Star Equity Holdings Inc (STRR) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Digirad Corporation's second-quarter 2007 results conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded Monday, August 6, 2007. I would now like to turn the call over to Dan Matsui of Allen and Caron. Mr. Matsui?

Thank you. Good morning and thank you for joining us. If you did not receive today's press release and would like a copy, please contact Nathan Abler in our California office at 949-474-4300 after the call and he will be happy to send you one. This call is also being broadcast live over the Internet and may be accessed through Digirad's website at www.digirad.com. Shortly after the call, a replay will be available on the website.

I'd like to remind everyone that certain statements made during this conference call, including the question-and-answer session, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about the Company's revenues, costs and expenses, margins, operations, mobile imaging services, equipment upgrades, synergies from and progress of the integration of UltraScan, the benefits we believe can be obtained from relationships with academic, medical institutions, competitive advantages, the higher throughput and cost savings we expect to obtain from our camera fleet upgrade and financial results.

These forward-looking statements are based upon current assumptions and expectations and involve risks and uncertainties that could cause actual events and financial performance to differ materially. Risks and uncertainties include but are not limited to technological change, industry trends, changes in the Company's markets and competition. More information about risks and uncertainties is available in the Company's filings with the United States Securities and Exchange Commission including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and this morning's press release. The information presented in this conference call should be used in conjunction with the consolidated financial statements and notes included in those reports and speak only as of the date of this call. The Company undertakes no obligation to update these forward-looking statements.

On the call today for Digirad are Mark Casner, Chief Executive Officer, and Todd Clyde, Chief Financial Officer. Mark and Todd will discuss the Company's business activities and financial results for this year's second quarter and first six months, as well as provide commentary about strategy and their outlook for the Company. Following their remarks, there will be a question-and-answer period.

I'd now like to turn the call over to Digirad Chief Executive, Mark Casner. Mark?

Thank you, Dan. Good morning and thank all of you for joining us today. We are, of course, pleased to report another quarter of sequential improvements in net income and positive cash flows from operations which are the results of reduced costs and improved efficiencies; areas that we've been focusing on and will continue to focus on in the future.

From a revenue standpoint, during the two months since the close of the UltraScan acquisition, revenues from UltraScan's mobile ultrasound services more than replace the effect of discontinued sales of stress agents. The integration of UltraScan operations is ongoing and has progressed as expected. We are very pleased with the early synergies and the positive work that has been done by both groups to create a cohesive, mutually beneficial environment. We expect this integration to be virtually complete by the end of the fourth quarter.

Cross-selling to UltraScan customers is also having a positive impact on DIS services operations, as internal medicine and primary care practitioners either already are using UltraScan's ultrasound imaging services or being newly introduced to UltraScan continued to add nuclear imaging to their practices. We also expect that in time current DIS nuclear services customers will add UltraScan's ultrasound imaging services, although to a lesser degree.

Since we began the former partnership with UltraScan in February 2006, approximately 30% of UltraScan's customers are now nuclear imaging customers as well. This synergy illustrates the growth potential we see in offering comprehensive imaging services to physicians who already have experience in using one such modality in their own offices. There are approximately 130,000 primary care physicians in the US. Of the larger four-plus physician practices, only about 23% presently use ultrasound imaging and only 13% use nuclear imaging in their offices.

Historically, these practices have referred patients to hospitals. The advancement of technology in clinical care that now allows for the delivery of in-office medical imaging has promoted the movement of additional services from the hospital to non-hospital settings in a cost-effective and efficient manner. The ability of physicians who provide ultrasound imaging in their office to add nuclear imaging or vice versa greatly facilitates immediate clinical care, patient compliance and patient convenience. We see these benefits as another reason why our plan to diversify the imaging services we offer and to include cardiology as well as internal medicine practices to our group of physician customers should lead to better patient care as well as growth opportunities for Digirad.

On last quarter's call, we began to discuss a new strategic initiative that recognizes the close working relationships between medical professionals and highly regarded academic medical institutions. We are in discussions with a number of these centers of influence that work with affiliated practitioners in surrounding areas in the delivery of ultrasound and/or nuclear imaging. To date we have established a strong and active association with one such center of influence in Georgia where we serve approximately 100 physician practices. Recently we have begun relationships with Vanderbilt University and Penn State, and look forward to working with these two centers of influence in medical practices in those areas. We expect these associations to raise awareness of the availability of high-quality imaging and much easier access to comprehensive imaging services.

Also as expected, the ongoing upgrades of our DIS fleet of nuclear cameras to multihead configuration for faster image processing among other things, are shortening procedure times and increasing patient throughput. This higher rate of utilization is allowing DIS personnel to work fewer extended days, which in turn is contributing to the DIS margin. We now have 42 multihead and mobile cameras in operation in our 87 nuclear camera fleet, which includes five nuclear cameras we acquired with UltraScan. With the addition of UltraScan we now have 130 nuclear and ultrasound units in our services fleet.

