’s first quarter 2017 financial highlights which were disclosed in the fact news earnings release. For the first quarter of 2017, total revenue was $6.8 million, reflecting a $750,000 or 12.5% increase over the prior year quarter. The year-over-year revenue increase reflects growth from both our detection and therapy businesses. Total revenue in our detection business for the first quarter of 2017 increased by 14% to $4.5 million. The incremental revenue reflects the growth of our mammography products including the sales of our 3D tomosynthesis product both in the U.S. and internationally. We are thrilled to announce the initial sales of our Tomo product domestically which occurred within days of the FDA approval just prior to the close of the first quarter. I’d also like to point out that true revenue growth in our detection business was somewhat mapped by the presence of MRI revenue in both the first quarter of 2016 and 2017. As mentioned on our previous call, our MRI assets were sold off to Invivo for $3.2 million during the first quarter of 2017. If one were to back out the MRI revenues from both quarters, total detection revenue from ongoing products for the first quarter would be up $840,000 or a strong 25% year-over-year. Shifting over to our therapy business, first quarter totaled $2.3 million reflecting a $20,000 or 9% increase over the prior year quarter. This increase was entirely driven by incremental product revenue. We are encouraged by the signs of stabilization that we are seeing in our skin eBx business. With the reimbursement flow that went into effect on January 1st of last year, we believe that dermatologists are in a better position to make a decision to incorporate out skin eBx system into their practices. The number of new subscription size as well as the volume of patient treatment administered continues to grow. Moving on to the rest of the P&L, gross margin in the first quarter of 2017 was 69% consistent with the prior year period. Operating expenses in the first quarter of 2017 were $5.1 million, down $6.7 million in the first quarter of 2016. It should be noted that operating expenses in the first quarter of 2017 were positively impacted by onetime gain of $2.5 million related to the sale of our MRI assets. This gain was partially offset by a $300,000 increase in stock compensation expense. This non-cash item fluctuates as new equities granted, legacy grants west and our stock price changes impacting performance based awards. The remaining increase of operating expense was driven by continued investment in our key growth initiatives which include increased sales and marketing resources focused on our key growth areas and additional resources to accelerate the on-boarding process in our skin eBx business. We believe these investments will accelerate revenue growth from new product sales and overtime will result an increase for current revenues from our subscription and service businesses. On our last call, we mentioned that our fourth quarter 2016 operating expense had increased to $7.8 million and that we expected expenses to come down in the first quarter of 2017. I am pleased to report that our first quarter expenses were in line with those expectations. After adjusting for the onetime gain on the sale of our MRI assets and excluding changes in stock compensation expense, first quarter 2017 operating expenses were $500,000 lower than the fourth quarter of 2016. Looking at our profit metrics, GAAP net loss for the quarter was $500,000 or $0.03 per share, representing a $2 million improvement over the loss of $2.5 million or $0.16 per share in the comparable prior year quarter. The year-over-year favorability and our bottom line also reflects the $2.5 million gain on the sale of our MRI assets. On a non-GAAP adjusted EBITDA basis, the net loss for the first quarter of 2017 was $1.5 million which was consistent with the prior year quarter. Turning our attention now to the balance sheet, we ended the first quarter of 2017 with $9.5 million in cash on hand as compared to the $8.6 million we had on hand as of December 31st, 2016. During the first quarter of 2017, we used approximately $1.6 million in cash from operation which was more than offset by the $2.85 million cash inflow related to the sale of the MRI assets. Overall, we started 2017 with a strong first quarter building on the solid progress that we made in the fourth quarter of 2016. On the expense side, we continue to make selective strategic investments to support long term growth particularly in both Tomo Detection and Skin eBx. Our balance is solid and we have no debt. Lastly, while we are pleased we’ve received FDA approval for our 3D Tomo software, we will not be providing forward-looking guidance until such time as we had better visibility on the revenue ramp for both our Tomo and Skin eBx products. I would now like to turn the call back over to Ken.

[Ken Ferry:]

