Star Equity Holdings Inc (STRR) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Digirad Corporation 2008 Fourth Quarter and Year-End Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions).

I would now like to turn the conference over to Matt Clawson of Allen & Caron. Please go ahead sir.

Thank you very much, Luke. Good morning everyone and thank you for joining us today. If you didn't receive today's press release and would like a copy, please contact Nathan Abler at 949-474-4300 after the call and he'll be happy to send you a copy. Also, this call is being broadcast live over the Internet and may be accessed at Digirad's website at www.digirad.com. Shortly after the call, a replay will also be available on the Company's website.

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, portable imaging services hubs, centers of influence, product division, financial results, estimated market shares and other topics related to Digirad's business strategy and outlook.

These forward-looking statements are based on 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 US 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 today for Digirad is Todd Clyde, President and CEO. Todd will discuss the fourth quarter and full-year results, update us on the Company's new strategies and comment on the Company's outlook for the coming year. The question-and-answer period will follow. And with that I'd like to turn the call over to Todd Clyde. Good morning, Todd.

Thank you, Matt, and good morning, everyone. I'd like to thank you all for being on today's call and for your interest in Digirad.

Over the past 100 days or so since I took over as CEO I continue to validate my positive views of Digirad. I believe that DIS has a solid core footprint on which to build, that the centers of influence strategy is sound and will serve as a foundation for our growth in the future. Our technology roadmap in the product business has the potential to improve future clinical protocols, resulting in improved patient care and more efficient health-care economics.

As we noted in today's announcement, trends in our core businesses were positive in the final three months of the year. Highlights of this period includes achieving profitability both for the quarter and for the full year in our product divisions, with a good balance of improved sales and more efficient operations; this fulfills the goal we set for the group over a year ago; improving our gross margin performance in our leasing of personnel and equipment services business through cost savings initiatives; completing the analysis of our hub network and beginning to process the selling and closing of some of the underperforming hubs.

Many of you will have noted that on today's announcement-- the announcement we made on Tuesday that we successfully transitioned the assets and operations of our three northern California hubs to MD Office Solutions. And finally, we generated over $2 million in cash from operations during the 2008 fourth quarter, elevating our cash, cash equivalents and securities to more than $28 million or approximately $1.50 per share at the end of the year.

As a reminder, our mandate at Digirad is to get the company to a position of regular and growing cash flow and profits as soon as possible and to lay the foundation for sustained growth. Specifically, we plan to accomplish that by eliminating unproductive assets, increasing our utilization in our core DIS locations, including the further progress in centers of influence locations and finally, to drive overall trends in nuclear imaging by introducing best in class camera technologies that can provide better patient care and serve solutions that create better economics for the physicians and the healthcare system as a whole.

Let me comment for just a moment on the fourth quarter. Fourth quarter financial results were strong across the organization, including record revenues of almost $22 million compared to slightly less than $19 million in last year's fourth quarter, or a 17% increase. Those top-line results were a result of better than expected sales of cameras and related product revenues.

Once again the product division was profitable as bookings increased, production costs remained in check and new imaging technologies continued to garner interest among customers. I will talk a bit more about our technology blueprint a bit later in my comments.

The fourth quarter also saw a strong contribution from our centers of influence locations. COI revenue growth was primarily the result of a steady ramp in revenues from our successful existing centers. During 2009 we expect to take the lessons we have learned from our most successful centers and apply them to the newer locations such as UCLA and the University of Chicago.

Gross margin improved significantly in the fourth quarter over both the corresponding period last year and sequentially over 2008 third quarter. Strong product sales definitely helped improve margins in the period, but we also had margin improvement in the DIS segment as we focused on our cost structure in that network.

While it is still too early strategically and financially to provide guidance for 2009, our strong finish in 2008 gives us a foundation on which to continue to execute our plan to attain profitability and generate positive cash flow. We're also beginning the next phase with a strong balance sheet and liquidity that in this uncertain times, we see as an advantage and as a real value driver.

What we do know is we expect the impact of the discontinued hubs on our revenues will not exceed approximately $7 million. We anticipate the net impact of strengthening the core DIS hub network to result in greater gross margins and a return on equity.

Looking forward, the organization is focused on two key areas. With regard to our leasing and personnel and equipment services business, or DIS, the centers of influence strategy continues to work well in established centers. That said, we have learned a great deal about what drives success in a given COI. The relationships, the economics, the logistics all need to resonate in a location to create the dynamics necessary for growth and the character of each location is unique.

We will focus on further penetrating these established centers and we'll apply what we've learned to our newer centers in an effort to make them more successful. We do not have specific plans to expand beyond the current locations in 2009 but rather to expect to capitalize on our current locations. Adding centers without the right sales and operational infrastructure will only bring mediocre results. This measured approach fits our new mantra of profitability first.

