Star Equity Holdings Inc (STRR) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Digirad Corporation's first-quarter 2008 results conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. Dan Matsui of Allen & Caron. Please go ahead, sir.

Thank you, Patty. Good morning and thank you for joining us (technical difficulty). If you didn't receive today's press release and would like a copy, please contact Nathan Abler in our California office at 949-474-4300 and he will send you a copy. Also, this call is being broadcast live over the Internet and maybe accessed at Digirad's Web site at www.Digirad.com. Shortly after the call, a replay will be available on their Web site.

I'd like to remind everyone that certain statements made during this conference call, including the question-and-answer period, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal Securities laws. These forward-looking statements include statements about the Company's revenues, costs and expenses, margins, operations, mobile imaging services, product division, camera fleet upgrades, relationships with academic medical centers, financial results, and other topics related to Digirad's business strategy. 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, business and economic conditions, 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 U.S. 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 discussed during 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 for Digirad are Mark Casner, Chief Executive Officer, and Todd Clyde, Chief Financial Officer. They will discuss the Company's business activities and financial results and comment on their strategy and outlook. The question-and-answer period will follow.

I will now turn the call over to Digirad Chief Executive, Mark Casner. Mark?

Thank you, Dan, and good morning, everyone. By now, you've all seen the numbers for the quarter and our new guidance for 2008.

Based in part on the condition of the economy, uncertainties surrounding reimbursement, and other healthcare dynamics and their impact on our business and therefore overall growth, we wanted to reset expectations now rather than later and move forward with the first quarter as a reference point. We don't know how long these external conditions will continue, but from an inside perspective, we are encouraged by positive indicators in several key areas.

First, while overall growth has continued at a slow pace and despite the effects of weak product sales, DIS revenues have nevertheless grown, which is a direct result of our strategy to diversify revenue by adding ultrasound to our core imaging services. Ultrasound, and more specifically the acquisition of Ultrascan in May 2007, was also the impetus for developing our Centers of Influence strategy, which continues to produce positive results in the form of a steadily rising number of academic medical centers participating in our program, a program that generates economic benefits for all parties -- the centers and their cardiology faculty, the physicians in surrounding areas, their patients, and as these pieces fall into place, our business.

More generally, the cumulative impact of Emory and the other four centers -- Penn State, Vanderbilt, Methodist Hospital in Houston, and UCLA -- are beginning to become more evident. We're still in the early stages of these relationships, and revenues are not yet sufficiently smooth and predictable enough for a definitive outlook. Nevertheless, on the whole, revenue potential from centers of influence shows promise, and with Johns Hopkins coming onstream and the addition of at least three more centers this year, we expect to see more visible effects in later quarters.

We are pleased with the progress of Ultrascan, and expect to meet our 2008 plan in this servicing segment. As evidence of this, we began serving another large cardiology group under the Emory umbrella that we expect to contribute over $0.75 million annualized to our revenue -- again, another example of continued penetration in a market centered around a premier academic institution.

We continue to look for other service segments to add to our nuclear and ultrasound offerings to entrench us more in our physician practices as well as increasing the amount of revenue we can generate in office and even possibly in a single day.

During the first quarter, we began a pilot program to evaluate a new diagnostic ultrasound procedure for examining the health of carotid arteries as an adjunct to our vascular imaging. Imaging procedure can easily performed the same day, and the physicians involved in the pilot are saying that this can help them provide a higher level of patient care. Depending on further results from this pilot program, we anticipate launching this new service, at which time a large number of primary care physicians enrolled in DIS Ultrasound Services would be able to offer additional diagnostics to their patients, add incremental revenues to their practices and potentially boost our overall number of service days per physician. We also expect the new service to improve margins, since the new procedure easily integrates into our existing mobile services process and uses the same infrastructure.

