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ICAD: Q1 2018 Results: Detection Disappointing But Still Looking For 2.0-Related Inflection in 2H

By Brian Marckx, CFA


iCAD (ICAD) reported financial results for their first quarter ending March 31st. While Therapy revenue was just about dead-on with what we had been expecting, Detection revenue was quite disappointing. Detection revenue was 15% lower than where we thought it would come in, with almost all of the miss related to product sales. While we had anticipated Detection revenue would contract sequentially given some lumpiness in Q4 ’17, we did think tomo-related momentum would result in solid double-digit yoy growth in product sales in that segment. Instead, total Detection revenue fell (ex-MRI) approximately 4% yoy with Detection product revenue contracting by about 3%. While management provided some color on the Q1 call, it is not completely clear why Detection performed so relatively poorly.

On the brighter side, indications are that Q2 may have started off at a much stronger pace and that interest remains high. Importantly, ICAD is still guiding for Version 2.0 shipments to begin in Europe in the very near term and result in meaningful revenue contribution starting in Q3. Other potential catalysts to Detection include the ongoing shift from 2D to 3D, awareness from ECR and attendance at upcoming events, (the impending) U.S. launch of ICAD’s 3D breast density software and eventual U.S. launch of tomo Version 2.0 – PMA filing for which is expected any day.

The release and potential publishing of the U.S. reader study (which will support the 2.0 PMA filing) could also help facilitate adoption. In fact, management indicated that performance in the reader study was compelling – including a significant increase in sensitivity, specificity and meaningful reduction in reading time – and potentially strong enough to support a superiority (vs. reading w/o tool) claim. That could further significantly enhance the marketing message.

Total Therapy revenue was flat yoy, Both product sales and service/supplies revenue were inline with our estimates. As a reminder, in January ICAD decided to pull the plug on the Xoft subscription business. Noting that growth in the number of active sites lost steam after peaking in Q3 ‘17 and lack of sufficient treatment volumes (necessary to cover costs, much less to generate profit), the decision was made to shutter the business. But, the Xoft capital-customer segment not only remains intact, (per comments on the Q4 call) it was responsible for ~80% of treatment volume in 2017.

As a whole, the Therapy segment was a loser. Mostly related to adverse change in NMSC-treatment reimbursement policy and rates, since the end of 2014 ICAD wrote down more than $34M in Xoft-related goodwill and intangible assets. Over the same period, the Therapy segment generated $41M in revenue and incurred aggregate operating losses (excluding the impairment charges) of $17M.

The good news is that elimination of the NMSC-subscription business has already begun to improve Therapy margins and related cash burn – and those benefits should further improve going into Q2. As we noted in our Q4 ’17 update following news of shuttering of the subscription skin business, the potential opportunities in the (relatively much higher volume) NMSC-capital segment as well as in IORT breast and gyn, means that the value of the Therapy business might be the greatest that it has been in years.

We cover ICAD with a $6.75/share price target. See below for free access to our updated report.


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