From a broader perspective, industry information indicates that the number of ultrasound procedures performed each year in the US is growing by more than 10% annually. According to these sources, physicians will perform an excess of 90 million ultrasound procedures in 2008. In 2005, the latest year for which we have obtained information, they performed 19.7 million nuclear imaging procedures.

We also believe that cardiac and vascular specific imaging procedures, which make up the majority of our nuclear and ultrasound procedures in our DIS services business, have been rising each year due in large part to the aging population in the US.

To summarize, 2007 continues to be the year in which we have seen results from the operational turnaround that we initiated in 2005. For the last two quarters, we've reported higher margins, brought operating expenses down and returned to profitability with cash flows having improved substantially. We are focused on revenue growth from greater coverage in our existing regions, expanded services, and marketing to a large market in internal medicine as well as cardiology practices in regions containing centers of influence. Our strategic initiatives have put into motion and we believe they will enable us to increase our topline as well as our future profitability.

I'll turn the call over to Todd Clyde, our Chief Financial Officer, to provide insight to some of the numbers we reported earlier this morning and reaffirm our guidance for 2007. Todd?

Thank you, Mark, and good morning, everyone. Please note that all quarterly comparisons for the second quarter of 2007 compared with the second quarter of 2006 and all six-month comparisons are for the six months ended June 30, 2007 compared with the six months ended June 30, 2006 unless otherwise stated.

For the second quarter of 2007, consolidated revenues decreased 1.1% to $18.8 million compared to $19.0 million for the second quarter of 2006. DIS revenue for this year's second quarter, including revenue from our May 1, 2007 acquisition of UltraScan, was $13.3 million including 0 revenue from stress agents. This compares to DIS revenue for the second quarter 2006 of $13.4 million which included stress agent revenues of $854,000. As stated on last quarter's call, we no longer provide DIS service days as a metric now that ultrasound is a significant revenue stream. However, we have introduced a new utilization metric to track the productivity of our DIS assets and drive improved margins.

As of June 30, 2007, DIS operated 130 nuclear and ultrasound units with an overall asset utilization rate of 60%. This compares to 80 units in service and a utilization rate of 60% at the end of the second quarter of 2006 prior to the UltraScan acquisition. We upgraded 15 additional units in the Company's 87 unit DIS nuclear fleet to our most advanced CardiusXPO cameras during the second quarter. We now have 42 multiheaded mobile cameras operating in our imaging services business. The labor costs in our imaging services business was more efficient in the second quarter of 2007 compared to the prior year period. We believe a large contributor to this improvement is the more rapid throughput of the XPO platform driving down direct labor hours resulting in improved margins.

Product related revenues, which include camera sales and maintenance revenue, decreased 2.3% to $5.5 million for the second quarter of 2007, and included sales of 19 cameras for that quarter compared to $5.6 million including sales of 19 cameras for the prior year period. Consolidated gross profit for the quarter improved to $5.8 million or 30.9% of revenues from $5.7 million or 29.8% of revenues for the prior year quarter.

DIS gross margin improved to 27.4% of revenue for the second quarter of 2007 compared to 25.6% for second quarter 2006. The improvement was driven mainly by lowered appreciation and labor costs. Product related gross margin was 39.2% of revenue for the second quarter of 2007 compared to 39.8% for the prior year period. We are pleased with our ability to achieve margins in the high 30% range during the past few quarters, recognizing we have had increased production volumes due to our fleet upgrade initiative at reduced costs through outsourcing initiatives; all occurring despite continued pressure on average selling prices in what remains a difficult market environment. We expect production volumes to return to normal levels in the back half of 2007 as, according to plan, fewer DIS units will be upgraded. We also anticipate lower average selling prices in future quarters, all of which will have a downward pressure on the margins.

Operating expenses for the second quarter declined 18.6% or $1.3 million to $6 million from $7.3 million in second quarter 2006 as cost control remains a high priority. Interest income was lower in Q2 2007 compared to the prior year period due to cash used to pay for the UltraScan assets and pay off UltraScan debt. Net income for the second quarter was $238,000 or $0.01 per share after accounting for stock based compensation expense of $351,000 compared to a net loss of $1.2 million or a $0.06 loss per share including stock based compensation expense of $574,000 for the prior year period.

For the six months ended June 30, 2007, consolidated revenues declined 4.3% to $36.4 million compared to $38 million for the first six months of 2006. DIS revenue for the six-month period was $25.5 million compared to $26.6 million for the six months 2006 and product related revenues were $10.8 million for the first six months 2007 compared to $11.4 million in the prior year period. Consolidated gross margin for six months 2007 improved to 31% from 26.5% for the same period last year.