For the year, we experienced in excess of 15% revenue growth in centers of influence locations over prior year, significantly outpacing our non-COI locations. Clearly the strategy is working, but we think that it can be an even greater driver of growth if managed correctly.

On the technology side, we see some emerging opportunities we have not seen in recent years. By investing in our product technology platform and furthering the competitiveness of our cameras, I believe we can take market share from our larger competitors and actually impact the direction of the market.

The cardiac nuclear imaging market will be driven by advances that we believe will fuel a migration to new cameras over the next few years and we hope to be in the forefront of driving that change and take advantage of these positive trends. We anticipate these future products to offer new efficiencies and possibly provide new clinical protocols. Expect to see two new product introductions during 2009 that fit within this strategy. Our Cardius 3 X-ACT camera, which provides a unique attenuation correction method, is designed to begin migrating the market in a direction that will both improve patient care and benefit Digirad, both in terms of product and service offerings.

We also announced this morning that our Board of Directors has authorized a stock buyback program to repurchase up to an aggregate of $2 million of outstanding common shares. The Board is pleased with the Company's direction and goals toward generating positive cash and earnings. Coupled with an undervalued stock price, Digirad stock was a logical investment choice that should bring a solid return over time to our investors.

To wrap up my prepared remarks, I would like to reiterate our goals for 2009. Number one, create greater efficiency as we sell or close initial underperforming hub operations. Number two, continue improving our approach to launching and growing centers of influence. Number three, introducing new imaging technologies during the year that establish a long-term technology platform designed to attract new customer segments and take market share from our competitors. And ultimately number four, drive profitability and positive cash flow.

We are working diligently to make sure your confidence is rewarded and we will keep you posted as we progress. With that I'll turn it back over to the operator for questions.

Thank you sir. We will now begin the question-and-answer session. (Operator Instructions).

And our first question comes from the line of Stephen Silk with C. Silk and Sons. Please go ahead sir.

Good morning, Todd.

Hi, Stephen.

Congratulations on a nice quarter.

Thank you.

Could you talk a little bit more in depth about the sale of the northern California hub? What type of revenue did they do for the fourth quarter or for the last calendar year?

You know, I appreciate the interest. What we've talked about is that all of the locations that we will either be selling or closing represent about a $7 million number, and that will be essentially taken off the table during this first part of 2009 as we sell and/or shut down these locations. We talked about selling the location in northern California. We have also shut down operations in a few the locations in the United States. For example, we closed our St. Louis hub. There were a few others as well.

As far as the kind of breaking out the revenue specifically, we're not as focused on that right now. So I'm not going to break it down by every hub location and every time we dump off a chunk of the business.

Will the sale price be disclosed in the 10-K?

It will not. It will not, because we continue to negotiate other deals and we don't think that's a wise choice.

Alright. So I'm assuming that they didn't buy the hub to lose money. So how can they drive it to probability and do you see this as a way to perhaps to grow the business if you want to have independent operators per se?

Yeah, I guess that could happen. It's certainly not what our strategy is today. Our strategy is to really focus on a solid footprint of hubs. Many of those will be around centers of influence. Some will not, where we have a lot of great potential in the mid and future length of growing them to be really positive. If there's a location that really is outside of that, it doesn't seem like it has a lot of potential for growth, it doesn't seem like we can maintain and sustain profitability, that's the type of location that we would walk away from. If we talk about what--how does someone else perceive the business and why they able to create value, you know their whole structure and things like that are quite different and you know it's really more of a question for them of how they think about that business.

But it could be beneficial to you as far as if they expand for camera sales and some derivative product revenue for Digirad wouldn't it?

Yes. For sure, for sure. And in these cases we're signing service contracts under the cameras and we would hope to continue to maintain a great relationship. And if that translates into some future business later on down the road absolutely we'll be open to that.

Okay. The DIS revenue which increased year-over-year, what was the average price per rental per day? Was it lower so that your--the increase in revenue came with more days? Or how did those compare?

The numbers kind of either one of the categories of how you described it have been fairly flat really. What we've got to do is drive more revenue per day per system or team, however you want to think about that. And that's kind of a derivative of the utilization metric. Didn't seem like we made a lot progress on that over the last year-and-a-half and clearly that's a key initiative for us in 2009.

Very good. I applaud you for the buyback. I know I've been on your case for a while. If you look at the price of the stock now, I think you're a quarter late, but nonetheless it's good and I like the $2 million number because it has--it's somewhat tied into your--the cash flow that was generated in the quarter. And I think as far as the buyback, when it's advantageous to do it, it's nice to see a percentage of free cash flow being used for that purpose so you can grow your actual cash and retire shares at the same time. So no question there, but--oh, actually I do have a question. In the third quarter there was some institutional sellers. I haven't seen fourth quarter numbers yet. But now are you available to go to perhaps the people that might have sold a portion to see if they'd be interested in selling a block so that you could make the repurchase in one fell swoop?

