Earnings call: iCAD reports growth in AI cancer detection market

iCAD Incorporated (NASDAQ:ICAD), a global leader in AI-powered cancer detection solutions, discussed its fourth quarter and full year 2023 financial results and strategic progress in a recent earnings call. The company highlighted a 36% increase in annual recurring revenue (ARR) following its transition to a subscription-based revenue model.

Despite a decrease in overall revenue for the year, iCAD has seen improvements in gross profit and operating expenses and reported sufficient cash to fund operations without additional funding. The company is optimistic about growth opportunities, particularly in the US mammography market and international markets, as they focus on expanding their suite of AI cancer detection solutions.

Key Takeaways

• iCAD's transition to a subscription-based model has led to a 36% increase in ARR.
• The company has expanded its leadership team and upgraded its brand.
• Collaborations with partners like GE and Google (NASDAQ:GOOGL) Health are set to enhance iCAD's technology and accessibility.
• iCAD aims to improve breast cancer detection, which could save billions in healthcare costs.
• The company reported a decrease in total revenue but improvements in gross profit and operating expenses.
• iCAD's ProFound suite is cleared by the FDA, has the European CE Mark, and Health Canada licensing.
• There are significant growth opportunities in the US and international markets for AI mammography solutions.

Company Outlook

• iCAD sees a large addressable market opportunity for its AI solutions with the growing incidence of breast cancer.
• The company is focused on deepening business with existing accounts, expanding sales channels, and growing their geographic footprint.
• iCAD's ProFound solutions are expected to contribute to earlier breast cancer detection, potentially saving substantial healthcare costs.

Bearish Highlights

• The company reported a decrease in revenue for 2023.
• Transitioning to a recurring revenue model may result in lower GAAP revenue and a negative cash flow impact in the short term.

Bullish Highlights

• iCAD has an active customer base of 1,488, representing 46% of the AI market and 17% of the total US market.
• The company is expanding its partnerships and integrations to increase access to its solutions.
• Positive ARR metrics and closure of multiple perpetual and subscription orders in the fourth quarter of 2023 indicate growth potential.

Misses

• The company did not specify any misses during the earnings call.

Q&A Highlights

• iCAD's CEO, Dana Brown, emphasized the need for change management and cultural adoption to increase AI market adoption.
• The company is developing an adoption campaign and training materials to support this change.
• New sales representatives have been added to focus on new business and expanding within existing accounts.
• OpEx is expected to increase due to investments in sales hires, regulatory resources, and engineering resources.

In conclusion, iCAD Incorporated is navigating a strategic transition to a subscription-based revenue model while expanding its AI-powered cancer detection solutions. The company remains committed to improving detection and diagnosis of breast cancer and is optimistic about future growth opportunities both in the US and internationally.

With new product developments on the horizon and a focus on creating a world where cancer can't hide, iCAD is positioning itself as a key player in the fight against breast cancer.

InvestingPro Insights

iCAD Incorporated's (ICAD) recent financial performance and strategic initiatives have been noteworthy, particularly the 36% increase in annual recurring revenue (ARR) due to the shift to a subscription-based model. The company’s optimism about growth opportunities in the AI cancer detection market is mirrored by some of the data from InvestingPro.

InvestingPro Data highlights that iCAD's market capitalization stands at a modest $47.96 million USD, reflecting the size of the company within the market. The company's Price to Earnings (P/E) ratio is currently negative at -9.63, with an adjusted P/E ratio for the last twelve months as of Q4 2023 at -6.8, which may indicate investor skepticism about future earnings potential or reflect the company's current growth investments.

Additionally, the gross profit margin remains high at 85.87%, showcasing the company's ability to maintain profitability on its products and services despite the reported overall revenue decline.

An InvestingPro Tip notes that iCAD holds more cash than debt on its balance sheet, which is a positive sign for financial stability and may provide the company with the flexibility to invest in growth initiatives without the pressure of high debt levels.

Another InvestingPro Tip points out that the stock has taken a significant hit over the last week, with a one-week price total return of -11.73%. However, it's important to note the strong return over the last month, with a one-month price total return of 24.46%, which might interest investors looking for short-term gains.

For readers interested in a deeper analysis, there are additional InvestingPro Tips available, including insights on sales projections, profitability expectations, and dividend policies. To explore these tips and more, visit InvestingPro at https://www.investing.com/pro/ICAD and use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 5 more InvestingPro Tips listed on InvestingPro that can provide further guidance on iCAD's financial health and investment potential.

Full transcript - iCAD Inc (ICAD) Q4 2023:

Operator: Greetings and welcome to the iCAD Incorporated Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are on a listen-only mode, and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Jeremy Bennett. Sir, the floor is yours.

Jeremiah Bennett: Thank you, operator. Good afternoon, everyone. Thank you for joining us today for iCAD's fourth quarter and full year 2023 earnings call. On the call today, we have Dana Brown, our President and Chief Executive Officer, and Eric Lonnqvist, our Chief Financial Officer. Before turning the call over to Dana, I would like to remind everyone that we'll be making forward-looking statements on the call today. These forward-looking statements are based on iCAD's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. For a list of factors that could cause actual results to differ, please see today's press release and our filings with the U.S. Security and Exchange Commission. iCAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. Also, please note that management will refer to certain non-gap financial measures. Management believes that these measures provide meaningful information for investors and reflect the way they view the operating performance of the company. You can find a reconciliation of our GAAP to non-GAAP measures at the end of the earnings release. With that, I'll turn the call over to Dana.