Thanks Rich. I’ll now provide a more detailed update on the progress with our key growth areas in the first quarter and for the balance of the year. In our cancer detection business as I mentioned earlier, we’re very excited to receive PMA approval from the FDA late in the first quarter for PowerLook Tomo Detection product. We’re pleased to have several sales of our new product within days of the PMA approval, reflecting the urgent lead for interpretive tools that can assist radiologists to read these data intensive exams in an accurate and productive manner. To illustrate this point further, a radiologist typically reads four views of the breast and a 2D exam. In a 3D exam, radiologist typically reads 75 to 80 views per breast. In our U.S. clinical reader study using PowerLook Tomo Detection, 20 radiologists read 240 Tomo exams with an average reduction in reading time of greater than 29% without compromised in detection accuracy. We received additional feedback from the radiologists that participated in the study that there were many additional workflow benefits when using our tool. In the U.S. we are working closely with GE’s breast imaging field team to launch the product to the growth Tomo system customer base as well to new potential customers. We’ve also recently increased our presence at key imaging leading such as the European Congress of Radiology which took place in March in Vienna and the Society of Breast Imaging ACR Symposium which took place in April in Los Angeles. We will continue to raise our visibility at these meetings with abstracts and presentations on our two clinical reader studies conducted in conjunction with the development of the product. We’re pleased to achieve extensive media coverage from our press release on the approval of PowerLook Tomo Detection, a total of 244 news outlets published the release reaching a total potential audience of approximately 90 million viewers. In addition, we launched an aggressive multi-faceted marketing campaign that includes articles and key journals, targeted advertising, web optimization and education initiative designed to build strong awareness in the market for the availability of this powerful new tool. Lastly, we are making significant progress with the development of next generation multivendor Tomo detection software product that should be available on other major 3D Tomo systems in late 2017 for the OUS market and early to mid-2018 in the U.S. market. The performance of our 3D PowerLook Tomo Detection product is an excellent example like as latest innovation built on artificial intelligence. This product utilizes a sophisticated branch of AI called deep learning, which enables our solution to achieve extremely high cancer detection rates while providing significant improvements to workflow. We intend to leverage our core artificial intelligence technology platform to other imaging modalities overtime. Turn into our therapy business and skin cancer treatment segment, we are pleased with the progress we're making in adding new sites and on-boarding our existing subscription customers. We make targeted investments to improve our on-boarding process for new customers late last year and these efforts are now paying off. More ever we have added marketing resources in support of helping our customers in their efforts to attract new patients to their practices in those cases where eBx would be a good treatment option as an alternative to most surgery. We had a strong presence at the American Academy of Dermatology in Orlando where we hosted in-built education sessions in early March, which were well attended. Additionally we've ramped up our marketing value added services offering writing customers numerous ways to market availability of skin eBx treatments in their community and educate patients on the value of the treatment. We are pleased with the success that we are experiencing in signing up new customers and with the increasing volume of key procedures and our existing customer sites. Among our customer base the treatment rate has grown 45% in Q1 when compared to Q4 of 2016. While we're definitely making progress we're finding that it still takes a fair amount of time to get practices on-board, and once the on-boarding process is completed getting them to the point where they are treating approximately 10 patients a month it will take some time. Under the subscription model however these patients volume we should be able to generate approximately $150,000 in recurring revenue per site per year. Overall while this progress is considerable we’ll take a few more quarters for these subscription revenues to begin to make a more meaningful impact on overall company revenue. Also from a commercial standpoint we added salespeople in the fourth quarter for the dermatology market in geographies where we've seen an established track record of reimbursement success. Lastly we've continued to make considerable investments in support of our longer term strategy to secure a CPT 1 reimbursement code for skin cancer treatment. In the fourth quarter, we completed one of the key studies needed for application, which compares patients that were treated with Electronic Brachytherapy to those with similar lesions treated with most surgery. This study is essential to our overall long term plan to provide national access to the treatment in adequate reimbursement for the physicians offering the service. Moving on to IORT for breast and gynecological indications, we added customers domestically and internationally in the quarter and are pleased with the procedure volume growth we're continuing to see in our established sites. Our strategy longer term is to leverage the value of our platform technology and expand our applicator offering, so that we can treat more types of cancers. This will be particularly important to expanding our international business. We are continuing to make progress with our expert clinical study the largest U.S IORT study to date that approximately a 1000 patients now enrolled. We plan to begin publishing early data later this year on the results of this study and expect to results to further drive adoption from a clinical perspective. In addition, our commercial efforts are focusing on national accounts, ACO efforts and surgery centers in addition to teaching hospitals. Internationally, we now have 45 centers treating with growing procedure volume while we continue to focus on increasing regulatory approvals in key markets such as China, India, Egypt and Saudi Arabia. Lastly we're looking for additional strategic partners that could help us to expand our presence and penetration in key markets internationally overtime. So in summary making good progress with our cancer detection and cancer therapy businesses and we expect that this will become more evident on our top line results as we execute on these priorities over the course of 2017. Also our goal overtime is to reestablish growth with our service revenues as we believe we're on track to do this particularly with the launch of our PowerLook Tomo Detection software and the service strategy that we have developed for this product. So before we open the call for questions, I'd like to reiterate our top priorities for 2017. First in cancer detection, aggressively large our 3D Tomo synthesis software into the U.S. market, taking advantage of the recent PMA approval will also continuing to drive adoption of PowerLook Tomo Detection for international markets. Second, in therapy continue increasing the number of dermatology practices that offer our skin eBx solution for the treatment of non-melanoma skin cancer, while assisting existing customers to increase patient volumes. Third, continue to drive global momentum from breast and IORT and GYN applications. Fourth, continue to invest in clinical studies to build the long term data required in support of our increased adoption of Xoft eBx for the treatment of breast and skin cancer. And lastly, continued to carefully manage our expenses in cash flow. So overall, we have a strong conviction that we are well positioned to accelerate growth in our cancer detection and cancer therapy businesses, especially in the second half of this year. We have innovative technologies, growing positive clinical evidence, we are addressing large markets at the early stage of penetration, or especially interesting and expanding our artificial intelligence deep learning expertise as evidenced in our PowerLook software in breast and other imaging areas. We look forward updating you on our progress of these goals at the coming investor conferences, medical meetings and on our second quarter conference call. I think now we're ready operator to open up the call to questions.

