Star Equity Holdings Inc (STRR) 2005 Q1 法說會逐字稿

Welcome to the Digirad Corp. first-quarter 2007 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 Monday, May 7, 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 expectations of continuing gross margin improvement and declining operating expenses in both DIS and the product business; our belief that the Ultrascan acquisition is complementary to our DIS business and provides opportunities for the creation of substantial growth and positive financial performance; improved performance and lower cost for our upgrade of the DIS fleet to the mobile version of the Cardius-3 XPO and systems; our expectations of achieving reduced operating cost as a result of cost-cutting measures; and our anticipated financial results for 2007.

These statements are not guarantees of the 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 this call and the Company undertakes no obligation to update these statements.

Thank you. I would now like to turn the call 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 first-quarter results conference call. Joining me today is our Chief Financial Officer, Todd Clyde. He and I will be glad to answer your questions following our prepared remarks.

This was a good quarter for Digirad. We returned to profitability for the first time in two years compared to a loss for the first quarter of 2006. We executed on our diversification strategy with the acquisition of Ultrascan announced just last week and we moved forward in our continuing efforts to improve operating efficiencies and reduced operating costs in both our DIS and product businesses.

Our return to profitability was driven by higher gross margins in both DIS and products and decreased operating expenses compared to the first quarter of last year. These latest improvements continue the positive trends we established during 2006. We are optimistic that many of these gains are sustainable and that further improvements are achievable.

The acquisition of Ultrascan contributes to our optimism. Ultrascan is a leading provider of mobile ultrasound and nuclear medicine services and currently provides mobile ultrasound services to more than 100 clients through a 32 unit mobile fleet as well as fixed site nuclear imaging services at physician offices, clinics and hospitals primarily in Georgia.

Under the terms of the purchase agreement we announced on May 1st, Digirad paid $7.25 million in cash and assumed $1.5 million of Ultrascan debt. And Ultrascan shareholders can earn up to $3.85 million in cash and Digirad stock if Ultrascan achieves certain EBITDA milestones over a four-year period. We anticipate Ultrascan to contribute between $4.5 million and $5 million of revenue to our imaging services business during the balance of 2007 and we expect Ultrascan to be accretive to our bottom line.

Approximately 15 months ago we entered into a partnership with Ultrascan to complement the ultrasound services they were currently providing to their customers. During this time nearly a third of our customers have added mobile nuclear imaging in their offices this model as allowed us to reach even smaller primary care practices to see the value of delivering high-quality multidimensional imaging services directly to patients in the office. Most importantly, we believe that Ultrascan's ability to center these services around a highly regarded academic medical center as an intangible measure of success.

To date we have initiated discussions with a number of institutions around the country to implement this model. We believe it's a scalable, repeatable and will serve as the foundation for our future success in growing both our ultrasound and nuclear imaging business.

This transaction helps us achieve several objectives. We have discussed a need to diversify our portfolio of services and expand our client base. It is an important step in our overall strategy to create long-term growth by leveraging and complementing Digirad's nuclear cardiology service capabilities with strong regional providers of other mobile imaging services. Ultrascan has differentiated it services and added value of to its well-established operating platform by building a close working relationship with one of the leading medical institutions in the Southeast.

We believe this is an important strategic asset that will enhance our competitiveness in this market and provides a model for our approach as we expand in other areas. Now I'm going to ask our Chief Financial Officer, Todd Clyde, to review the numbers and comment on our operating enhancements during the quarter. Todd?

Thanks, Mark, and good morning, everyone. Please note that all the quarterly comparisons are for the first quarter of 2007 compared with the first quarter of 2006 unless otherwise stated. For the three months ended March 31, 2007 consolidated revenues decreased 7.5% to $17.5 million compared to $19 million for the first quarter of 2006. DIS revenue for this year's first quarter was $12.2 million which included no revenue from stress agents. This compares to DIS revenue for the first quarter of 2006 of $13.2 million which included stress agent revenues of $1.1 million.