Dana Brown: Thank you, Jeremy, and good afternoon, everyone. This week marks one year since I was named President and CEO of iCAD. I had my first earnings call on March 28th of last year, and during that call, I shared my background, why the Board and I believe I was uniquely qualified to lead the company and our confidence in the company's future. As I stated, then, and reiterate now, I'm honored to be leading this incredible company. Working alongside our talented team, our Board, our clients and partners, I'm committed to uphold our vision to be the world's most pervasive and personalized suite of AI cancer detection solutions, changing lives for patients around the world and creating value for our shareholders and stakeholders. The management team we've assembled is uniquely prepared to leverage their experience and expertise to position this company for future growth. And I hope as you followed our progress over the course of the past year, you see we deliver on what we say we're going to do. Before we get into financials, I want to take a few minutes, particularly in light of 2024 being our first year as a company solely focused on AI cancer detection and risk solutions. To recap our solution set and market opportunity. iCAD is a global leader in AI powered cancer detection solutions. Our mission is to create a world where cancer can't hide because cancer wins when it hides remaining undetected. Cancer poses one of the greatest threats to life. With our industry-leading ProFound breast health suite, cancer has finally met its match. The ProFound breast health suite enables medical providers and professionals to accurately and reliably identify where cancer may be hiding and when it might make its move. The ProFound suite offer solutions is comprised of four areas. Number one, breast cancer detection. Number two, density assessment. Number three, one or two year breast cancer risk evaluation. And number four, cardiovascular risk evaluation related to elevated levels of breast arterial pacification. Powered by the latest innovations in artificial intelligence and built on one of the largest, most demographically and geographically diverse data set. The ProFound suite offers unique 360-degree solutions for cancer detection, density assessment and personalized risk evaluation, all based on a 2D or 3D mammograms collection of images. The ProFound detection solution scores cases and suspicious lesions, helping radiologists identify and focus on areas of most concern and highest suspicion of cancer. The ProFound density assessment standardizes and simplifies breast density reporting, algorithmically examining a woman's breast anatomy from the mammogram image. The ProFound risk solution provides a near-term probability for developing breast cancer in the next one or two years, making it more actionable and relevant than generalized lifetime risk scores. The ProFound heart health solution identifies the presence and quantity of breast arterial calcification, which is proven to correlate with calcifications elsewhere in the body, raising concern for cardiovascular or heart health concerns. Used by thousands of providers serving millions of patients, ProFound is available in over 50 countries. We estimate that ProFound has been used for more than 40 million mammograms worldwide in the last five years alone. With over 25 years of experience in AI cancer detection, iCAD has secured 45 patents, completed over 50 clinical studies, and as I just described, we train our algorithms on one of the largest and most diverse data sets, pulling data regularly from over 100 global locations. iCAD's deep experience and unmatched set of capabilities differentiates iCAD from this competition and positions it as the industry leader with an AI solution that continuously gets better as the company continually refined its algorithm models using its extensive data set and research partners. As outlined during our 2023 third quarter earnings call, iCAD is increasing its leading position as the premier breast AI solution by transitioning into a platform-based software as a service, data as a service organization by implementing a three phase transformation. Phase one, realigning our base. Phase two, strengthening our foundation and phase three, investing in growth initiatives. In 2023, we made good progress executing phases one and two, including stabilize the business through reducing our cash burn. EBITDA, which we view as a relevant metric to indicate operating cash flow was a loss of 0.4 million in Q4 '23 versus a loss of 3.6 million in Q1 of '23. This represents an improvement of nearly 3.2 million per quarter. Reduced cash burn. 2023 cash burn from operating activities of 5 million compared to 2022 cash burn from operating activities of 12.8 million. We believe cash burn is stabilized and I'm pleased to affirm the company does not need to raise additional funding to pursue current growth initiatives. Continued to manage the shift to a subscription-based annual reoccurring revenue cycle. We'll talk more about ARR growth later in this call, but in summary, we had a 36% increase in ARR since the start of the subscription transition. We've achieved 16% compounded annual growth rate in total ARR over the two-year period through the end of Q4 '23. We expanded our leadership team with the appointment of our permanent CFO, Eric, and the addition of the COO, Chief Product Officer, Vice President of Marketing and Vice President of the Customer Success. In December, we announced expanding our sales leadership team to accommodate growth. Bill Keyes shifted and expanded his role to Senior Vice President Global Sales Operations, and Peter Graham joined us as Senior Vice President North American Sales. We also made good progress in recruiting new board members, and you may have seen the recent announcements on those additions. We upgraded our brand by transitioning from a product focus to patient centric value proposition, resulting in our new tagline of “Creating a world where cancer can't hide.” You can see more of this brand upgrade in our new investor deck available for download via the investor section of our website, icadmed.com. Announced game-changing collaborations with the esteemed partners, exemplifying our company's commitment to creating the world's most pervasive and personalized suite of AI cancer detection solutions. And last but not least, the divestiture of Xoft also resulted in a reduction to cash burn and an influx of cash. Completing this divestiture has enabled us to put our focus into scaling the ProFound suite business, immediately prioritizing, expanding our sales and partnership models to grow revenues. The company's next phase of transformation phase three has begun in 2024 and includes launching initiatives that strengthen and deepen business with existing accounts and growing through expanding our direct and indirect sales channels, including expanding, iCAD's geographic footprint. We believe U.S. sales had declined due in part to a significant reduction in the sales force in fiscal year 2022. At the Q3 2023 in the U.S., we had six sales reps versus 12 in Q3 of 2022. After a thorough analysis of rep performance over the past three years, we believe adding additional sales reps focused on new business, given our large addressable market opportunity, which I'm going to discuss next, and rep focused on large national accounts will lead to revenue growth. Since our Q3 call, we added four new team members to the sales organization. I'll take a few minutes now to outline our large addressable market opportunity. When diagnosing breast cancer early detection matters identified as stage one, cancer is more likely to respond to treatment and can result in greater survival rates. In fact, according to the American Cancer Society, the relative five-year survival rate from breast cancer is 99% when detected early. However, the incidence of breast cancer is growing. According to the World Health Organization, breast cancer is the most common cancer worldwide, recently surpassing lung cancer with 2.26 million new cases diagnosed worldwide in 2020. One in eight women will get breast cancer in their lifetime, and every 14 seconds, a woman is diagnosed with breast cancer worldwide. Compounding the situation, 59% of women in the U.S. missed their recommended screening mammograms. And for those who regularly screen for breast cancer, 20% to 40% of cancers are missed in mammogram screening, with up to 50% missed in women with dense breast tissue. Traditional risk assessment models have relied on family history of the disease as a leading risk factor, when in fact, and most surprising, 89% of women diagnosed with breast cancer have no direct family history of the disease. And 90% to 95% are not related to inherited gene mutation. As breast cancer detection is becoming increasingly complex, AI can help radiologists spot cancer faster with greater accuracy and save more lives. With the continuing migration from 2D reading systems to 3D, known as DBT or Tomo systems, radiologists are spending 2x the amount of time reading hundreds more images per 3D case, compared to the four images captured with 2D. This geometric increase in the number of images to read leads to stress. 