Q2 Results. Street's Over-Reaction Prompts Upgrade


Brian Marckx, CFA


iCAD (ICAD) announced financial results for the second quarter ending June 30, 2011 on July 28, 2011.  Revenue was well ahead of our estimate but this was more than offset by the combination of a slightly softer than anticipated gross margin and significantly higher operating expenses.  The net result was EPS coming in just shy of our estimate.  While the market (with the stock trading down 25%+) was apparently less than enthused by the earnings release,  we are not disappointed by the numbers and had actually anticipated the lower revenue guidance.  The price action has created an attractive entry point and prompted our upgrade from Neutral to Outperform.  See below for free access to our 25-page report on iCAD.          

Despite the slight miss on EPS and downward revision in 2011 revenue guidance (already baked into our estimates) there were some noteworthy highlights in details within the numbers and comments from management on the call.  Most encouragingly is that revenue from Axxent handily beat our respective estimate and management expects sales to pick up in the second half of the year (commensurate with our earlier expectations).  The company also did some significant cost-cutting during Q2 (sooner than we had expected), the fruits of which should be seen during 2H.  

Revenue of $6.65MM was up 9% y-o-y and almost 12% better than our $5.95MM estimate, due almost entirely to services/supplies revenue beating our number by almost $600k.  

•    Products revenue:  $4.49MM actual vs. $4.37MM estimate

  •     Digital & MRI CAD revenue was $3.2MM, down 20% y-o-y and well below our $3.61MM estimate.  Management noted that while MRI CAD sales continue to be strong in the U.S. (up 21% y-o-y) that international revenue was very soft due to economic weakness and coordination and product integration issues with OEM partners.  Management noted on the call that they expect these issues to be ironed out and international sales to firm up in the second half of 2011.  Meanwhile, they indicated that mammography CAD continues to slide (as expected), closely tracking sales of new digital mammography systems (as reported by FDA's MQSA data - see our graph in this report).     
  •     Film based revenue was $537k, down 26% but ahead of our $450k estimate
  • Electronic brachytherapy (Axxent) revenue came in at $760k, better than our $300k estimate.  iCAD sold three systems during the quarter and expects sales to pick up from here on out.  Recall of FlexiShield had stunted Axxent sales but with FDA clearance granted on July 22nd for their new shield (Rigid Shield), this should no longer be an issue.    

•    Services / supplies revenue:  $2.15MM actual vs. $1.60MM estimate

Q2 EPS of ($0.09) was just shy of our ($0.08) estimate.  Despite the beat on the top-line, a slightly narrower gross margin (67.8% A vs. 69.9% E) and higher operating expenses ($9.6MM A vs. $8.4MM E) caused EPS to come in slightly lower.  Management looks for gross margin to improve in 2H - our model incorporates only a very minimal widening of GM in the second 6 months of the year - which could prove to be conservative.   

The majority of the difference in operating expenses is due to $800k in R&D expense related to iCAD's "reader study" for SecondLook Premier (next-gen mammography CAD product) which is expected to be used for support of FDA approval.  The study is expected to wrap up in the fall and this will not be a recurring expense. Sales and marketing expense was also higher than where we had it pegged but as a % of revenue, the difference was more muted.  Management also noted on the call that cost-cutting during Q2 should help trim operating expenses for the remainder of the year.     

Management moved revenue guidance to $30MM - $32MM, down from $32MM - $35MM provided in May 2011.  Management noted on the call that softness in Axxent sales due to the shield recall was the major reason for reducing revenue guidance.  Management expects to achieve break-even cash flow within the next three quarters and looks for the Xoft acquisition to be accretive in the next 12 - 18 months.    

Prior to Q2 results we were estimating 2011 revenue of $28.7MM.  We have made only minor tweaks to our model and with Q2 revenue coming in ahead of our estimate, we are actually increasing our 2011 revenue forecast to $29.7MM.  We now look for 2011 EPS of ($0.33), revised slightly lower from ($0.31) prior to Q2.  


SecondLook:  "Reader study" should be wrapped up in September/October.  We continue to look for an FDA filing later this year.  If all goes well SecondLook Premier could be in the U.S. market by mid-2012.  SecondLook is already available in Europe, Canada and China.       

CPT I Code:  Decision on CPT I code for IORT breast brachytherapy is expected in October 2011.  If all goes well, the CPT I code would be effective by January 2012 and provide a level of reimbursement (i.e. - relative value) that incentivizes (or at least does not dis-incentivize) radiation oncologists to use IORT instead of EBRT or APBI for those patients where it is appropriate.  Assuming a CPT I code is established and provides a reasonable level of reimbursement, this should be a significant catalyst to increasing demand for Axxent.  

New Shield:  FDA clearance for new Axxent shield was granted on July 22, 2011.  

FlexiShield lawsuit:  Management did not have anything new to report relative to the FlexiShield product liability lawsuit.     

For a free copy of the full research report, please email scr@zacks.com with ICAD as the subject.

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