A few unusual items factored also into the impact on DIS' revenue in this year's first quarter. Weather-related services disrupted the Northeast, cost us about 40 service days, more than in prior year, and reduced revenue by approximately $150,000 compared to what it would have otherwise been. Another unusual factor was that our isotope supplier was unable to provide product for three days during this year's first quarter which we estimate resulted in approximately $65,000 in lost revenue.

DIS service dates for the first quarter of 2007 were 3,461, flat compared to the first quarter of 2006. I remind you that we closed some underperforming starting in the fall 2006 in conjunction with our efforts to improve our bottom-line operating performance. Revenue per service day, excluding stress agent revenue, in the first quarter of 2007 was $3,524 compared to $3,489 in the prior year period. In the future we want longer provide DIS service days as a metric now that Ultrascan will be a significant revenue stream.

We upgraded eight additional units in the Company's 82 unit DIS fleet to our most advanced Cardius-3 XPO mobile camera during the first quarter and we now have 27 multi headed mobile cameras operating in our mobile imaging services business. We have long believed the more rapid throughput and enhanced reliability of our XPO platform will help us improve employee retention and reduce labor costs in our imaging services business.

We are beginning to see evidence that this program can deliver the cost benefits we anticipated. For example, we have been able to reduce labor time by more than 1.5 hours in one of our hubs in the Southeast where we have replaced the older single head cameras with a mobile Cardius-3 XPO camera. We will continue to provide updates throughout 2007.

Product segment revenue which includes gamma camera sales and maintenance revenue decreased 6.9% to $5.3 million for the first quarter of 2007 compared to $5.7 million for the first quarter of 2006. This decrease reflected a change in the mix of cameras sold and a decrease in average selling prices. Digirad sold 19 cameras in this year's first quarter compared to 18 in the prior year quarter.

Consolidated gross profit for the three months ended March 31, 2007 increased 23.9% to $5.4 million or 31% of revenues from $4.4 million or 23.2% of revenues for the first quarter of 2006. DIS gross margin increased to 26.7% of revenue for this year's first quarter compared to 21.1% for the first quarter of 2006. While this is still below our goal of 30% gross margin in DIS, the positive effect of our cost reduction efforts is becoming increasingly evident in our results.

In our product segment gross margin improved to 40.9% for the first quarter of 2007 compared to 28% for the prior year quarter and to our 40% goal in this business we have communicated to you on previous cause. The increase in gross margin versus the prior year was a result of the increased production volumes, our cost reduction and outsourcing initiatives and occurred despite continuing pricing pressures on average selling prices in what remains a difficult market. We estimate the positive impact of onetime items included the increased volumes have contributed approximately $400,000 to the first-quarter results. We do anticipate lower average selling prices in future quarters.

Operating expenses declined 23.9% to $5.9 million for the first year of 2007 compared to $7.7 million for the first quarter of 2006. Clearly our cost control programs are working and the continued success of these programs remains one of our highest priorities.

Net income for the first quarter of 2007 was $74,000 or $0.00 per share which included stock based compensation expense of $274,000. This compares to a net loss of $2.8 million or $0.15 per share for the first quarter of 2006 which included stock based compensation expense of $471,000. Cash and equivalents and securities available for sale at March 31, 2007 were $39.8 million compared to $44.3 million at December 31, 2006. Net receivables were $8.8 million at March 31, 2007 compared to $7.5 million at December 31, 2006 and net inventories were $6.8 million at March 31, 2007 compared to $5.9 million at December 31, 2006.

We have adjusted our guidance for 2007 based on these first-quarter results and the acquisition of Ultrascan. Management currently anticipates consolidated revenues for 2007 in the range of $77 million to $80 million consisting of DIS revenues between $54 million and $56 million and product revenue between $23 million and $24 million and a bottom-line ranging from consolidated net loss of $500,000 to $2.5 million including estimated stock based compensation expense of $1.1 million. Digirad anticipates no stress agent revenues for 2007 versus stress agent revenues of $2 million for 2006. Operator, we are now ready for questions.

(OPERATOR INSTRUCTIONS). Tycho Peterson, JPMorgan.