To address underperformance of our Product division, economic and market conditions aside, late last year, we began the new program to improve sales, operations and profitability. Although both product revenue and bookings were light in Q1, which will inevitably affect our Q2 (technical difficulty) we are encouraged by solid bookings during the first three weeks of April. This progress is the result of a higher level of sales activity in our core physician market with increasing contributions from our dealer network. We are cautiously optimistic that our Q1 product results were an acute issue and expect improvement in future quarters but do not expect to make up the full Q1 shortfall.

Turning to gross margin, the wage guarantee program we instituted late last year to reduce turnover has produced results, but productivity has not improved as expected. We are evaluate the program and looking at alternatives to bring costs in line with productivity and help to bring DIS gross margin back to prior levels.

Third, our operational cost structure has remained relatively flat, which has been a specific focus over the last few years. We expect only modest growth in out quarters, which will contribute to better net results when revenues strengthen in subsequent quarters and we resolve labor cost and productivity issues.

I will now turn the call over to Todd Clyde, our Chief Financial Officer, who will provide more specific detail regarding our financial results. Todd?

Thank you, Mark, and good morning, everyone. Please note that all quarterly comparisons are for the first quarter of 2008 compared to the first quarter of 2007 for periods ended March 31.

Consolidated revenues for the first quarter 2008 were $18.3 million, a 5% increase from $17.5 million generated in the prior-year quarter. DIS revenue increased 14% or $13.9 million in 2008 from $12.2 million in 2007. Product-related revenue declined to $4.4 million in sales of 11 cameras in 2008, compared to $5.3 million on sales of 19 cameras in the first quarter of 2007. The approximately $2 million increase in cost of DIS revenue was due primarily to increased operational expenses associated with the delivery of Ultrasound Services, which were added in May of 2007, and to a lesser degree, higher labor cost related to our employee-retention initiatives and, as expected, increased depreciation, repair and maintenance costs associated with our nuclear fleet upgrade.

I also note we upgraded eight more nuclear systems in the first quarter of 2008 and expect to finalize the upgrade program by the end of the second quarter of 2008.

For first quarter 2008, our system utilization rate was 64%, compared to 58% in the prior-year quarter. The decline in costs of Product revenue was due primarily from the lower revenues associated with that business.

Also contributing to the $1.4 million net loss for the quarter was approximately $184,000 in non-cash amortization costs associated with intangible assets related to the acquisition of Ultrascan.

We consumed cash in the quarter as we upgraded nuclear systems in our DIS fleet, purchased equipment to service the new incremental business in Atlanta, and burned more cash than we anticipated in working capital due to the higher net loss. We expect the cash requirements to be much less during the remainder of the year, somewhere in the $1 million to $3 million range, with cash flow becoming positive by year-end.

Despite our optimism for DIS revenues via our Centers of Influence and an eventual turn-around in product sales, we realize that general market and economic conditions may continue to affect our financial results overall. We prefer a more cautious outlook for 2008, which is reflected in our new guidance for consolidated revenues, in the range of $75 million to $81 million, consisting of DIS revenue of $56 million to $60 million, and product-related revenues of $19 million to $21 million, and a consolidated net loss of $2 million to $4.5 million, including estimated stock-based compensation expense of $1 million.

We will now take questions. Patty?

Thank you. Ladies and gentlemen, at this time, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). Tim Lee, Caris.

Good morning. Just in terms of the instrument sales, I mean, what was the reason? Is it just more the credit crunch or just any more specificity you could provide on that would be very helpful. Thank you.

I think it was a combination of factors, Tim. Certainly, the economic and credit crunch does play a role. We've seen that physicians have struggled to get financing more than we saw in prior years. We see physicians delaying in making decisions to get into a camera purchase and to some degree also even to get into the service model, as there are reimbursement concerns and just continued, you know, a little bit of a cloud over healthcare in general.

You know, the one positive sign that we've seen in August is we did see a number of those deals that seemed to be delayed kind of release and we were able to book some orders. So we do expect some improvement, but our bookings in Q1 were really light. You know, they were light in Q4, but they were even lighter in Q1 on the Product side. So that's going to create a drag, clearly, as we head into Q2.

