Star Equity Holdings Inc (STRR) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Digirad Corporation fourth quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. [OPERATOR INSTRUCTIONS.] As a reminder, this conference is being recorded, Wednesday, February 14th, 2007.

Please note that this conference call will include forward-looking statements. These statements are based on current expectations, estimates, and projections about Digirad's business, based in part on assumptions made by management.

Examples of such statements include the statements regarding our plans to upgrade our DIS fleet to the mobile version of the Cardius-3 XPO system, and the benefits we hope to achieve as a result of the upgrade, statements regarding the expected results of operational improvement initiatives and cost reduction measures, statements regarding the expected financial impact of our decision to discontinue offering stress agent, our belief that we have achieved increased market share in a declining market, and our expectation that we will continue to do so, our anticipation of seeing improved financial performance as a result of the efforts of our sales team, and our anticipated financial results for 2007.

These statements are not guarantees of future performance and actual results may differ materially. A more detailed discussion of these risks and uncertainties is contained in this morning's press release and Digirad's various filings with the SEC. The statements made during this call are made only as of the date of the call, and the Company undertakes no obligation to update these statements.

I would now like to turn the conference over to Mr. Mark Casner, Chief Executive Officer of Digirad. Please go ahead, sir.

Thank you, Operator, and thank all of you for joining us for this morning's fourth quarter conference call. Our Chief Financial Officer, Todd Clyde, is here with me today. We will be glad to answer your questions following our prepared remarks.

I am pleased to report that our financial results for the fourth quarter and 2006 came in better than we expected when we updated our guidance on January 11th, 2007. Comparing 2006 to 2005, revenue increased 5.5% to $71.9 million even though we did not generate almost $2.5 million in stress agent revenue during the second half of 2006. Gross profit increased 25%, and our net loss declined to $0.34 per share from $0.52 per share.

For the fourth quarter of 2006 compared to the fourth quarter of 2005 revenue declined slightly to $17.2 million, principally because we no longer generated approximately $1.1 million in stress agent revenue, while gross profit increased 50.2%, operating expenses decreased 15.1%, and the net loss declined to $0.01 per share from $0.15 per share. In addition, the Company generated about $320,000 of free cash flow in the fourth quarter instead of absorbing cash, as it did a year ago. As reported in this morning's press release, and as Todd will detail for you later, we expect further improvement in Digirad's financial performance in 2007.

These gains reflect the significant strides we made this past year toward our goals in sales and marketing, operations, and product development. During 2006 we rounded out our Executive Team, most recently with the addition of an experienced Vice President of Human Resources. We executed a number of cost reduction initiatives, introduced a plan to improve our recruitment and retention, and significantly enhanced our product line. We believe that these achievements set the stage for further progress in 2007.

In our DIS business, we recently signed our first contract to provide ultrasound, the first step in the plan we discussed during previous conference calls to diversify our mobile service offerings. We believe ultrasound is a natural complement to our existing cardiac imaging services and a precursor to enhancing the growth opportunities for this business.

We are encouraged by the signing of new DIS service agreements with a number of large hospitals, multi-specialty practices, and integrated delivery networks. We believe that this is evidence that the targeted marketing approach we introduced in 2006 is beginning to meet with success and helped us offset business we lost because some of our physicians purchased their own cameras or switched to a different service provider.

During the fourth quarter we upgraded 11 more cameras in our 83-unit DIS fleet to our most advanced Cardius-3 XPO camera. At yearend we had 19 Triple-Head cameras in our mobile imaging service. This upgrade program will continue in 2007.

DIS is our primary growth driver and a key reason for our optimism is the favorable demographics behind the business. The fastest-growing age groups in the country are precisely those that include the heaviest users of cardiac imaging services. Industry data show the growth trend quite clearly. As reported by IMD Medical Information, from 2002 to 2005 the total annual number of cardiovascular imaging procedures in the United States grew from approximately 8.8 million to more than 11.2 million. We are positioning DIS to take advantage of this long-term growth opportunity.