Thanks. You talked a little bit about closing some underperforming hubs during the quarter. Can you give us a sense of how many were closed, what stability has been like with the underlying sales force and then with the Ultrascan addition, if that changes any of your plans to open additional hubs this year?

What we were reminding you of are the hubs that we closed earlier in the third quarter and then a few that trickled into the first quarter of 2007. In total we've closed between five and six hubs, Tycho, and that was based on driving profitability into the business as a whole. As far as our desire to not open additional hubs based on Ultrascan, we'll continue to march on the same plan that we outlined in the beginning of the year which was to open approximately five hubs.

And then have you worked through the isotope supplier issue? Is that something that could come up again or how do we think about that?

It was only three days and we definitely worked through it. It happened a few other times in our history. This was a little bit more of a significant impact and we have put in place a double of additional backup sources and remedies for the future.

Let me just add, Tycho, that clearly that's something that is a degree of vulnerability for anybody other because there are very limited supply of radioisotope companies in the first place. And so what we have done Michael Keenan has done a great job in leveraging our current -- contracts and having more appropriate emergency response if you will when these kinds of things happen. We do anticipate I think next year as Cardiolite and some of these other things come off of patent and actually the supplier problem should be mitigated quite a bit. We'll just need to get through this next year.

Okay. And I know in the past you've talked about in terms of how the bonus structure is set up that there's a trigger there if you guys at $76 million to $77 million in sales, can you remind us if that includes acquisitions or how to the structure?

That is exclusive of acquisitions.

Great, thank you very much.

(OPERATOR INSTRUCTIONS). Tim Lee, Caris & Company.

Good morning. Just a point of clarification. I think you had said that Ultrascan adds $4.5 million to $5 million incremental revenues this year, yet you took your full year sales -- total revenue DIS goes only up by $4 million. So can you reconcile the two for me?

Yes, I did that on purpose. Just as we're working through the integration and looking at how all the businesses are going to tie together and also our projections in the DIS business. So we recognize that when we laid that out we kind of hedged that down a little bit. The real positive here is that we expect $4.5 million to $5 million from the ultrasound business. We've seen that continue to be a positive both in our business and we're seeing traction from their business in other states other than just simply Georgia.

The other thing that really isn't built into our model, just kind of based on uncertainty, but historically we've been able to close with a number of the physicians that we're doing ultrasound with Ultrascan into getting them to do both ultrasound and nuclear. For the new expansion business we don't have that built-in. We won't build it in in this year, but it's certainly an upside that we're projecting as we integrate that business and look out a little bit further.

Okay, thank you. And then just kind of following up on the prior question in terms of your executive bonus plan here. Given this acquisition will the Board come up with a new plan particularly as the business gets integrated it's going to be tougher to figure out what's base revenue versus what's incremental revenue. Should we expect to see -- so I guess when it comes out there should we expect to see a new executive compensation plan here in the short-term?

I can't definitively speak for the Board, Tim, but I can tell you, it's certainly been a matter of discussion at the last two Board meetings. We had our last Board meeting late last week, as you know. Our expectation is that they are going to revise that with the base obviously being what we have already put out on the Street. So my expectation is perhaps by the third quarter we may have an update on that for you.

Okay. And just one last one. In terms of your current cash position of $39.8 million, have you already paid for the cash outlay for the Ultrascan acquisition or is that yet to happen?

Yes, we have. But it was subsequent to the number that you see there, because the number you're seeing is a March 31 and then the acquisition was done on really May 1st. We also (multiple speakers) got the $1.5 million of debt at the same time.

Okay, great. Thank you.

You can pull the numbers down by that.

Got it.

Probably closer to that $31 million kind of starting point right now.

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

Glenn Novarro, Banc of America.

David D. [Geralmo] in for Glenn. Good morning. Just a few questions. First on Ultrascan. You said $4.5 million to $5 million, that's through the remainder of the year?

Right.

Okay. So it would have been let's say 6 to 7 if it were a full year of sales?

It's eight months worth of revenue, right?

Got it.

And you're going to get a little over 7 certainly on the top end of the range.