50% of radiologists are overworked, and burnout is reported to be 49% per Medscape radiologist lifestyle, happiness and burnout report 2022. Simultaneously, false positives and unnecessary recalls for suspected cancers have continued at similar rates. While hard to detect interval cancers are being missed or diagnoses are delayed. The rise in workload for radiologists has felt by patients too, anxiously waiting weeks for results or receiving unnecessary recalls and biopsies lead to undue stress and anxiety, not to mention the stress of the healthcare system. On average, only 10% of women recalled back from a routine screening mammogram for a diagnostic workup are ultimately found to have cancer, resulting in the patient being confused and frustrated with the process. Additionally, a significant economic burden is placed upon patients and payors that extend throughout multiple years when a breast cancer diagnosis is missed in its early stages, and instead diagnosed at a later more advanced stage. Beyond associated clinical benefits, finding and treating breast cancer earlier may limit the need for more intensive and expensive treatments. Increased patients' health-related quality of life have a significant impact in managing healthcare costs among cancer patients and reduced caregiver and societal burdens. iCAD calculates if diagnoses were shifted one stage earlier for just 20% of the 280,000 women in the U.S. diagnosed with breast cancer each year would result in a savings of approximately $3.7 billion across two years of patient treatment and healthcare costs. Our AI-powered mammograms are setting a new standard of care in cancer detection, density assessment, and short-term risk evaluation. With iCAD's ProFound breast health suite, radiologist's reading times may be cut in half, with improved accuracy and specificity in finding suspicious cancerous lesions. Radiologist's benefit from standard, objective, inclusive results measured by an algorithm built upon many millions of images. And patient's benefit from receiving timely personalized results, fact-based assessment of the breast density, and short-term risk assessments that inform their screening plans. As noted above, iCAD's mission is to create a world where cancer can't hide, because when cancer wins, we all lose. For the health of women everywhere in the benefit of their communities, iCAD's AI-powered image-based solutions help detect cancer faster, earlier, and with greater accuracy, as well as evaluate breast cancer and cardiovascular risk from a single mammogram. The ProFound breast health suite is cleared by the FDA and has received European CE Mark and Health Canada licensing. As I noted earlier, ProFound is used by thousands of providers serving millions of patients. ProFound is available in over 50 countries. According to a December 2023 report, approximately 40.5 million annual mammograms are conducted in the U.S., across 8,834 certified facilities, as measured by the FDA mammography Quality Standards Act. Yet, only 37% of facilities are using an AI mammography solution. According to research and markets, United States mammography and breast imaging market outlook report 2022 to 2025, leaving room for growth. Of the 3,268 facilities using AI, iCAD has an active customer base of 1,488, or 46% of the AI market, and 17% of the total U.S. market. In the last five years alone, iCAD estimates reading more than 40 million mammograms worldwide. Based on the number of DBT units relative to the total units left to be converted to DBT and the associated large number of installation opportunities, we believe our ProFound solutions for 3D may represent a significant growth opportunity in the United States. We also believe that there is a growth opportunity for 2D mammography and DBT AI solutions in international markets, both from the analog to digital conversion, as well as more countries adopt the practice of each exam being read by a single radiologist using AI, rather than the current practice of having two radiologists read each exam. Furthermore, additional Western European countries have already implemented or are planning to implement mammography screening programs, which may increase the number of screening mammograms performed in those countries. Since having released our first FDA-cleared product in 2002, iCAD has remained committed to innovation and artificial intelligence by continuously improving and releasing the highest performing and most widely available solutions in breast care with FDA clearances, CE Marks, and health Canada licenses. The latest versions of iCAD ProFound breast health suite solutions are currently under review with the FDA, including version 4.0 of our ProFound detection solution, built on the newest deep learning neural network AI. Per regulatory test data, iCAD has observed detection version 4.0 will deliver significant improvements in specificity, sensitivity, and the highest AUC or area under the curve for specificity and sensitivity for breast cancer detection at 92.5%. Along with the new heart health solution, measuring the level of calcification and breast arteries, identifying cardiovascular concerns, and new cloud deployment options, iCAD's overall value and ease of implementation continue to improve. In 2023, we strengthened our market leading partnerships. Recognized as the leader in breast AI powered solutions, iCAD partners with industry leaders across technology, academic research, integration, and advocacy organizations to iterate and improve upon iCAD software and make solutions more accessible to customers. Our solutions are interoperable with more than 50 PACs vendors worldwide. With 22 global distributors and growing, iCAD's market shares on the rise. In 2023, iCAD continued its work with Duke University, Indiana University, University of Pennsylvania, and Karolinska Institutet. on artificial intelligence advancements in clinical testing. Additionally, iCAD expanded its partnership with Google Health to enhance the company's technology and expand access to millions of women and providers worldwide. iCAD's new 20-year research and development agreement includes co-development, testing, and integration of Google's AI technology with the ProFound breast health suite for 2D mammography for worldwide commercialization to potentially ease radiologist workload and reduce health care disparities for women. The conventional double read workflow used by most countries where mammograms are assessed by two separate radiologists has become increasingly challenging as there's a global radiologist workforce shortage. Leveraging AI is a viable alternative to current double reading by introducing iCAD as secondary independent reader can help radiology departments run more efficiently. To make iCAD solutions more available to customers, we expanded into new platform and channel partners, technology partners, and health system partners. In November of 2023, we announced iCAD is the only breast cancer AI detection solution integrated into GE's new my breast AI suite. And all in one platform made up of three workflow algorithms from iCAD's ProFound breast health suite. GE has released MyBreastAI suite first in U.S. and plans to release globally in 2024, simplifying the sales and implementation process for GE and enabling AI used by customers across the globe. Additionally, iCAD developed several new partnerships and integrations with several AI distributors and marketplace aggregators to implement ProFound AI via cloud options, such as Ferrum, Change Healthcare (NASDAQ:CHNG), Blackbird, and have several others currently under negotiations to further expand iCAD footprint. Looking forward, iCAD is dedicated to serving those in need by establishing free equitable access to AI red mammograms. To start, iCAD will bring ProFound detection to the countries of Ghana and Guiana in partnership with RAD-AID, a nonprofit entity that works in over 30 countries to improve and optimize access to medical imaging and radiology in low resource regions of the world. Together, iCAD and RAD-AID plan to improve diagnosis of breast cancer where breast cancer mortality rates are the highest. I'll now turn the call over to Eric for a detailed review of our Q4 and year end 2023 financials.