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question from Kevin Ellich with Craig-Hallum. Please go ahead.

[Kevin Ellich:]

Good afternoon and thanks for taking the questions. I have a couple here, starting with cancer, your cancer detection business. The newly improved Tom CAD is already generating sales, can you tell us how much outreach are you guys doing versus GE system users coming to you proactively?

[Ken Ferry:]

Well the way we've established the channel strategy is on an international basis, which is largely Europe at the moment, the sales are going exclusively through GE. And we actually saw nice pickup in sales in the first quarter international, I believe we sold seven or eight systems after a slower start in 2016 and then the feedback we got from the GE team at the European Congress of Radiology in Vienna back in March is that the interest in the demand from accordion activity is picking up very nicely. There are also a lot of presentations and discussion at that meeting around to almost synthesis the need for detection tools. So we're kind of optimistic that the international market, which was strongest to date in Q1 of through GE’s sales teams in various countries, will continue. In the United States, we have more of a divide and conquer strategy I guess as best I can describe it, where we're targeting the GE installed base of existing systems while the GE salespeople primarily work on new customers. And it's really a collaborative effort where we're involved with the GE sales team on all of the transactions, but we're taking the lead in working with their customer base that customer base that we've talked about is approximately about 300 systems today, and at the same time they're spending a significant amount of time with new customers in that they just introduced in the same timeframe we got our approval their second generation Tomo system, which is called Pristina much more competitive system than their first generation. So I think we've got kind of a perfect storm here where they have a new second generation Tomo system hitting the market, at the same time that our interpretive software is hitting the market. They have about 34, 35 or so sales people out there directly selling the product with primary focus on new customers. We have six dedicated outside reps and three inside sales people spending quite a bit of time working the install base and then working collaboratively with GE to bring those transactions to fruition. So it's really a collaborative sales effort obviously it's a co-exclusive agreement where GE can sell a product anywhere and we can sell the product anywhere. So we're working in good coordinated fashion, and I think obviously we're really at the early stages, so there's a tremendous amount of activity that's growing, lots of coding, but we're still early and it's going to take us, I think, as I’ve said earlier, this quarter to work through that activity before we start to see any real measurable impact in terms of revenue.

[Kevin Ellich:]

Got it, got it. And Ken, did I hear you correctly, did you say the U.S. installed base was 300 systems?

[Ken Ferry:]

Approximately, that's our estimate.

[Kevin Ellich:]

Okay, understood. And then is development of the next generation products still expected to be done in the next month or so, do you have any?

[Ken Ferry:]

Yeah, it’s our schedule. It will have to go through additional testing, internally. And then I think the most important step as we’ve learned in the prior submissions we have to do a reader study to prove the performance of the product. And so as we all know reader studies can take time but we still believe that this product could be available OUS in probably the fourth quarter of this year and it could be available in the first or second quarter of with any luck in the United States. We obviously have the benefit of having been through this whole process once. Our colleagues at the FDA now have experience obviously working end-to-end in the approval of the Tomo Detection software in the market. And we’re excited about this product. The early testing results are just tremendously promising. This product we think could have some breakthrough performance results that have not been achieved even with radiologists using the current detection tool. So we’re extremely optimistic about it. Our PhD’s are very capable talented people that have now moved to a second generation product and brought all that learning with them. And it will be available for all of the rest of the market. And so my hope would be in Q1, Q2 timeframe of 2018, this product will be out there in the United States market. And depending on the relationships we build with the different Tomo system providers, could substantially increase the size of our addressable market.

[Kevin Ellich:]

Understood. Thank you. And then switching over to the skin business, I think at the end of 2016, you guys have said you had 70 customers, wondering where that stands now?