I can just clarify that. I think Todd meant to say April and not August. We've actually seen considerable activity in the first three weeks of this month, which gives us some, as we've indicated, some cautious optimism that there was a bit of an acute issue in Q1 that hopefully will soften here in subsequent quarters.

Just two more quick follow-ups, if I may? In terms of your comments of providing a broader range of imaging services, does that go beyond your current modality? Does that mean an acquisition, or a potential use of your current cash? Just any type of color you could provide on that?

Sure. We're trying to stay within the realm of portable mobile imaging services, Tim, so as we look at this and these additions of new services, I think, initially, we are going to focus more on de novo/organic development of these services, so as we talked about, the carotid artery measurements or something we can do in-house. In fact, we have already started in our Georgia and Tennessee markets. We're looking at some other modalities that fall into those same lines.

We've not ruled out acquisitions. I can tell you that we definitely slowed down the process on that, in part due to the events of the first quarter. I think we need to focus on keeping things back on track, but we will certainly entertain future acquisitions, just not right now.

Then just one last one here -- I think it's only been about 90 days since the Board had set the executive bonus plan here. I think the revenue goal on that was $85.4 million, if memory serves me, something in that range. And here you are kind of lowering the bar for the '08 outlook here. Just quickly, does that mean, given what you see now, the executive team has a very little shot of making its year-end bonus, and is that the right way to try to incent and keep some of your senior staff?

Well, I can tell you there are certainly more than a few depressed folks here in terms of the bonus plan, but let me address that in a couple ways.

We just had our board meeting earlier this week. I think the Board is cognizant that the plan, as it was originally established, it's going to be a challenge for us to get those numbers this year. We didn't hit them last year and subsequently didn't receive a bonus.

I can tell you, to a person, we have a very committed and motivated senior team, irrespective of what the bonus plan looks like right now, and we are committed to still those initial numbers. Obviously, we've dug a bit a hole of ourselves Q1, but I don't think we are dismissing those targets immediately out of hand. I do think we need to reset expectations in light of that reality, on a go-forward basis, and certainly need to reset those expectations for our shareholders. But nonetheless, we remain committed to that.

Will we need to review that bonus plan in coming quarters? Likely we will. Obviously, the Board wants to make sure that we are properly incented, but we've made no definitive decisions at this point.

Great, thank you. I will jump back in line.

Stephen Silk, C Silk & Sons.

Good morning. I got on the call a couple of minutes late, so if I'm repeating what you might have talked about already, I apologize.

In the last quarterly conference call, you had brought up that you really hadn't had a strong presence in the hospital market and we're looking to change that this year. Now, how has that progressed? Is it the hospital market that is delaying purchases, or is it more individual practices that might have been delaying purchases?

Let me kind of address it from a couple of angles, Stephen.

Number one, we've continued to see excitement and traction around or 2020tc, which is a mobile general camera. That has been really a great little portable unit for a hospital to move around to different wards, different locations. You can do bedside imaging for a patient that's in ICU, for example, rather than trying to move them down to the basement to be imaged.

We continue to see interest in that area. Those sales cycles have always been longer. I wouldn't say that we've seen them extend out dramatically. Where we've seen the extension of time is in our base bread-and-butter cardiology purchases. So I wouldn't suggest that the hospital has contributed to that. We're working more hospital deals this quarter than we probably did six months ago, so we are pleased with that.

We also see hospitals, and especially kind of like a community outreach hospital, taking a look at our DIS service platform where we can also come in and provide staffing and the camera as well for them. That might be on a short-term basis; it might transition into a purchase, something like that. So both sides of the business are opening up that market a little bit more than we've seen in the past.

One other segment that I would say we're having more success in today is, on the camera side, is we're starting to go up to the more sophisticated purchaser. This might be academic institutions; it might be real large cardiology practices who never had space constraints or other challenges in the past, now really looking to our technology as the best technology to be adopting. We, for example, in the first quarter, we dropped in a camera in a really high-end, well-respected location that we actually displaced a competitive camera.