Eric Lonnqvist: Good afternoon, everyone, and thank you, Dana. I'll now summarize our financial results for the fourth quarter and year ended December 31, 2023. Please note that these results exclude the divested Xoft business unless otherwise noted. Results relating to the Xoft business line are presented in Note 2 of our annual report on Form 10-K. Revenue for the year ended December 31, 2023 was 17.3 million, a decrease of 2.5 million or 13% from 19.8 million in fiscal 2022. Product revenue declined 2.7 million offset by a 0.2 million increase in service revenue. The revenue decline was driven primarily by a reduction in sales force along with our continued shift from a perpetual to a subscription-based revenue model. Revenue for Q4, 2023 was 4.7 million, an increase of 0.1 million or 2% from the fourth quarter of 2022. Fourth quarter, 2023 product revenue was 3 million up 8% from the prior year. Service revenue was 1.8 million down 6% over the prior year. Moving on to gross profit. On a percentage of revenue basis gross profit was 91% for the fourth quarter of 2023, which was up from 84% in the fourth quarter of 2022. On a pure dollar basis, gross profit for the quarter was 4.3 million as compared to 3.9 million last year. Total operating expenses for the fourth quarter of 2023 were 5 million at 1.4 million or 22% decrease year-over-year. This improved run rate reflects the implemented cost cutting measures previously announced. GAAP net loss for the fourth quarter of 2023 was 0.5 million or $0.02 per diluted share compared with GAAP net loss of 2.2 million or $0.09 per diluted share for the fourth quarter of 2022. This year-over-year decrease in the GAAP loss per shares primarily due to operating expense reductions. Non-GAAP adjusted EBITDA loss decreased $1.7 million to $0.4 million in the quarter ended December 31, 2023, from the same period in 2022. Note that the non-GAAP adjusted EBITDA loss for quarter ended December 31, 2022, was $3.1 million with the Xoft business unit included. Moving to the balance sheet. As of December 31, 2023, the company had cash and cash equivalents of $21.7 million compared to cash and cash equivalents of $21.3 million as of December 31, 2022. Net cash used for operating activities for the year ended December 31, 2023, was $5 million compared to $12.8 million for 2022. This improvement of approximately 61% year-over-year is due primarily to cost savings initiatives implemented during the first quarter of 2023. Please note that the cash balance and net cash used in operating activities both reflect total iCAD, both Xoft and detection. As Dana noted earlier, we believe we have sufficient cash and resources to fund our planned current operations, but no need to raise additional funding. The cash balance as of December 31, 2023 includes net proceeds of $4.5 million from the Xoft sale in October 2023 as well as net proceeds of approximately $2 million from the issuance of shares of common stock in at-the-market or ATM offerings. The ATM proceeds were generated primarily in Q3 2023. As noted in our prior earnings call, the steady shift to a recurring revenue model from a perpetual model has numerous benefits including better business visibility, more efficient expense management and an improved ability to predict future cash flow. It also has risks, including short-term lower GAAP revenue, and negative cash flow impact for the next 3 years. To help illustrate our progress in this transition, we began reporting the following annual recurring or ARR metrics in Q3 '23. Total ARR or TARR represents the annualized value of subscription license, maintenance contracts and active cloud services at the end of a reporting period. Maintenance Services ARR or MARR represents the annualized value of active perpetual license maintenance service contracts at the end of the reporting period. Subscription ARR or SARR represents the annualized value of active subscription or term licenses at the end of the reporting period. Cloud ARR or CARR represents the annualized value of active cloud service contracts at the end of a reporting period. Total ARR or TARR was $8.7 million as of December 31, 2023, up from $8.3 million at the end of the prior fiscal quarter. Maintenance Services ARR or MARR, was $7 million, up from $6.9 million at the end of the prior fiscal quarter. Subscription ARR or SARR, was $1.7 million, up from $1.4 million at the end of the prior fiscal quarter. Once we have released our commercial cloud platform, we'll begin tracking cloud ARR. In addition to the recurring revenue metrics noted above, we also began disclosing the number of orders relating to perpetual product, subscription and cloud deals. The intent of this metric is to illustrate the pure volume of sales without the complexity of the multiple GAAP revenue streams. We are pleased to report that in the fourth quarter of 2023, we closed 80 perpetual and 9 subscription orders. This brought our 2023 year-to-date total to 273 perpetual and 31 subscription orders. This concludes the financial highlights of our presentation; I would now like to turn the call back over to the operator to lead the Q&A.