In our product business, we sold 17 cameras in the fourth quarter compared to 18 in the fourth quarter of 2005, and experienced improved margins due to the success of our cost reduction and outsourcing initiatives. We plan to continue outsourcing certain manufacturing steps to gain additional savings in the future. For the year, as a whole, we delivered 71 cameras compared to 55 in 2005, a solid performance given the continued pressure on the market for nuclear cameras for cardiac imaging, as reported by NEMA.

We believe that the improved image quality, throughput, reliability, and service ability of our latest Cardius-3 XPO cameras contributed to the increase in our market share. We hope to solidify our position by making the key XPO features available in our Cardius-1 and Cardius-2 cameras in the first half of 2007. During the past year we also saw an increased interest in our 2020tc general purpose camera in the hospital market.

We made significant strides during 2006 towards our goals in sales and marketing, operations, and product development. Our 2007 goals include increasing our sales growth rate, continuing to lower operating costs, approaching positive cash flow, and driving to profitability. We intend to accomplish these objectives through diversification of DIS, employee retention, operational efficiencies, DIS expansion, technology enhancements, and development of new products. With our steady progress in recent quarters, we are increasingly confident that our goal of sustainable revenue and earnings growth is within reach.

Now, I'm going to ask Todd to review the financial results in detail. Todd?

Thank you, Mark, and good morning, everyone. Please note that all the quarterly comparisons are for fourth quarter of 2006 compared with the fourth quarter of 2005, and the YTD comparisons are for the 12 months ended December 31, 2006 versus the 12 months ended December 31, 2005, unless otherwise stated.

For the three months ended December 31, 2006 consolidated revenues decreased .9% to $17.2 million, compared to $17.4 million for the fourth quarter of 2005. This decline was primarily due to a 3.5% decrease in DIS revenue of $11.6 million for the fourth quarter of 2006, compared to $12 million for the prior year quarter which, in turn, was primarily attributable to our decision to phase out providing stress agents used in some imaging procedures beginning in June 2006. Instead DIS physician customers now provide these stress agents. We estimate that the stress agent change reduced DIS revenue in the fourth quarter of 2006 by approximately $1.1 million, compared to what it otherwise would have been under the original delivery model.

For the fourth quarter of 2005 DIS revenue included stress agent revenues of approximately $1 million. DIS service days for the fourth quarter of 2006 were 3,306, compared to 3,247 for the same period last year. Revenue per service day in the fourth quarter of 2006 was 3,511 excluding the stress agents, compared to 3,704 in the prior year period which included stress agent revenues.

Product segment revenues which includes sales of gamma cameras, upgrades, accessories and maintenance revenue increased 5% to $5.6 million for the fourth quarter of 2006, versus $5.4 million for the prior year quarter. Consolidated gross profit for the three months end December 31, 2006 increased 50.2% to $4.9 million or 28.5% of revenues from $3.3 million or 18.8% of revenues for the fourth quarter of '05.

DIS gross margin increased to 25.9% of revenues for this year's fourth quarter, compared to 14.7% for the prior year quarter. DIS gross margin for the fourth quarter of 2005 was 23% before the $1 million impact of the change in the depreciable life of the DIS fleet in cameras.

The improvement in DIS gross margin for the fourth quarter of 2006 versus prior year is especially noteworthy in view of the shift we announced in the third quarter of 2006 in the focus and responsibilities of some of our DIS personnel towards operational, as opposed to administrative tasks, with the result that certain costs previously accounted for as general and administrative expenses are now reported as cost of goods sold. This resulted in approximately the $500,000 in additional costs of goods sold in the fourth quarter of 2006 compared to the prior year.

Product segment gross margin improved to 33.7% for the fourth quarter of 2006, versus 27.9% for last year's fourth quarter, the result of lower materials and maintenance costs. G&A expense declined to $2.8 million for the fourth quarter of 2006, including the shift of $500,000 of costs from G&A and the cost of goods sold, that I just mentioned. This compares favorably to the G&A expense of $3.7 million for Q4 of 2005.

Sales and marketing expenses increased by approximately 9% quarter to quarter in support of our targeted marketing program, and R&D expense was down by approximately $335,000 versus the prior year quarter. The net loss for the fourth quarter of 2006 was $149,000 or $0.01 per share, which included stock based compensation expense of $177,000. This compares to a net loss of $2.8 million or $0.15 per share for the fourth quarter of 2005, which included stock based compensation expense of $86,000.