So those are real positive trends. The challenges are really just the overall market economics and the size of the camera market that we play in continues to be small, so you end up with a lot of vacillation.

So I probably should think of that as perhaps a building pipeline as opposed to what you might have put in your revenue forecast?

Yes, absolutely I think that's right. One of the key areas of our innovation focus is really looking at doing a new camera that would fit well in a hospital market and have even expanded characteristics than what our current camera has.

Now, that's not an '08 event by any means. It's '09 and probably traction in probably 2010 but I think we are absolutely focused right and I think we will eventually turn that pipeline into revenue in out years.

Now it's another three months we had four Centers of Influence set up at various stages from when they initially were laid out. Could you talk about the uptake of the end-user internists and how -- if you're getting a feel for being able to go to the outside sphere of that influence and having them sign up?

Yes. You know, Stephen, we're very pleased, quite frankly, with the progress that we've made. We are thrilled that Johns Hopkins joined us earlier this month. We will have a significant announcement next week to announce our seventh Center of Influence. So, we are finding very good opportunities across the country with absolutely premier centers.

Clearly, the challenge for us has been how quickly can we establish those inroads in with the internists and family practitioners in those communities. That's running a little slower than we'd like, but we are seeing some traction now at Methodist Hospital in Houston, UCLA, some of these other markets.

We are very confident that the 36-month maturity cycle that we outlined in earlier calls is probably the right time period. It is taking us, however, a little bit longer to get that initial thrust. We think, once we do, the momentum will take care of itself, because we have discussed before we will be providing, on at least a quarterly basis, an update with numbers of centers that we have under contract and the corresponding gross revenues assigned with those centers.

So stay tuned. We remain very bullish. We think -- as I said, we will have an announcement next week on a seventh center, and we have several more that we think we will sign by the end of the year. So it's progressing nicely. Obviously, timing is always one where you'd like to have things happened a lot quicker than they do.

Sure. Will you also be tracking or giving data on how many internists or end-users that they'll be so you can get an idea of how many of you're adding?

Yes, I'm not sure how we're going to report at that granular level, Stephen. We've committed to reporting incremental revenue growth for those centers, and we will have to take a look at how do we break that down either by number of practitioners, ultrasound versus nuclear. We will come up with some meaningful measure so that you guys can track the progress with us.

Okay, so now, if I read correctly, you should be finishing updating the complete fleet in this quarter?

That's right.

Okay, so what do you anticipate the cash usage there? I assume all of that now will go away as far as a fleet update, right?

Yes, that's right. After the second quarter, any new cameras that are placed out into operation will be for expansion and new business.

We expect to burn a little bit of cash during the remainder of the year, but it's nowhere near the amount that we burned in the first quarter by any means. We talked about a range of $1 million to $3 million, and then driving to cash flow positive by the end of the year.

On the balance sheet, you had moved $2.5 million down to long-term investments. Does that have anything to do with auction rate Securities situation?

They are all auction rate securities. We held more that we were able to get out of, so we have two chunks. At this point, we're carrying them at the par value and we're just going to have to stay in touch with really what happens with these institutions to find out if they either go into something much longer or if we find some liquidation path through some discounts or something like that.

You're still getting interest?

This is obviously a huge issue for a lot of people.

Right. You're still getting interest on it?

We are.

They are still current? Okay. Any thought, if the cash burn becomes less, with the price of where the shares are now, to maybe take a couple of million dollars to purchase some shares?

That question comes up a lot, Stephen. At this point in time, I don't think the Board feels that it's a good use of the cash. I think that may change when the flip over to being cash flow positive and some other metrics improve; they may revisit that. I think, right now, that's not where they are headed.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). I'm showing that we have no further questions at this time. Please continue.

Thank you. We are well aware of the challenges in the environment today and remain focused on following through our growth initiatives while preserving the gains we have achieved over the last two years. We appreciate your interest in Digirad and look forward to keeping you apprised of our progress. Thank you.

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