Operator: Thank you. [Operator Instructions] Our first question is coming from Per Ostlund with Craig-Hallum Capital Group. Your line is live.

Per Ostlund: Now that we've gotten through the divestiture, obviously, it seems like the margin profile of the detection business is very much shining through, and I think the growth profile ultimately will as well. Now that you really have the singular focus on the detection side, I want to start out with some of the new product activity that you've alluded to in your remarks Dana. So you mentioned ProFound 4.0 is under review at FDA. We've talked about the Google Health combined algorithm. We talked about breast arterial calcifications. Kind of curious as to how the timing of those three things might start to phase in. I assume 4.0 is probably the nearest in and might have some impact here in 2024. But you tell me, and then with respect to Google Health, is there a reader study there? What kind of this timing there, and then, the same goes for breast arterial calcification.

Dana Brown: Sure. So I think your sequence is correct. So maybe just to reiterate, first of all, to caveat, right, it's all dependent upon regulatory approval. And if I've learned anything in the last year, that can be unpredictable. So all of this comes with like best late plans, right? So but 4.0 is a new version of the algorithm that is under review with the FDA because it's an update to an existing product that's already received a device classification using [indiscernible] allegedly, it should move the fastest. So yes, we hope that the FDA can get through their review and give us clearance to take that algorithm to market here within this calendar year. And we'll keep everyone updated as we move along through that process. Breast arterial calcification, which is a new stand-alone solution that works with the entire suite is also in the FDA process. It's a new product, not just for us, but for the market in general. So lots of Q&A going back and forth with the FDA. But it's moving forward. So, likewise, we hope to receive clearance this year, but you just don't know whether it's a brand-new product. And we have our partner Solis Mammography, helping us with answering questions for the FDA based upon real-world experience. And in fact, they'll be kicking off a treating exercise to help prepare some of the additional data needed to answer some of the FDA's questions. The third one is the combined kind of Google algorithm, in particular, the use of the algorithm for independent and second reader that is a European Union focused effort, not something that has widespread possibility in the United States as of today. And that's going to be a very long-term effort. So that's probably going to take a few years to get through regulatory approvals. There are studies already underway but we're expecting to have to do multiple studies across different countries to get that algorithm through clearance. So it's not anything that we've built into our commercial model from a revenue standpoint in this calendar year.