For the 12 months ended December 31, 2006, consolidated revenues increased 5.5% to $71.9 million compared to $68.2 million for 2005. DIS revenue decreased 1.2% to $49.6 million including stress agent revenues of $2 million. This compares to DIS revenue for 2005 of $50.2 million including stress agent revenue of $4.2 million. Product revenue increased 24% to $22.3 million from $18 million. Overall, gross profit margin for 2006 improved to 26.5% versus 22.4% for 2005.

The net loss for 2006 was $6.3 million or $0.34 per share, which included stock based compensation expense of $1.6 million. This compares to a net loss for 2005 of $9.6 million or $0.52 per share, which included stock based compensation expense of $497,000.

On the balance sheet, cash and equivalents, and securities available for sale as of December 31, 2006 were $44.3 million compared to $49.5 million at December 31st, 2005. Net receivables were $7.5 million at December 31st, 2006 compared to $8.1 million at the end of 2005.

Net inventories were $5.9 million at December 31, 2006 compared to $5.1 million at December 31st, 2005. As Mark noted earlier, our 2007 goals included--include increasing our sales growth rate, continuing to lower operating costs, approaching positive cash flow, and driving to profitability.

With this in mind, I want to reaffirm our previously announced guidance for 2007. As we announced on January 11th, 2007, management anticipates consolidated revenues for 2007 in the range of $73 million to $76 million, consisting of DIS revenue between $50 million and $52 million, and product revenue between $23 million and $24 million, and a consolidated loss between $1.3 million and $3.3 million, including estimated stock based compensation expense of $1.3 million. Digirad anticipates no stress agent revenue in 2007, versus stress agent revenue of approximately $2 million for 2006.

Operator, we're now ready for questions.

[OPERATOR INSTRUCTIONS.]

Our first question comes from Tim Lee.

Hey, guys, good morning.

Good morning.

Good morning, Tim.

Hey, just--Mark, I know you touched on this just briefly in your comments in terms of the employee turnover, where did that stand in the quarter, you know, how is that trending relative to what we had seen here in 2006?

Well, we did not see a heck of a lot of improvement in Q4 compared to earlier quarters, Tim. Marc Shapiro did join us, the end of the summer, and has completely revamped his HR Team. We've already begun to implement a number of initiatives across the board, which we anticipate will have pretty significant improvement here in 2007.

And probably the most important thing, quite frankly, is just improved visibility to the field. We've talked somewhat about Michael Keenan's approach with the area managers and, basically, decentralized management throughout the field. Our senior team is spending much more time in the field, as well. Marc and I are on a cross-country tour, if you will, to visit all of our hubs and as many of our employees, as well as customers over 2007.

Do you have a target rate for '07 in terms of getting your DIS turnover down, you know, [is that]--?

Yes. I think it's difficult to quantify that. Clearly, when you're running in the mid 50% range of turnover, which is what we've been doing, ideally we'd be able to cut that number in half over the next 12 months, and believe that we have a plan to do so. I think as we get a little more visibility on that, Tim, we'll share that with the Street.

Okay. Thank you. If I could just have one--a financial question, if I can? In terms of the ultrasound service that you're providing, what are the economics of that in terms of your revenue per billing day, and how does that compare in terms of profitability to your DIS program, your current DIS program?

Yes, the reimbursement for ultrasound runs approximately half of that for nuclear, so on average global reimbursement for nuclear is about $1,000 per study. Ultrasound runs about half of that. The economics for the physician, though, are fairly identical in that our cost to them is about half of that of nuclear, as well. We only have one tech, lower cost of capital goods on the equipment side. So the value play for the physicians is probably fairly comparable.

But in terms of revenue and profit contribution to Digirad, how--I guess that's what [I meant there]?

I think probably the best way to think about that, Tim, is that on a per-day basis it would be about half of where we are on the nuclear side. We would still expect to be able to drive to around a 30% gross margin. There's even some possibility that we could see a little bit higher gross margin, but we'll have to really get into and start doing some service before we can respond to that effectively. It's a one-man team versus a two-man team, so there's a number of costs that really just [aren't] in play.