[Ken Ferry:]

Well, we’ve done two things, one is we continue to increase the number of new customers under contract. But I think the best way to think about this business is that long term, this is a subscription base business. And in a subscription base business the way we have modeled it, it’s all about patient volume. At the end of the day, certainly the number of sites matter. But what matters most is patient volume. And the more sites that are treating and the more patients that are being treated has a direct impact on our revenues. And so I can maybe provide you with just a little bit of history so we can get a sense of where the trend is in that business. If you go back to the third quarter of 2016, we believe that we treated just over 5,000 treatments, so 5,000 fractions were treated in the quarter. In the fourth quarter [Technical Difficulty] seeing the revenue grow in a dramatic fashion yet. Although we are seeing in a very encouraging sign number of patients, number of total treatments growing very fast. The other dimension to this which adds a little complexity is today about 80% of these treatments are being done on sites that all they own the machine which have a very different business model of the subscription. However, the entire business is rapidly shifting to subscription. And in a non-subscription side, where they own the machine, the level of services we offer are much less and that the average annual revenue is more than the $50,000 range. So we’re obviously now kind of migrating from a more of a capital model with a lower service entity to one that is much higher subscription with much higher recurring revenue. So the mix shift is occurring where the growth quite frankly is happening much faster as I’d referenced those numbers on the subscription side. However, we’re still going through a transition from a more traditional capital model where the recurring revenue from those customers is much lower. So we’re kind of in this transitionary period where treatment volume is growing significantly, revenue is growing for certain but not in the proportionate manner. But I really think by the end of this calendar year, it will start to kind of more even out relative to the increase in subscription customers and revenue from those particular sites.

[Kevin Ellich:]

Got it. I have two last quick questions. First on gross margin, it was better than we expected largely driven by services and supplies I guess, what were the main drivers behind the improved gross margin we saw on that segment? And then second, anything on the regulatory front that we should be thinking about for the year and then in contract with that, could you give us an update on what you’re doing or plan to do from a clinical data standpoint to get a CPT 1 code for skin eBx?

[Ken Ferry:]

So margin improvement, Rich.

[Rich Christopher:]

So, on the margin improvement, I think you’re talking about on a consecutive quarter basis, we were flat at 69% year-over-year for the first quarter, but up a bit that’s compared to the fourth quarter of 2016. And it really comes down to product mix. We’re making higher margins on both our software and our services than we are on our hardware. So depending on the product mix in any one given quarter, those numbers can be moved around. On top of that, as well as the mix internationally and domestically, obviously we have a higher bar margin here in the U.S. particularly on the software side than we do internationally. So depending on the mix of both geography, as well as product mix, you can see swings from quarter to quarter related to that.

[Kevin Ellich:]

Yeah. I was - sorry, I was actually talking about our expectations margins came in better, so that’s great. And then on the regulatory front, anything we should be thinking about?

[Ken Ferry:]

The only we have going on regulatory is we’re developing breast density for 3D exams and we had been working through a process to go to the FDA with a submission and we found that the performance of the product really wasn’t reaching the level of accuracy that we felt we needed. So we decided to kind of go back and do some additional development work. And so our expectation is probably that in the third quarter of this year, we’re going to be submitting, it will be a 510(k). And today, we have a product available that measures density in 2D exams. And our hope would be that by the third quarter, we will have a 510(k) in front of the FDA with the type of performance we feel is appropriate to get something approved hopefully by sometime in the fourth quarter. So that would probably be the only regulatory activity this year. The other one of course would be the next generation’s Tomo product. That one will probably begin in early Q4 and but obviously we’re not expecting to get the outcome of that until 2018. So I think we do have a second major regulatory process, but our expectation of course is that that’s a 2018 clearance if we’re on a typical schedule. So the only thing that might come out of regulatory would be density in a 3D fashion. And there was one last question, I missed after the regulatory, I’m sorry.

[Kevin Ellich:]

Yeah. It was about what you’re doing from a clinical data standpoint to get a CPT 1 code for skin eBx?

[Ken Ferry:]

Sure. So what we just completed was a matched pair study at the end of Q4 where there were 300 patients that received eBx and 300 patients with very similar lesions that had been treated with most surgery. And those patients were followed for approximately three years. And what we found in the study was that the recurrence rates were almost identical both in both cases less than 1%. So as it related to a CPT 1 code that is one of the important studies but it’s not the only study. So we have other studies that we are pulling together that we have already authors have conducted and published on, we’re contemplating the possibility of doing some additional study or studies and obviously that will impact whether we apply this year or next year for CPT 1. So we’re working through it. What I would say though is the most compelling progress is this study we conducted and finished in the fourth quarter. It’s the first time we’ve done a study that was head to head with most surgery with similar type patients and the outcome was extremely favorable. So we’ll continue to work it and at the same time, our reimbursement experts are helping to get that data in front of the medical directors of each of maths that doesn’t do not provide coverage and payment today because that kind do information could help us to fill out this more coverage from a CPT 3 standpoint across the country. It’s very compelling data. So we could still make reimbursement progress sort of having CPT 1 code.