We'll be engaging a broker to really manage the process and all the details will be worked out over the coming weeks.

Okay. The strength in the sales, the last quarter you talked about gaining market share. And also you were replacing some competitors' existing systems. You talk about how that trend is going and what is really driving your sales?

Yes. Those trends continue. I think we're very pleased with the adoption in the market and I think I talked before that what we realize is you know, our bread-and-butter historically has always been that small cardiology practice. How do we open it up where we're really viewed as one of those top thought leaders and sell into much larger practices and even into hospitals where you're selling them a cardiac-specific camera or a specialty general purpose type camera like our 20/20 camera and we're starting to do that. We have opened up a number of hospitals and sold into a few hospitals in the fourth quarter and we continue to sell into more large practices. And frequently when you're doing that, you are displacing a camera--a competitive camera. We displaced a number of competitive cameras this year, whereas in years past that was very few and far between if any. So I think we are absolutely making the right steps to progress and open up and continue to take more market share and our technology roadmap, Stephen, really fits into that equation. And we believe that we will continue to make progress and not just be considered as one of the big four, but eventually the number one provider and really the only choice in nuclear cardiology because our technology is so sound.

Can you just give a general idea of are you selling to new customers, or is it an expansion of existing customers?

It's all of the above. New customers, replacement and upgrades to existing customers, second and third cameras to existing customers.

Okay. Attenuation correction systems. I know there was some--a couple out for testing. How is that progressing? What are you seeing and the potential for demand or interest when that becomes available?

Interest continues to grow. Obviously we're not showing and marketing the camera yet because it that hasn't received the full 510(k) approval. We're in the process right now with the FDA in that. We are doing clinical trials and some data sites and we'll continue to capture data and look to publish--have those physicians published on that great device in the future. So we're still very bullish. It will be launched during kind of mid-2009.

And as that comes out, that doesn't really take away from your existing pipeline? It's totally new markets that you would be selling into?

Yes. I guess there's always some aspect of crossover where a physician that may purchase a C-3 from us today would buy a C-3 X-ACT camera. But it's really a C-3 camera with this attenuation correction device added to it.

And finally will you feel like commentating on the topic of the CMS and the mobile leasing with the government regulations and any clarity on if it affects Digirad or where that stands?

Yes, sure. There was a lot of confusion around some preamble language that they had put out earlier. The group came back and posted on the CMS website under FAQ that groups that are leasing equipment, leasing personnel or both to physicians where essentially the services are performed by the physician and these services and individuals are simply leased and provided underneath the supervision of those physicians, that they do not have to register as an IDTF.

Okay. Continued success.

Thanks a lot Stephen. Appreciate it.

No problem.

Thank you. (Operator Instructions). And our next question comes from the line of Mark Silk with C. Silk and Sons. Please go ahead sir.

Todd, congratulations on a successful first 100 days.

Thanks, Mark.

On the camera sales in Q4, it looks like you covered most of what was happening. But did you also see maybe some doctors had some money left over in their budget to make that purchase? Or again, you still see continued strength?

Yes, I think you highlight some of the uncertainty of the economy. We definitely saw a shift towards lower cost cameras. The mix between new and used was really much more weighted towards used than we've seen in the past. We sold 31 cameras. 21 of them were new and 10 of them are used. So that's a pretty strong used percentage for us. Definitely there was some concerns around new administration and changing of tax laws and taking advantage of some of that at the end of the year. I don't know how you even judge that. I've heard that every that I've been here that those depreciable accelerated benefits are going to go away and they seem to always come back in play. So I do think that there's a potential for modification. And I think that's where there's still some uncertainty as you look at 2009 for sure.

So when you--on used cameras, someone replaces one, upgrades, you'll buy it from them and then resell it? Is that kind of?

Yes that's right.

And what are the comparisons to profit margins between new and used?

You know it really is deal specific, but they're probably somewhere between 50% to 60% of the margin of a new camera, in dollars.

Okay, that's fair. On your 10b-18 plan, does that preclude you from buying blocks of stock if it's offered to you?

Now there are certain--there are daily and weekly restrictions. But my understanding is that you can go out and actually do a block purchase once a week. But there are still limitations underneath that block buy.

And my last question is, I'm just going to read this quick sentence or two. I'm sure you saw it in the news. "Patients are receiving the equivalent of 600 chest x-rays when they get CT scans for heart disease and not enough clinics are using known ways to reduce this exposure." How can you basically leverage that to your advantage?