Okay. Thank you. I'll jump back in queue.

Sure.

Your next question is from Tycho Peterson.

Good morning.

Good morning, Tycho.

Just kind of thinking about the year here, you know, can you give us a sense of how we should view the year, both in terms of revenue and earnings, playing out seasonally? And along those lines you've talked about adding some of these hubs, and how we should think about the impact to margins there? I guess more for the back half of the year?

Yes, that's a great question, Tycho. Let me maybe start out by expressing a couple of trends that we're seeing, especially if you kind of take Q4 as kind of a baseline. First of all, we had a number of onetime expenses in Q4. We saw strong production as we were preparing to put systems into DIS. We had some insurance credits and some other costs that were probably onetime in nature, that's going to probably add $350,000 to $450,000 to the baseline.

On top of that, as we come in with merit increases here at the beginning of the year, that will probably add a couple $100,000 on top on a quarterly basis, as well. And then the stock based comp was certainly lighter in Q4 based on how some cheap stock had bled out, and then also we'll be granting options, so the stock based comp number on a quarterly basis will probably be closer to around $300,000.

We mentioned that we saw an increase in lost business in DIS, kind of in the back half of the year versus the first half, so that kind of offsets a little bit of some of the strong bookings that we've seen. And then just some insight into the northeast, all of you who are out there recognize the challenging snow days that we've had, we can probably see losing about 35 to 45 days in DIS in Q1 based on inclement weather. That would have an impact of approximately $125,000 to $160,000. As you think about Q1 it's usually a slower quarter on the camera side.

As we--now, specifically, into some of your questions, as we do grow and launch we're anticipating probably growing into five additional hubs this year. Those things definitely put a little bit of a strain on the gross margin line in DIS. Clearly, Q3 will be the most seasonal quarter in DIS. Q2 is usually the strongest, so we might--you might kind of think about the modest improvement there in Q1, offset by some of these snow days. Q2 is probably your best quarter, then you'll definitely probably see a dip in Q3, and then you, you know, you kind of run hard in Q4.

That's kind of how I think about it, so as you build through your model you should be able to get into that $50 to $52 million range in DIS, somewhere between the $23 and $24 in the product business. Where does that leave your operating expenses, you know, in the $23 to--a little over $23 million for the year, so you're running $5.5 plus on a quarterly basis.

Okay. As we think a little bit about the ultrasound opportunity, I guess can you give us a sense of specifically where you're seeing the up tick from physicians and the opportunity potentially from bundling?

Yes, absolutely. We have--and we've talked about this relationship before, partnered with a company in Georgia. And what we have found is over the past year the natural complement to ultrasound services, and they are a pure play ultrasound company, is that it's a natural lead-in to nuclear services. And to date I think we've converted approximately 30% of their customer base to nuclear services.

We're now taking that show on the road, if you will, and in some select communities around the country we'll be introducing that same model, where we introduce ultrasound with the expectation that we'll either bundle directly with nuclear from the get-go or that will follow very closely behind. We did sign our first contract, we actually have several more that are pending, and our expectation is that, as we had talked about a year ago, that that will finally gain some legs for us, begin to improve that diversification strategy that we talked about 12 months ago.

Tycho, when I think about the numbers for ultrasound, in our modeling we keep it at a very modest level because we know that this is a year in which we'll be cutting our teeth in that modality. Certainly, there's a lot of great synergies with the doctors. We're looking to provide multiple service offerings into a single practitioner location through ultrasound and nuclear, but the numbers are certainly less than nuclear and we've got to learn our way. So I would probably encourage you to keep your model modest on that side.

Okay. Great. That's very helpful. Thank you very much.

The next question is from Glenn Novarro.

A couple of questions on DIS. First, how many Triple-Heads do you expect to put into the field in 2007? And then, secondly, can you talk to us a little bit about how the Triple-Head is reducing expenses, you know, reducing overtime, and things like that for those locations where the Triple-Head is? That's question one.