[Kevin Ellich:]

Excellent. Thanks for taking all my questions.

[Ken Ferry:]

Sure. Thank you.

[Operator:]

Thank you. And now we’ll take our next question from Brian Marckx with Zacks Investment Research. Please go ahead.

[Brian Marckx:]

Hi. Good afternoon, guys and congrats on the quarter. Just on detection revenue to start with, was there are many MRI amortization in the quarter, I think you guys sold the business in January, if I’m correct, but if you can just - was there any of that amortization that hit the detection revenue in Q1?

[Rich Christopher:]

Sure, Brian. It was a partially $300,000 worth of MRI revenue in the first quarter of 2017 and there was approximately $600,000 in the first quarter of 2016, so there was a $300,000 swing from year-to-year based on that sale.

[Brian Marckx:]

Okay. And that's all done right now going forward?

[Ken Ferry:]

That’s correct in the focus.

[Brian Marckx:]

Then Rich, the sales and marketing expense talked about the change from Q1 of last year and Q4 of last year some of that was stop comp I believe, can you tell me what’s the difference in stock comp was versus Q4 of last year might have missed it?

[Rich Christopher:]

I'm sorry, isolating sales and marketing, are you talking about total operating expenses?

[Brian Marckx:]

I'm sorry yeah, in sales and marketing.

[Rich Christopher:]

Okay the sales and marketing swing from the first quarter of 2017 versus the fourth quarter of 2016, correct?

[Brian Marckx:]

Correct.

[Rich Christopher:]

Right, there’s an $80,000 increase quarter-over-quarter and sales and marketing related to stock compensation expense.

[Brian Marckx:]

So, can you can you kind flush out a difference?

[Rich Christopher:]

Well, it’s a $23,000 increase quarter-over-quarter.

[Brian Marckx:]

Yeah, appreciate that. I know you guys have talked about adding some cells personnel, and Ken I think you’ve alluded to that in the prepared remarks, is that kind of what makes up the difference and the sequential difference in the sales and marketing and the side from the $80,000 increase in stock comp?

[Ken Ferry:]

Yeah, well just going back to numbers, and I want to make sure you are right Brian, because I actually answered your second question first, which is why it’s confusing matters here, so just to backtrack, sales and marketing expense quarter-over-quarter is up $100,000. $20,000 of that is stock compensation expense, $80,000 of that it headcount related expense associated with the incremental heads that we added in the fourth quarter.

[Brian Marckx:]

Gotcha, gotcha, I guess I missed that, thanks. Okay, that’s great, thanks, appreciate that Rich. And so going forward can you guys help us a little bit with what we should expect in terms of operating expense at least in terms of the SG&A line in 2017 particularly, now that you've got Tomo 3D in the U.S. how does that potentially affect OpEx, I guess in 2017?

[Rich Christopher:]

Well, we haven't necessarily broken down those items in the past on the projection basis, I think on our last call, we said we were comfortable with $30 million worth of total operating expense for the year, and we're still on track with that.

[Brian Marckx:]

Okay, okay. All right, thanks. In terms of the skin business, can it sounds like things are moving in the right direction particularly some like that utilization based on the numbers that you decided 40% from Q3 to Q4 of 2016 and then another 30% or so from Q4 2016 to Q1 2017. But it's not - I was kind of surprised that we didn't see a little bit, I guess better or bigger increase sequentially in the therapy services and supply revenues, so can you kind of talk about you know why if utilization is going up, why you wouldn't see more of an increase given the set that why an item is essentially kind of flats for about the last five quarters when utilization has been increasing?

[Ken Ferry:]

Sure. And there's probably Brian two factors impacting that, one is we're still the treating capital customers that own their machines that their contracts have expired and they've not renewed. So when you look at the total people - we had one 135 sites treating, we probably had about 80 or 85 treating owning their own machines and maybe 50 they were treating on a subscription type model. So what's happened is a lot of these capital customers quite frankly didn't renew agreements, so we've had revenue dropping from I guess you could say source and service agreements that were being driven by capital customer, and there's still a treating. So that's reducing contract revenue in the skin business. The second factor is that as of today, of all of those treatments using the 10,000 treatments in Q4 80% of them were delivered by sites that only run machines, so enhance that’s a site that is only going to give us 50,000, 60,000 a year. So the 2000 treatments they were delivered from the subscription business is literally up 100% quarter-over-quarter. We delivered 1000 treatments on subscription in Q4, we delivered 2000 in Q1. So that's where the growth will come from, but in the meantime, we still are treating capital customers and chose not to renew. And I'll give you an example of that, we have several third party service providers, in one case, one of those service providers owned 25 of our machines, they have gone from 25 machines in play treating patients at our peak down to zero. But now back they needed 10 of their machines back in the field as the market is rebuilding, but as the contracts for those other 15 that are essentially mothballed come up they're not renewing them. They will initiate a new contract when the demand supports it. So it's a bit of a complicated story. The good news is, as I said earlier, you really want to measure this business by the number of treatments delivered and that directionally is the most important variable not the number of sites and so on and so forth related to capital versus subscription, it's really a number of patients treated, but there is an additional time element before that will turn into really meaningful revenue and that's how we're looking at the business, and we're very encouraged by the pace of treatment growth. With that said it needs to shift over to subscription more so than from capital, which is definitely as I pointed out, it's brought up growing 100% where quarter-on-quarter total treatments grew 45%, so clearly it's moving in the direction we want it, and it will over the next several quarters continue at a pretty rapid pace and then you'll start to see a pretty significant revenue growth. And at the same time we should bottom out on these contracts with capital customers on and the skin machine that chose not to renew their contracts. So when things taking revenue away and the other one started to push it back into the revenue line, and again I think we're only a few quarters away from starting to see a more measurable impact on total therapy revenues as relates to skin.