Net income for six months was $312,000 or $0.02 per share including stock based compensation expense of $625,000 compared to a net loss of $4 million or $0.21 loss per share including stock based compensation expense of $1 million for the same period in 2006. Cash and equivalents and securities available for sale on June 30, 2007 totaled $32.2 million compared to $44.3 million on December 31, 2006. Cash usage in second quarter 2007 included the $7.25 million acquisition of UltraScan and repayment in full of $1.5 million of assumed debt which was offset in part by positive operating cash flows of $1.2 million.

Net receivables were $9.7 million on June 30, 2007 compared to $8.8 million at March 31, 2007 and $7.5 million on December 31, 2006 due largely to the UltraScan acquisition. Net inventories were $6 million on June 30, 2007 compared to $6.8 million on March 31, 2007 and $5.9 million on December 31, 2006.

Reflecting the results from the first half of the year and the integration of UltraScan, we continue to anticipate consolidated revenues for 2007 in the range of $77 million to $80 million consisting of DIS revenue between $54 million and $56 million and product revenue between $23 million and $24 million, and consolidated net losses ranging from $500,000 to $2.5 million including estimated stock based compensation expense of $1.1 million. Digirad anticipates no stress agent revenue for 2007 versus stress agent revenue of $2 million for 2006.

We will now take questions. Operator?

(OPERATOR INSTRUCTIONS) Tim Lee, Carus & Co.

Just in terms of your bottom-line outlook for the full year, I mean, given the fact that you're profitable for the first six months, is it this margin degradation that you're expecting with the lower camera production that's going to be really driving down profits in the second half of the year? Is that how we should be thinking about it or are you just being somewhat conservative in your outlook?

There are two factors involved, Tim. One is, which you have indicated, will have the majority of the upgrades in the fleet done by the third quarter, so certainly that lower production volume in the back half, primarily in the fourth quarter, will drive the margins in the product business down. And we also anticipate further ASP drops. The second contributor is the seasonality that we experience in the summer in the DIS business which normally creates lower margins in that business as well. We would tell you that the trajectory for the loss for the year is probably closer to the improved or the lower loss number in the guidance. If you look at the topline, currently the trajectory of the revenue stream, would probably put you closer to the bottom end of that range. But overall we feel comfortable with the range that we've laid out.

And then just from a cash flow perspective, I mean given you're expecting net loss of $500,000 to $2.5 million, what kind of cash flow are we expecting for the full year?

I think we felt pretty good about the cash generation in the second quarter. I don't expect us to consume a large amount of cash in the back half of the year; probably somewhere in the $1.5 million to $2 million on a max.

And then one just last one if I may. In terms of the reimbursement outlook for next year, I guess some of the physicians have come out for the proposed cuts. Any thoughts on how that could impact your business if the cuts go forward based on the current proposals?

Yes, Tim, this is Mark. Let me address it in two ways. The 9.9% scheduled cuts to the [RB/RBSC] schedule, in all likelihood it's going to get repealed by Congress. So there's already -- in fact, it's passed in the House and I think it's pending Senate approval. The larger issue, though, remains how to fund the children's health insurance program, for those of you who have been following this more closely, know that that's something that is top of mind for the Democrats today and they're trying to figure out how to pay for it. And one of the proposals that's been floated out there is that they pay for it essentially on the back of additional cuts to imaging.

Quite frankly, I don't know that we have enough visibility today to understand whether that will pass or not. The President has indicated he'll veto it, mostly because he's concerned about the growth in the program, not necessarily how it's funded. I think we just need to be a little more patient. We'll probably have some more insight by the fall in terms of whether we think that will impact us or not.

You know, we took some pretty significant hits -- or imaging in general took some pretty significant hits in 2006. My expectation is that the response this year will be rather muted in comparison, unless there's a whole lot of momentum to get this health insurance program funded.

Thank you. I'll get back in line.

David Khtikian, JPMorgan.

Todd, I guess first question for you on the UltraScan acquisition. Are you able to provide the revenues that came in from UltraScan versus the total DIS?

As we indicated on the last call, we aren't going to break out the ultrasound revenue stream from DIS as a whole. We'll continue to report them together just like we did in the second quarter. I can tell you that we were very pleased with the UltraScan results and the revenues and the results came in according to plan. So we're very happy and pleased with the acquisition. The integration continues to go well and we expect that to be a positive contributor in the business on a go forward basis.

Okay, you had initially guided I believe to 4.5 to 5 million for the full year for '07. Is that still on line?

Yes, we haven't updated that and we've kept our guidance for DIS with that included in the same range.