Per Ostlund: Okay. Excellent. Let me add one more product question. ProFound risk. As I understand it, when we spoke at RSNA, FDA has some new guidance related to that product and those type of tools, where does that stand today? Are you still doing data gathering mode there, or is that also now back at FDA kind of where are we looking at there?

Dana Brown: Yes. So risk is already cleared in the European Union. So it has its CE mark. It also has its Health Canada licensing. So we are actively selling it in those regions. But here in the U.S., we did hear back. So the first step with the FDA once the FDA had released its final guidance was to resubmit the risk product and ask the FDA to classify it. They did come back and which we have a firm answer from them that it is classified as a de novo or a brand-new device. There is no predicate device in the market today. So we're definitely breaking ground with something brand new. So we are going through the process right now of preparing all of the data and the documentation and information needed for a de novo device submission to the FDA. So that will be a longer process. So I think our estimates, it's probably going to be sometime early 2025. We hope, if everything goes well, when we receive any form of clearance back from the FDA. But again, you never know kind of what questions they come back with, but it is moving forward. It seems to be better understood now that we've submitted some of the answers to prior questions that we received. And so it's just a matter of going through the FDA process.

Per Ostlund: Sure. That makes sense. This may be a leading question, but indulge me, the fact that it's being treated as a de novo, that obviously adds a little bit of time to the equation, but --

Dana Brown: Yes.

Per Ostlund: Does it also, at the same time, actually strengthen your hand in the sense that there are other decision support tools out there that are kind of coin flips where you come out with a de novo clearance term FDA on your risk product and should that kind of look to everybody sort of ahead of the line for what they would want to use in that sort of scenario?

Dana Brown: It does, I mean part of, I'll say, a bit of the benefit in being de novo is we can kind of set the bar, right, for what additional products we need to provide in terms of functionality and their accuracy in order to claim we're a predicate device for them. So and it is also still available today for investigational use. So we still have customers using the product and driving some benefit for their customers, they're just not able to commercialize it. But that strengthened the analysis and the data that we can provide to the FDA through their use of it in an investigational mode.

Per Ostlund: Okay. Very good. I'm going to ask two more, if I can. The revenue performance in Q4 was nicely ahead of my forecast and consensus. And I'm hazard to guess that we all probably try to be a little bit conservative because of the moving parts and the modest transition and what have you, did the quarter surprise you at all versus your and Eric and the team's internal expectations because an 80 perpetual sale and 9 subscription. It seems like a pretty good number probably all implicitly had in our models.

Dana Brown: I'm trying to think it like [Technical Difficulty]. So the part that did not, right, surprise is, is we have a pretty rigorous forecasting and pipeline review process that happens every single week very consistently. So we begin to see deals moving through stages of the pipeline, obviously, much earlier than it at a point where it's something you could announce, right? So I would say we began seeing that movement happen. The flip side is, it was first time through that pipeline for kind of all of us as a team. And so while you might have a sales rep forecasting a deal at Stage 3, right, Stage 4 is kind of getting to the final stages. We ask as many questions as we can to try to validate that. But you still got a little bit of fingers crossed that we're all speaking apples-to-apples in terms of expectations as things are moving through the stages. So I would say it like around [Technical Difficulty] on the one hand, we start building and we're beginning to have some of that predictability. On the other hand, it was first-time through the process. And so we hope everybody was qualifying deal, the categorizing them at stages that we're all on the same wavelength. I think fourth quarter, in general, just having spent literally decades in software. It's always the best quarter. It's always very seasonal. So there was some expectation there in terms of just like the quantity right and deals that might come through. Everybody likes to take advantage of any discounts or just kind of end of your budget money that's available. So that part, I would say, kind of play through in terms of like a traditional software business, especially Software-as-a-Service business. But I'll ask Eric if he wants to chime in, and he can feel free to have the exact opposite point of view.

Eric Lonnqvist: I agree, Dana. I wasn't really that surprised by the results, honestly. We had a few deals that slipped out of Q3. I think maybe my take would be that Q3 was a little lower than we expected, and Q4 might have got a slight benefit from that. But no, I think it was in line with what we expected coming into Q4 internally. I don't think it's an anomaly for the business at all. I think it's a good quarter. We're happy with it, but it's not ridiculously high that we're surprised by it. I think we executed through expectations in Q4.

Per Ostlund: That's great. All right. One last one. I apologize. I feel like I'm hogging the queue. But maybe just a super big picture question. RSNA, I think it was your first time at RSNA, I believe, Dana. Just curious if you had sort of a high-level takeaway of what you felt like iCAD's overall presence in messaging and what the interest was? And did you see other really interesting things out there that gave you pause as far as your competitive standing? Or kind of just anything you kind of thought coming away from that shell.