[Brian Marckx:]

Okay, that's helpful. Do you have an idea on how many of the capital customers are pretender of the capital customers I guess prior to the reimbursement issue that didn't end up renewing through today kind of rough guess, I guess?

[Ken Ferry:]

I guess it would be 50%.

[Brian Marckx:]

50% okay, all right. All right, thanks guys.

[Ken Ferry:]

Sure, thanks Brian.

[Operator:]

Thank you. And then take our next question from Jeb Terry with Aberdeen Investment Management. Please go ahead.

[Jeb Terry:]

Hey Kenneth, can you hear me fine, hello?

[Ken Ferry:]

Yeah, Jeb go ahead.

[Jeb Terry:]

Well, certainly it's a lot more fun hearing you’re talking about growth in some quarters in the past. Your excitement is comparable and congratulations to all this. Couple of questions answered before, but let me take through the existing customers in installed based in GE there were you have the ability to directly market, am I correct in recalling those customers effectively already have an outdated PowerLook version and since there may be relatively short sales cycle getting those people to upgrade, if it's an upgraded as oppose to new - net new experience for that customer, is that correct?

[Ken Ferry:]

Well, basically what we have chosen to do is to move to a new higher performing hardware with the Tomo product Jeb, and the reason for that is the one time on the old product was longer than we thought made sense for our customers, and so while technically it could be a relatively easy upgraded being software only. The actual processing time for the exams increased to a point where it would have only made sense for customers that would do best processing meaning that they run all the processing overnight and they read them in the morning, and that's not the same as not a number of customers who do that. But to be able to really get you know two minute processing per exam is what we wanted to get done and simultaneous exams that at the same time, we had to go to a new hardware set. So it's going to be a more substantial upgrade for those customers. With that said, we've got special pricing for PowerLook customer that’s now going to what we call PowerLook Pro versus a customer buying something brand new. So they will get a more favorable price as a PowerLook customer. So that will help. The other issue which has caused some timing in the install base is the reading today is being done on the GE Mammo workstation which is called Seno Iris. And a number of the customers have that product and a number of them have the earlier version. So if they on the earlier version, they have to buy an upgrade to the workstation as well as to buy our Tomo upgrade. So a little bit more complex than we provably like to be, enhance it will take a little bit more time. But I can tell you is from our sales teams data that they have given us, there is probably right now about 80 to 100 customers out there with serious interest in doing an upgrade, adding our capability in the install base and that’s probably over the next say 12 months and that number is building. So that’s very encouraging to have that many customers that have already got into serious conversations with us, that’s only approximately third of their install base, but we haven’t out there that long and to have that many showing a strong interest and have expectation in 12 months or so to upgrade. My sense is that that number will grow. So we’re counting on their install base for some meaningful business. Again I think it’s really Q3, Q4 timeframe based on timing issues for them to find the cash and to coordinate and upgrade between us and GE. But I believe that those sites will all upgrade overtime. And the question is really just really about the pace.

[Jeb Terry:]

Okay. And so that upgrade still you know effect to the bundle notwithstanding the fact you don’t have the best density suitable products will turn out.

[Ken Ferry:]

We are having little trouble in hearing it.

[Jeb Terry:]

Okay, hold on. So the - so can you refresh our memory is what the ASP is for these upgrades?

[Ken Ferry:]

The upgrade is going to vary in price. I think thinking about maybe 40k to 50k range is probably a good ballpark number depending on configuration. And that would be for one connection to a machine. That wouldn’t include additional licenses. Somewhere in that range.

[Jeb Terry:]

Great. And moving to your comments about your next generation Tomo Detection which would be multivendor available and with the - the inclusion of FDI, can you clarify what size of market increase, addressable market it comes with that? You mentioned I think twice that it would be applicable to other cancers other than breast cancer rather than detection motility?