Okay, great. I then I guess can you walk me through just how you calculate the utilization rate? It's obviously somewhat new compared to the revenue days. Can you just kind of maybe talk to that number?

Sure, absolutely. And maybe before I specifically describe the calculation I'll explain the purpose. I know that even when we've provided days historically, most of you were really looking at the utilization rate to understand how the margins were being driven and the leverage was happening on the suite of assets anyway. And so in that we stopped providing the days because of the discongruence between a nuclear day and an ultrasound day, we've decided to really give you that ultimate metric which is how does the utilization really drive in the fleet. And as that percentage comes up closer to the 70, 75% range, you should see an improvement in the margin. And clearly to do that you'll see more density just on the assets themselves. So we think that's a real strong indicator of progress in the business.

The way that the calculation works as we look at the number of units that are in the fleet as a whole and we look at the number of days that are actually serviced, with those units in relationships to the total days that they could have serviced and we calculate.

And then I guess on that, it says you have 130 units in service as of the end of the quarter, I guess?

Yes.

And then 87 are nuclear. So the calculation to get to ultrasound, just the difference there, so it looks like 43 ultrasound units?

It is. And we picked up five nuclear units in the UltraScan acquisition. They have five fixed site cameras where they do a number of procedures for -- generally for hospital and kind of smaller locations. So that's now part of that 87. So there were -- last quarter we talked about 82 nuclear units in the what you would have referred to as the Circle DIS fleet, that's still at 82 plus those 5 and then plus the 43 ultrasound units.

(OPERATOR INSTRUCTIONS) Tim Lee.

Just a couple of follow-ups here. Just to follow-up on the utilization question. So, how quickly could we get to the 70, 75% type number that you're talking about? Is that a 12 month goal? Is that a 24 month goal or --?Give us some framework on that, please, if you may.

Yes, that's a great question, Tim. I think what we've been trying to do is really focus on improving the business as a whole and we understand that that metric is important. We're also trying to make sure that we understand the proper profile of how a hub would be developed and really focus on these centers of excellence. So our primary focus today is to drive the business through the centers of excellence, make sure that our hubs are oriented to where those centers of excellence actually reside and then build around them.

So, I think it will probably take a little bit long than even maybe 12 months but I would hope that we've made some real significant improvement over the 12 months -- or 24 month period. We'll continue to update you as we go and as we fine-tune that process and understand it better. Certainly we as a Company as a whole are very new to the centers of influence model, although we're very pleased with the traction we're seeing right out of the gate. We're very pleased that we're able to start a relationship with Penn State and with Vanderbilt. Now the question is how long does it take to really bring that business online and then round that out. So, as we gain more experience there we'll update you as we go.

Okay. And I appreciate the fact you don't want to provide the ultrasound contribution number, but if we looked at it just an organic growth number ex the stress agents and what -- could you provide what the growth was or the decline was in the quarter on terms of your base business?

You're talking about DIS nuclear?

Well, either DIS -- your pick. Either DIS or total revenue, however you want to measure it out. I'm just trying to get a sense of what the underlying growth of the Company was in the quarter.

Tim, let me jump in here. I mean, obviously, if we gave you that we'd give you what the UltraScan numbers were. And we've been -- we've basically indicated over the last couple of calls that we're not going to be breaking those numbers out for the foreseeable future. I think clearly when you look at our revenue numbers, on the one hand you could say they're a bit challenged. We actually lowered our guidance, if you will, from the beginning of the year if you factor in the UltraScan acquisition. And that, quite frankly, is due in large part to continuing to look at the operations when we look at the utilization numbers. We closed some hubs at the end of 2006.

We're continuing to pay attention to not just boosting the topline but, quite frankly, providing a more efficient level of service. And you've certainly seen that in the margins -- margin improvement actually on both sides of the business, and we're going to continue to focus on that.

I think now that we seem to have a pretty good handle on fixing the expense side of the equation, clearly that topline revenue growth that many of you asked us about is top of mind for us. We've introduced the new centers of influence, strategic model. I can tell you that we have other strategic initiatives in place. And our expectation is that on a go forward basis, you can expect to continue to see not only improved position at the bottom line but focused on the topline as well. And I would ask for your patience a little bit longer as we continue to roll those initiatives out. We do expect that they will be taking effect here and again, we've been hesitant to give you an exact timeframe. But I think what you'll see over the coming quarters is continued focus on both the top and the bottom line.

Fair enough. Thanks, gentlemen.

Gentlemen, there are no further questions at this time. Please continue.

Thank you all for being on today's call. We certainly appreciate the interest that you have in Digirad and we look forward to reporting our progress on the next quarterly call.

Thank you. Ladies and gentlemen, that does conclude our conference call for today. Thank you all for your participation. You may now disconnect.