And then, second, as you review your DIS accounts for '07 do you know what percentage are larger practices that would want to maybe buy a camera instead of just the DIS service and, thus, making some of the DIS revenue susceptible to exiting the company? Thanks.

Good morning, Glenn. This is Todd. Good questions. I'll respond in order. First, the Triple-Heads, we had 19 cameras in the fleet at the end of the year. We expect to upgrade approximately 28 cameras during 2007, and then we'll have some additional cameras that will go out into the fleet based on the expansion. We've talked about five hubs, so depending on how the demand works out, that could be--think about five additional cameras, or so, right in that range.

But as far as how the--I'm sorry?

The 28 cameras, should we just assume--

Those are replacements.

Those are replacements, yes.

Okay. And then five additional cameras. And should we assume like four or five per quarter or is there any, you know, frontend, backend?

We'll probably be a little bit heavier on the replacement cycle in the first half of the year.

Okay.

Okay?

And really, Glenn--good morning, this is Mark. That really gets to what we had talked about at the beginning of last year was our expectation that introducing the Triple-Head would do a number of good things for us, and I know that was kind of the second part of your question.

Correct.

And I think Todd can enlighten you a little bit on some of the early statistics, and I stressed earlier, I don't think our sample size is big enough yet, and plus we, of the 19 that we had in the fleet at the end of the year, 11 of them were introduced late in Q4.

But early results would indicate that what, you know, our theories in the beginning of the year are beginning to prove out, which is we can operate on a shorter day, our throughput is greater, it is cutting our staffing cost because we can get the staff out earlier, and it's making the physicians' groups more productive. And I'll let Todd share a little more detail on that.

Sure. I'll probably give you a couple of, maybe I'll give you a case here, a case study that we did, Glenn, because by putting 11 cameras out with many of them near the end of Q4, as Mark indicated, the population sample is not good as far as really being able to talk about it in more scale.

But we took a physician who had been running on a [C-1] mobile camera and done a pretty decent amount of studies in the first half of 2006, then converted to a mobile Triple-Headed camera. And the results that we were able to derive are as follows. We saved an hour of time at the physician site, and in this specific location we actually performed one additional study. So all in all, between the two components we saved about $95 an hour on the labor side or in the day, and then we saved, or we picked up essentially 200 or 112 additional margin dollars based on that. So, all in all, kind of think about it as a $200 improvement from where we would have been on the Single-Head.

The directors that are out in the field running these operations also believe that you could, if the physician were to run still around 7.5 studies in the day, that we could cut out two hours out of the day, which tends to be pretty similar to running additional studies or phasing the hours. So I think we're very confident in that. That ended up being about a 2.9% margin improvement for that specific customer.

The challenges will clearly be that there are a number of other variables that play into the way that the labor is managed and overseen, and if we can get the savings in the physician office we've got to make sure that that can translate all the way through into the margin lines within the business. So there's still quite a bit of work to be done from Michael Keenan and his team to make sure that we--we'll be able to effectively realize those savings that we're seeing.

And let me just add, Glenn, and for the benefit of Tim, which relates to his question about turnover, this was one of the [tenets] that we felt would help us improve our ability to retain our employees, which is basically improving the quality of their lives by shortening their day. So, again, early stressed preliminary results are it is going to accomplish what we thought it might, we just need a little more visibility on that. And we'll clearly share that with you all in future calls.

And then can you answer the question about when you look at your DIS customers today, maybe what percentage is at risk of buying a camera and leaving the DIS service?

Yes, we truly believe that that number is already beginning to decline, primarily because more and more of our focus is in the primary care arena as opposed to the cardiology arena, and we do believe that trend will continue. And the interesting note with the primary care folks is that while we expect them to get busier, as well, we don't think that they will achieve the same volume levels that our cardiology practices do and, therefore, want to convert over to a camera sale.

What would your--so what would your guess be in terms of the percentage of business today that may be at risk of leaving? Is it 10, is it 5%?

I'm not sure we want to conjecture at this point, Glenn. It's been over the years a relatively small number, and I don't think that that's going to change anytime soon.

Okay. Great. Thank you.

Uh-huh.