Dana Brown: So, overall, I think our show presence and level activity exceeded my expectations. So we had a bit of an internal competition in kind of a high bar in terms of what would count as a meeting, right, that was booked during RSNA and meeting with the prospect of our customer and it had to meet certain criteria. You heard on the call, right, in my prepared remarks, we were at a sales force 50% half the size of the year before, and we had far, far more meetings and qualified meetings at RSNA generated by that small mighty team. And in both the U.S. base as well as international base meeting. So I think our share presence was great. We have people expressing genuine interest. I would say the flip side is because I was so busy in all those meetings, I probably didn't get to walk the show floor and check out other things that were going on as much as I thought that I might but I did get to spend time at some of our competitors' booth. Everybody is kind of a bit more friendly in a trade show environment, they know I was still walking around and open to talk. So that was great. Obviously, seeing the presence of companies like GE was just fabulous and get a peek at some of their innovations, things that were important to them in terms of articulating their innovation and the way that they were to see their products positioned. As I mentioned, right, that was very timely because we were able to announce this full-blown integration into their MyBreastAI Suite at the show so that was good. I think if I flip it around and I'm the radiologist walking to show floor. I think it can still be a bit overwhelming figuring out how all of these technology components fit together and kind of how I make my decisions, right, on what to use and in what order. So that gave us more insight when we came back home after the show on ways in which to really improve our messaging, our product demos, even our initial kind of introductory to iCAD pitches. So we've been spending a lot of time on that. We are developing a new kind of adoption campaign and some training materials, trying to make sure that we don't underestimate the amount of change management and cultural adoption that needs to happen with AI. You heard me close to stat, and we actually talked about this even with Hologic (NASDAQ:HOLX), team members have to show of only 37% of rate of screening, right, mammography screening centers are using AI. There's still a long ways to go to really saturate that market. And so what are barriers to adoption, and a lot of it is just cultural and change. And so we've been focusing a lot more on that to complement maybe the technical aptitude and knowledge that we try to share in our presentations in the past.

Per Ostlund: That's great. That's very thorough. I appreciate the answers.

Operator: Our next question is coming from Marie Thibault with BTIG. Your line is live.

Marie Thibault: Wanted to ask here about your new Head of Sales and the new folks that you welcomed on to your sales team. Tell me a little bit about when they came on when you expect them to ramp? What they're focused on? Is this perpetual? Is the subscription, a bit of both? And how we can expect to see OpEx maybe step up a little bit. I know that's been very nicely controlled, but I guess you have to spend a bit on some of these new folks.

Dana Brown: Yes. So I'll talk a bit about, I'll say kind of like the new structure for the sales team, and then hand it over to Eric to talk about the OpEx side. So maybe just to step back, when we had the 6 sales reps, and we had a head of sales. I'll say everybody is kind of doing everything. And when you really get to know a salesperson, I would say most often, their DNA skews to either really being excited about cold calls and new business, right? Or they may like more of the ongoing relationship management, account management, just kind of care and feeding right, of existing accounts. And given our large installed base, we were skewing much more right to that side of the equation, much more to an account management versus a new business type of DNA in the sales team. So when we thought about the way in which we wanted to restructure the team going forward, we wanted to do a bit of division of roles and responsibility. So the new head of sales we brought on board. He is the new SVP for Commercial for North America, so both the U.S. and Canada. He's definitely wired as a new business guy. So he likes getting the net new logos, breaking ground, right, in new accounts. So to complement that, I would say, of the six that we had, we had one other individual who is really clearly kind of a new business person, and we had one with a strong hybrid, and the rest were really great at account management. So of the four that we've added, 1 was the new leader that I just mentioned. We added two more account reps that are focused on new business. So we have three people kind of double cooking our new business. We added a new strategic national accounts executive and so she's on board. So that makes up the four new people that we have and then move the existing sales team in to more of that account management role. And as account managers, they're really focused on expanding within an existing account. Making sure accounts are staying current on upgrade and update maintenance and support agreements, whereas the new business team is really kind of net new logos. So everyone, the head, the new SVP started very late December, and the other three new individuals started in mid-January. So their pipelines are beginning to build. A couple of them have some very small deals on the board as our SVP likes to describe it. And we're expecting, right, that they've got a couple of quarters here of ramping up so far they're on track with what our expectations are and hope they begin to contribute in the second half of the year. So Eric, do you want to talk a bit. I would say a couple of other, I would say, kind of holes in our team that we filled. We did add a couple of other regulatory resource and a couple of engineering resources as well. So to your point, when you think about OpEx in addition to some of the sales hires, we had a couple of others in those other departments as well.

Marie Thibault: Anything from Eric there or?

Eric Lonnqvist: Yes. Yes, I can add in a little bit of color, too. So in Q4, our OpEx was right around $5 million. I think as you're thinking about what that means is kind of the first clean quarter without Xoft. We did have some benefit in the quarter. I think onetime kind of favorable P&L impact. So I'd say, in the $200,000 to $300,000 range. So I think about Q4 is kind of where we're at in OpEx post off. But going forward, it is going to change quite a bit. So Dana has mentioned and she talked about, we released publicly these increases in the sales team, the four new heads and they're pretty senior level people, some of them. So there will be an expense that is largely isn't in our run rate for Q4. And there is also some of the things Dana mentioned in terms of investments in regulatory as part of the plan as we enter this kind of third investment phase after we've stabilized the cash burn. So you will see a bump for these initiatives in OpEx.