Clearly, a nuclear study would be putting in the patient a lot less radiation than a CT. I say that from a very broad perspective, right? I'm sure that all depends on how many slices the CT system is and all of that. But look, there's a lot of patients out there with cardiovascular disease or indications of cardiovascular disease. Earlier detection brings better patient care without question. And the services that Digirad provides either in the cameras or the equipment and personnel leasing businesses where we provide ultrasound or nuclear services we really help do that. And I think we do it in an efficient way and in a healthy way for the patients.

Good luck going forward, Todd.

Thanks a lot. I appreciate it, Mark.

Thank you. (Operator Instructions). Our next question comes from the line of [Elan Greshkin]. Please go ahead sir.

Hi guys. You're doing a great job so far.

Thank you.

A couple of quick questions. First, are you seeing any difficulties for doctors getting financing to buy any of your units?

We don't find that yet with physicians. They continue to be very financeable individuals/entities. Where we are selling to maybe a mobile operator there's probably a little bit more constraint on those guys. And if you look at a mom-and-pop shop where they're buying a camera or two and servicing some local routes in an area, I would say that's where you see a little bit more the financial strain. And then the hospital markets, there's been a lot of news on that, where their capital spending has slowed way down. That hasn't been our primary market, but we appreciate the need to get in there, so those are some of challenges we'll be facing in '09.

Okay. On the balance sheet, I saw you have property and equipment held for sale of $1.1 million. I'm assuming that's I guess from the hubs you shut down?

Yes, that's correct.

Is that legitimately realizable dollars or--?

Yes. It's an asset value that as we've gone through all of these hubs and had to bifurcate them into different categories between those that we're shutting down and those that we're expecting to sell, that's the number that we're expecting to sell. So then it's a question of can we actually realize it dollar for dollar? Does it end up being a little bit higher? Does it end up being a lower bit lower? But that's our estimate today.

Elan Greshkin. Okay. Do you think we might see that hit come off the balance sheet in Q 1? Or is that going to take longer than that?

Well, a portion of it came off here in essentially on the second of February as we sold these 3 hub location assets in Northern California. And then we'll continue to work feverishly to get the rest sold over the next chunk of time.

Okay. And lastly I notice obviously there's no guidance, but it kind of sounded like first quarter may not be cash flow positive. Am I correct in thinking that way?

You absolutely are. I would say that we won't generate positive cash. We won't generate a profit in the first quarter. And that's because, look, what are we trying to do? We're trying to make money and generate cash and that's really our goal for 2009. But at the same time, we appreciate that we're in a business that has some fluctuation. Capital equipment sales are always really strong in the fourth quarter. They're usually pretty weak in the first quarter, for example, so that can have a fairly significant impact. And then our DIS business has seasonality in the summer months, for example. So we appreciate that there will be some gyration between the quarters and that's why we talked about trying to get the company to a point of consistent cash flow and consistent profitability.

Okay. Lastly then, with the two new products coming out, is there an expected date where the FDA needs to respond by?

Yes, we're still bullish that were going to get the X-ACT system launched in the middle of 2009, and we didn't give a specific timeline on the other product other than we're attempting to launch it here in 2009. So we're working through it with the FDA. They've become a little bit more stringent on their review process. That's certainly not specific to our industry, but we've experienced that as well. But I think we're doing a good job working through things.

Okay, great. Thank you so much.

You bet.

Thank you. And Mr. Clyde, I'm showing that there are no further questions in the queue. I'd like to hand the conference back to you for any closing remarks.

Great. One comment that I should make. I know that there was a little bit of confusion in the bonus plan that we had put out, where we highlighted that one component of Randy Weatherhead's target was based on hitting a goal of $39 million of revenue in the DIS. We talked about that as our internal DIS which excluded the Ultrascan acquisition which really covers the Georgia and Tennessee markets. When we report our segment DIS that includes the Ultrascan numbers as well. So just a little bit of guideline there. That area or that region is doing over $10 million of revenue. So if it seems like there's a pretty large disconnect with what we did in DIS for the whole year versus only saying we're going to pull $7 million out then seeing a target of $39 million, that helps you reconcile that just a little bit.

To my closing remarks, the financial and operational performance in the fourth quarter was a strong indication that a leaner Digirad organization is adopting the changes necessary to move the company forward and generate greater value for our customers and shareholders. I believe we are in an excellent position to achieve positive cash flow and sustained profitability. I'll look forward to updating you with our progress on our next call. Thank you very much for joining us today.

Ladies and gentlemen, this concludes the Digirad Corporation 2008 fourth quarter and year-end results conference call. You may now disconnect. Thank you for using the conference center.