[Ken Ferry:]

Well, the way I would look at it Jeb is if you look at the MQSA data, what’s been projected in the MQSA data is a total install base of about 17,000 Tomo machines when the market is saturated. And so that’s at least what the number is out there. So you know when you think about 17,000 systems in the United States that’s an $800 million to 900 million addressable market. Now obviously it takes time and there will be others in the market and I don’t want to naïve to assume we would do all that business. But that’s the size of the market, it’s 17,000 systems and this product compatible and available for all of the vendors. And so today about 25% of that projected market is - has assistant from one of the different companies. So in essence since no one Tomo CAD other than us, our view of the entire market which now includes GE of course is it’s an $850 million opportunity if you just say each socket is worth $50,000 times and 17,000 Tomo system that are projected by MQSA in their database. So that’s a big opportunity. And obviously we know Hologic has the majority of them. So I think the challenge for us is whether we are able to be successful in adopting our systems on Hologic platforms. Something we’re planning to make available, what level of interest, what level of cooperation with them, what level of customer demand driving that opportunity, all that is to be determined. But we’ve done quite a bit testing with the new product. And all I can say in preliminary phase is that we’ve been extremely pleased that this product has really overachieved in the early stage performance-wise based on our original methods. So that may help us to move through the reader study and the regulatory process more quickly than we originally anticipated, provided continuing testing, results from the testing ultimately are as strong as the preliminary testing.

[Jeb Terry:]

Is this too fair to say that Hologic has not developed Tomo reader, I think you mentioned in the past that you’ve been in discussions but they don’t have a comparative offering at this point as they had in the 2D world?

[Ken Ferry:]

Yeah, that’s true, they don’t. You know I would expect that they will have something, right. I mean they are sitting still, they are the market leader. So I think the question is really when will they have something and how well will it perform. And obviously myself interest would that we’re on our second generation product, while they are possibly on a first generation product. And if our performance is in order of magnitude better and their customer see that there should be significant opportunity for us. But all that is probably 2018 to be determined. I think right now that what I would simply say is that we’ve done some pretty significant preliminary testing on this new product. And the performance is significantly higher than we originally expected. And both well for our other partners like Siemens and Fugi [ph] will each have now approved systems and a reasonable market share in the United States. I mean between the two of them, they probably own 20% of the 2D market. So you extrapolate that out to a 17,000 system and now you’d have another 3,500 sockets if they are able to hold on their 2D sockets, right. You know so - you know 3,500 is, let me just do the math quickly just for the heck of it, that’s a $175,000 million of addressable market not considering whether we’re able to do business with Hologic customers. So, we think we’ve got a very powerful two step process between the product and it’s been approved and the pace and the success we’ve had thus far with the next gen product. And we’ve got a very talented group of PhDs that are very, very confident in AI and machine learning. They have adapted those skills very, very nicely then it’s next gen product given what they learned with the first one. And I am really hopeful that by this time next year that product could be available in the United States, we’ll have to see. We had our challenges on predicting the first product, but we’ve learned an awful lot from that. And my hope is that we and the FDA will go into this next cycle in a position where we can move it along more quickly.

[Jeb Terry:]

That’s exciting. Thank you very much for taking my question.

[Ken Ferry:]

Yeah, thanks Jeb.

[Operator:]

[Operator Instruction]. Now move on to Shawn Boyd with Next Mark Capital. Please go ahead.

[Shawn Boyd:]

Good afternoon. You hear me okay gentlemen?

[Ken Ferry:]

Good afternoon, Shawn.

[Shawn Boyd:]

Ken, quick question on therapy, of the service revenues of that 1.8 million, how much of that was for breast priority?

[Ken Ferry:]

You know Shawn, we don’t really break that out, but what I would say is probably 50% to 60% and the balance for skin. Is that sound Rich, like I directionally pretty close?

[Rich Christopher:]

Yeah.

[Ken Ferry:]

Somewhere in that range would be IORT because you know every - Shawn every IORT site buys a service contract and buys an X resource contract from us. So today that’s a pretty constant business and it’s growing each year in terms of the number of sites. And obviously in our service line, well it’s a little bit more volatile I guess is a term I will use is the skin impact on service revenue. As I mentioned early, we still have some attrition of these capital customers in the skin space and at the same time we’re rapidly moving over to the subscription model. And so all of that sort of a transition has the skin portion of our service business kind of moving in positive and negative directions. The IORT portion is very stable and is growing each quarter and again represents maybe 50% to 60% of the total.

[Shawn Boyd:]

I got it. That’s helpful. Yeah, I understand the volatility between the two, so that’s kind of why I am asking. And on the product revenues, I am guessing we sold two systems in the quarter, and those are probably IORT, is that - and I - forgive me if I missed that earlier, I hope that I heard that on please?