[OPERATOR INSTRUCTIONS.]

The next question is from [Steven Field].

Good morning.

Good morning.

Good morning.

I'm interested in the--maybe as a follow-up to the previous question, do you--the number of patients on average that a practice might see, so that you push them not towards a purchase of a machine, but more procedures, so that you add a day maybe over a month period of time with the same practice, or maybe a day over every week to the practice?

You know, I guess the way I would answer the question--this is Todd-- is it really depends on the patient volume and the dynamics of the practice. We have sole practitioners who are sending anywhere between 11 and 12 patients to hospitals or imaging centers to be imaged, and when they take on the service from us you'll see that generally they stay within a pretty tight band around 8 patients a day, because on a Single-Headed camera that's about the maximum that they're going to be able to get done in an eight-and-a-half hour day.

As we roll-out the Triple-Headed camera we're also modifying the contract down to a six-and-a-half hour a day, just based on the insight that you're offering, which is it would be economically better for us to simply have them do two days if they were going to scan 12 to 13 patients, rather than adding just a few patients on the backend of one single day. It also ties into the quality of life of our staff.

To give you a real specific of what does that practice dynamic have to look like for them to transition into adding maybe one additional day in the month, it really is dependent on the practice. We certainly see some larger groups that have some outreach programs that we're working with them on, where we end up servicing eight, nine, ten different days even in a week, but we're going into multiple clinical settings, and so the likelihood of them coming around and wanting to purchase a camera is a lot lower than if a physician were to get the three to four days a week in their office, that would often be a natural position for them to convert into a camera purchase. But some of them don't want to do that because they really enjoy the fact that we just do everything top to bottom for them, other than, of course, the clinical piece of interpreting and everything like that, but it really makes their life a lot easier.

So as you take hold, you really don't break-out how many new accounts that you've added, but could you just talk about how that's been progressing? Has word of mouth of the success that a practice could have by generating revenue, by generating profit, that can add--perhaps make it easier for the sales force to go ahead?

Yes, Steven, we--this is Mark. Good morning. We just have not typically broken that out, and I'm not sure we're going to anytime in the near future. But one of the things that we have begun to talk about, and for those of you who were at the J.P. Morgan conference or listened to that, we have begun to discuss our bookings visibility, bookings are essentially new contracts.

And our bookings, clearly, for both DIS and product, for that matter, increased substantially in Q4. We're seeing good progress already early in the year. And so new bookings would suggest obviously new customers, and so what I would encourage everyone to do is monitor two things, as we continue to talk about bookings, that'll give you some insight as to the number of new customers, but more importantly and this is something we do talk about almost in every call, which is the camera utilization, itself. You may recall, that that's been hovering in the mid to upper 50% range, and Todd has talked repeatedly about pushing that above 70% which is really the number we need to be at.

So if you look at that, that would suggest to you improved density within the current hubs and improved organic growth with customers within those hubs. So those will give you some pretty good indicators of how we're doing on both of those metrics.

Okay. And, finally, you didn't break-out cash flow, so about what was your depreciation for the quarter, and do you see that staying about $1.2 million, that it's been, going back?

Yes, it's probably about in that range right now, Steven, and the depreciation will actually increase slightly as we put the Triple-Headed camera into play, because we've had a number of Single-Heads that we had accelerated the depreciation on because of the delay in the fleet upgrade program. We probably got a little bit of benefit in Q4, with a little bit lower depreciation because of that versus the replacement pattern, but we're back on track now as we head into the first quarter and all those cameras will be depreciating now.

All right. That's all I have. If you start your tour don't come to Boston.

We're going to wait until summertime on that, Steven.

Yes, wait till the [inaudible], and then come.

Thanks.

All right. Good-bye.

The next question is from [David Pickering].

Hi, guys.

Hi, David. Good morning.

I guess as a cardiology company, [I should] wish you a happy Valentines Day. I had a couple of questions. One is a variant, I guess, on Glenn or Tycho's questions.

On the--you made a comment in the press release about signing new DIS service agreements with several large hospitals and so on. I guess I want a bit more color about that, is that a different trend or are these customers that were typically targeted for product sales, are these [to] be low volume hospitals and, therefore, were never product sale opportunities? Perhaps you could just talk about that?