Marie Thibault: Okay. That's helpful detail from both of you. Thank you for that. I wanted a quick update. On Q3, you mentioned that about a quarter of the customer base had lapsed their maintenance agreements and there's an effort there to try to renew some of that. Any early progress updates on that effort?

Dana Brown: Because it's happened here and like just the recent first quarter that we're still in the midst of. We don't have anything that we are able to disclose yet. But I can tell you, anecdotally, it's going well. We actually have a service pack, which is an update, quite a bit of functionality that will be released next week. So that's also spurring customers to get current on the version of the software because they want to take advantage of those new features and functions. To your point, we didn't make that information known in third quarter. And so it's something that we are tracking and those are metrics that we plan on being able to talk about on next quarter's call.

Marie Thibault: Okay. We look forward to it. One last quick one. Just as I look ahead on your pipeline, you've got some nice new products like breast arterial calcification, potentially risk being added to kind of the suite of products that you offer. How should I think about impacts pricing or ASP as you kind of go out and offer these opportunities, would that increase the subscription ASPs? Is it all going to be part of one package? How to think about that?

Dana Brown: Well, both products are under review with the FDA right now. So I would say when you think about 2024, you're not going to see a big impact, right? It's going to take time to get through the FDA. They're available for investigational use right now. But under that categorization, we actually can't generate revenue from them from customers...

Marie Thibault: I'm looking into the future.

Dana Brown: So the solutions are priced both, I would say, individually. So you're an existing customer and you want to add it on, you can, the products are available in the cloud. So they can be an incremental price, right, of revenue to an existing subscription. And then we also offer the whole bundle. So I don't know, Eric, if you have any more like color you want to add to how we think about the pricing.

Eric Lonnqvist: I think the sales team is super excited to. Again, kind of in the door with our core suite of detection products, and they're chomping at the bit to have these add-ons to go to customers with kind of land-and-expand type strategy. So they can't get approved fast enough, I think, for our new sales team.

Operator: Thank you. A final question today will be coming from Yale Jen with Laidlaw and Company. Your line is live.

Yale Jen: Just a few quick ones. The first one is I appreciate that you provide the detailed number of deals done in the fourth quarter. My question to that does the perpetual order of fourth quarter generally for the floor numbers or referable number for, let's say, 2024 or that also is very fluctuating quarter-over-quarter.

Eric Lonnqvist: Dana, I don't know if you want me to take that one?

Dana Brown: Yes, yes, please.

Eric Lonnqvist: Yes, I think you're asking if the perpetual deals fluctuate a lot between quarters.

Yale Jen: I mean I didn't know what is that perpetual a lot, I mean between quarters. I'm just having -- we have number 80 is the one for the fourth quarter. So I wonder whether going forward, would that be a sort of relatively consistent number roughly quarter-over-quarter? Or that actually also could be fluctuating quite a bit over time.

Eric Lonnqvist: Yes, they do fluctuate a little bit. And order of magnitude not a [indiscernible] instead of looking forward, I'm kind of looking back at the last few quarters. I mean we're up a bit from Q3. I think if you're trying to think about how to model it going forward, I'd probably look at what we did release the number in Q3, I think it was closer to 60 deals for perpetual and we're up to 80-ish in Q4. So that's a movement right there. So it can move around. But not like two extra. It's been fairly consistent in the last few quarters. I think more what can change with perpetual deals is the size of the deals so they can to get 1 or 2 real big ones, it can swing the revenue if you're trying to model. So were stable, but yes.

Yale Jen: Okay. That's very helpful. Maybe just one more added here, which is now you are a pure play in the detection side. So I also noticed that the gross margin has been sort of more stable from the last quarter. So should we consider this quarter's number reference point for 2024 and maybe beyond.

Eric Lonnqvist: Yes. I can't speak to the future. But for this quarter, the first quarter without Xoft, and a clean view, we had the 91% margin. I think there's a few pieces in this quarter that did drive up a tick. The mix shift of what we sold, we sold more licenses and less hardware this quarter. So our margins are higher on the licenses, so that drove it up a bit. So going forward, if that mix shift changes more towards licenses, our margins will be better. It's more towards hardware sales and the margins will come down a little bit. So this quarter, we did benefit a bit from that. I think last year, we reported also in our continuing business which would be detection alone. Our margin was 85% in 2022. So I think somewhere in that range is where we're kind of looking for detection, the 85 to 90 is what we've seen to date. But it could change due to a number of factors, the mix shift in sales the mix shift more from perpetual to cloud. There's a number of factors that could move that number going forward.

Yale Jen: Okay. Great. That's very helpful. It helped us doing the modeling. So again, congrats on the progress. Look forward to talk to you guys soon.

Operator: Thank you. As we have no further questions in queue, I shall hand it back to management for any closing remarks.

Dana Brown: Thank you, operator. In conclusion, we're making bold moves to rapidly transform this company with a focus on maintaining stability, preserving our cash and building a defensible and competitive long-term strategy. Demand for our technology continues to be strong. The evidence supporting it continues to grow, and our team continues to secure opportunities with some of the most prestigious and esteemed health care facilities worldwide. I remain optimistic about the company and its future, and I firmly believe in the bright future of the company and our ability to generate significant shareholder value. Thank you and have a great evening.

Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time, and we thank you for your participation.

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