And have you given any degree of guidance in terms of how fast you think you can grow this particular business?

We haven't. We certainly see a lot of opportunity and potential specifically in the Southeast region as a whole. I think probably the best thing is let us get it integrated, let us keep working together as a team with them and then as we've got a little bit more knowledge of how that will work within our business we'll be able to update you on that.

And I think the best thing, when you all think about modeling is just tuck it under the DIS business. It's an additional revenue stream. I mean, granted ultrasound brings about 50% of the daily revenue that you would see in nuclear, but it's too small to really get into bifurcating it out and looking at all the details of that business. So we're just going to fold it up under there and we've given you some numbers to grow from.

All right. That actually answers, I think, one of my next questions which is you're just going to continue to report DIS and product.

Correct.

Okay. And that includes ex million dollars of Ultrascan sales?

That's right.

Got it. Okay, and in terms of the product side, you mentioned in the press release and also on this call this morning that it was affected by mix and ASP's and I wonder if you could break out how much is mix, how much was ASP and also regarding ASPs how much further down could this go?

Let me tell you more about the dynamics of the business. Certainly we saw a pretty big pullback in the market during 2006 in the cardiac specific space. We've continued to see pricing pressures this year and we also saw a number of used systems in the mix and that's really what kind of impacted the topline mix and pulled that back. We do expect to sell a number of used systems in the second quarter.

We actually expect to see the average selling price in general to be a little bit higher than Q1 but then we anticipate a pullback and ASP's probably in Q3 and Q4. How low we'll go, that's a guess that would be anybody's guess to make. But certainly we do expect some pricing pressures throughout the remainder of the year.

Okay. All right, I'll get back in queue. Thanks, guys.

Oliver Marti, Columbus Circle.

A couple questions. One, just regarding Ultrascan, the $3.85 million in milestone payments, can you just disclose when we should expect those to hit, what are some of those milestones?

The milestones are oriented to EBITDA, so we've kind of put in place a minimum EBITDA hurdle that has to be achieved and then performance above that really creates the ability for them to earn that out. And we look at it on an annual basis. So there is one potential payment at the end of this fiscal year and then thereafter it's an annual view and that's over a four-year period, okay?

So it's not going to be all in one lump sum? It would be various targets.

No.

Okay. Related to that question is the question that he gave on probability you said I think -500,000 dollar loss, and then you said to $2.5 million. I don't know, is that a $2.5 million gain or is that also part of the loss?

That was a consolidated loss range of losing somewhere between $0.5 million and $2.5 million.

Okay. Does that include this milestone potential payment at the end of the year?

No, it does not because it is structured as an earn out. That would really go against goodwill and not into the earnings number.

So these are all balance sheet item payouts, not income statement?

That's right.

And just generally, what is the gross margin of the Ultrascan products?

We anticipate that currently it's a little bit higher than where we are running in our DIS business. We won't give a specific again. We're expecting to kind of tuck that under and allow it to contribute positively to the business.

And the last is just a question on current business in the current quarter. Trends continuing fine?

Are you talking about DIS?

Yes.

Yes, I think we've made some great progress. When you look at the leverage that we've gotten in the gross margin line. We're continuing with all of our initiatives. We're pleased with the number of mobile cameras that we've gotten out there. And also the reception of the physicians of that multi headed camera, they really enjoy the improved image quality of the camera and normally once they start imaging with that they don't want it to be taken out of their location.

Let me add that part of this acquisition was a new strategy that we've developed this year and centering these kinds of services around the academic medical centers around the country and Mike Keenan has been traveling around now. We have had initial discussions with a number of centers which we plan to make announcements throughout the year. We're not ready to make any announcements today. But as those contracts get signed and those services get started we'll continue to update you.

Great, thank you.

(OPERATOR INSTRUCTIONS). And we have no further questions at this time.

Okay. As I reported on our last call, we are focused on Digirad's drive to profitability. We are pleased by our progress in the first quarter toward our goal of sustainable revenue and earnings growth. Thank you for your interest in Digirad, we look forward to reporting a progress to you on our second-quarter conference call in about three months. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.