Yes. So we're really doing a couple of things. It's--as it relates to the hospital environment, it's not really a sale into the hospital, it's more their outreach programs into the community. And so if you look at the partnership that we've had with this group in Georgia, their primary avenue has been Emory University and their outreach program that's associated with that. And that's worked very well. So we really think that that's a very repeatable and scalable model at academic institutions around the country.

But just as importantly, and Todd actually alluded to this just a few minutes ago, in terms of our approach with some of these larger multi-specialty practices and integrated delivery networks, et cetera, what we have found is that many of them have 5, 10, 25 different locations. And what they're interested in is patient convenience, and so it's not practical in most of those cases for them to install a fixed camera at each one of those, but if they can a day a week, a day every other week, or whatever there arrangements are, depending on volume, move a mobile camera around to each one of those locations, it really works very well for those groups.

And so there's one--just again to give you one brief example, we have a group that started out a day a week with us and I believe we now signed up 15 days with the same group at a number of locations in a two-state area. And we're seeing more and more visibility with that. It's--I'm not sure it's necessarily a new avenue for us, but it's one we clearly are focusing much more so on and expect good penetration in the months to come.

David, one thing--this is Todd--one thing I think it's really important to understand is that large specialty practices, academic groups, hospital outreach programs, these groups start to realize that they need to be involved with the primary care physicians so that they can keep these patients within the network. Because historically they're--generally you went to your local hospital and that's where the imaging was done, but now that there's more imaging groups, there's more specialty practices, and large cardiology practices, for example, that own cameras, they're out trying to petition the referral pattern of those internal medicine physicians and family practitioners, as well.

So if the hospital can have the outreach program and share a little bit in the economics with the partner of care physician what they're really interested in is getting the [reach], and more importantly the patient into their network when anything is required, like cathing, open heart, hospital days, things like that, so that brings a lot more or even sustains the revenue that they currently have in those locations. So that's a pretty exciting trend for us, and we want to really be a facilitator for those larger groups.

Got it. And the other question was on ultrasound, I guess a slightly different question from the one asked earlier, is from a, I guess, a better way to describe it, back office perspective, are there some synergies with the core DIS current business in terms of staffing or maintenance, equipment supply, and so on, that could [benefit from], or is it a completely separate business effectively?

It's kind of a mixed bag, David. The techs will be entirely different. Most nuclear medicine techs are not--well, I shouldn't say "most," but as far as I know most of our nuclear med techs are not cross trained, and so we will have to go out and find ultrasound techs. I don't expect a lot of crossover there.

But in terms of fleet maintenance, hub outgrowth, any other infrastructural [issues] that we have today to support the same sales team, the same operations team, it's the same everything, so I think from that perspective, yes, it's very synergistic and very complementary.

Great. Thanks a lot.

Thanks, David.

Your next question is from [Mark Filks].

Hi, guys. Great quarter, and looks like a great future. My question is it seems like a lot of these doctors' offices are hiring consultants, so, you know, where one consultant can control five or ten doctors, is that an approach that the sales team is making or is that something you're looking into?

Yes and no. I'm not sure that we have officially targeted that approach, Mark, but I can tell you we've seen some of that visibility, actually in the southeast region where there are a number of those groups already working.

It almost dovetails very nicely with the approach that we've had with these larger multi-specialty practices, where the consultants have arrangements with multiple groups within a specific region and have essentially contracted, if you will, to provide whatever kinds of services, whether it be ultrasound, nuclear or a host of other practice management issues.

And so we have made some inroads there. Quite frankly, it falls in the category of leave no stone unturned. And so, clearly, as we get more and more success with these groups we do plan to roll that out.

Thank you.

There are no further questions. Mr. Casner, do you have any closing remarks?

I do. Thank you for your continued interest in Digirad. We are pleased with the progress we delivered in 2006, and we are excited by our opportunities for further gains in the new year. I hope you will join us when we report our first quarter results in a few months.

Thanks, everyone.

That's completes today's conference. Thank you for your participation. You may now disconnect.