[Ken Ferry:]

Right. Yeah I think we sold four, and two are domestic and two are international if I recall. In one of the international systems may have had some acceptance language, so I'm not sure we actually recognized revenue on one of the systems we ship, but they obviously are all these days IORT we haven't sold a dermatology capital system in quite a while, the whole market is moving more towards the subscription base.

[Shawn Boyd:]

Right, okay. So just jumping over to detection, for the business grew when we back out the MRI comparison there, the business grew 25% year-over-year, we’re in still early days and couple of months now to sell under the U.S. market with Tomo CAD, but at this point it's safe to assume from these levels will probably grow sequentially through the rest of the year and sort of certainly more so Q3, Q4, but we've got to base level here or we pull anything into the March quarter?

[Ken Ferry:]

Yeah, I think the way I would look at it is, we had an extraordinarily strong international CAD quarter, we - when I say that, I'm talking about 2D, we literally had several very large tenders in one was in Ukraine, another one was in I don't recall exactly where in Europe, but we received several very large orders for 2D CAD in Europe in the quarter. We did, as I mentioned sell seven or eight Tomo CAD licenses in the quarter as well, but we had a very unusually strong international quarter, what's hard to predict is whether there's a trend there. What we're hearing in Europe is, number one if customers are still on analog platforms, and there still a lot of fair number that when they move to digital technology they now buying CAD. We’re also seeing existing customers in the 2D world upgrading to buying CAD. And so what's interesting in the first quarter we had probably our strongest international quarter in years and what you would normally expect what must be the Tomo product is really kicking in, on one hand yes, we had a strong quarter with Tomo and I would say of the seven or eight licenses, sure I would expect at least that many licenses in Q2. But I don't know we would see these large orders that we saw in these various countries. So I think it's hard to say today that there would be growth overall, and I think in addition we had a particularly strong product quarter in the United States. And so for us to build on that sequentially, what it would really require for us to have a substantial Tomo contribution both in Europe and in United States, and to be perfectly honest it's just too early in the process to predict that they happen. I still believe that Tomo business in the U.S. will drive the top line the most, but I think it's still a late Q2 kind of Q3 phenomenon, so at this point time it's really hard to give you a real definitive answer to your question.

[Shawn Boyd:]

Got it. Okay, that's it from me. Best of luck guys.

[Ken Ferry:]

All right, thanks Shawn.

[Operator:]

Thank you. And that does conclude today's question-answer-session. I would now like to turn the conference back over to Mr. Ken Ferry for additional closing remarks.

[Ken Ferry:]

Thanks operator. I'd like to thank everyone for participating in our first quarter conference call today. We spent quite a bit of time discussing our two most important growth initiatives obviously the skin market in the treatment of non-melanoma skin cancer is our largest opportunity, it's a billion dollar plus market. We spent a lot of time in 2016, preparing and rebuilding that business, and just based on sheer treatment volume progress. We feel we're making good solid progress and will sustain that for the foreseeable future. So we're getting encouraged that our skin business is starting to grow nicely, again we believe overtime as we’ve mentioned earlier it will be reflected in our financial results particularly on the top line in a more favorable fashion. As relates to our Tomo Detection business, we're just really excited and really looking forward to that opportunity, customer engagement and feedback has been just outstanding, you know just anecdotally we were just at the Society for Breast Imaging in Los Angeles in April that is a meeting of the top radiologist that typically only read breast exams. And the reaction of customers coming into our booth was just incredible. And anecdotally one customer literally said to us a radiologist that this capability was a jar dropping competitive advantage for GE in the marketplace. Another radiologist said to us that incur radiology suite they had something like 10 machines, nine of which were a logic Tomo and only one was GE and after seeing our software she intended to only image your patients on the GE machine, so that she would have the benefit of our software. So we're seeing some terrific feedback from our customers related to a contribution of software mix. We're making significant investments in helping to market that software and we're very hopeful over the next three to five years that it will be a sustainable growth area for us in our business as our large install base and new customers move from 2D to 3D. technology. And then lastly on the artificial intelligence fronts, we are growing very strong in our competence around machine learning and we're looking at a number of different application areas in the imaging space where our competence can be extended beyond breast health, those opportunities would again further the size of our addressable market over the longer term and certainly be areas where we can make major contributions particularly to the radiologist in the productivity as they read more and more exams across the spectrum of imaging modalities. So with that thank you all very much for participating again in the call. And we look forward to speaking with you again at the investor meetings, medical meetings, and certainly when we provide our second quarter financial results sometime toward the later part of the summer. Good day.

[Operator:]

Thank you. And that does conclude today's conference. Thank you for your participation. You may now disconnect.