Star Equity Holdings Inc (STRR) 2009 Q1 法說會逐字稿

Welcome to the Digirad Corporation 2009 first-quarter results conference call on the 30th of April, 2009. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). I will now hand the conference over to Mr. Matt Clawson. Please go ahead, sir.

Thank you, Carol. Thank you all very much for joining us this morning. And if you did not receive a copy of today's press release and would like a copy, please contact our office at 949-474-4300 after the call and we would be happy to send you one. 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 would 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 marketshares 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 the 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 and 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 and Richard Slansky, Chief Financial Officer. Management will discuss the first-quarter results, update us on the Company's new strategies and comment on the Company's outlook for the current year. The question-and-answer period will then follow. Now with that, I would like to turn the call over to Todd Clyde. Good morning, Todd.

Thank you, Matt and good morning, everyone. I would like to thank you all for being on today's call and for your interest in Digirad. Whether you are joining us live this morning or listening to the conference call on replay, we hope to make the next few minutes informative and useful.

First, as Matt announced, I am pleased to have the newest member of our executive team with me today. Richard Slansky joined us in March as our Chief Executive Officer (sic). We are very fortunate to have attracted an executive of his caliber to our team. He has extensive financial and operational experience and it is already clear he is a great fit for our organization.

We are off to a solid start this year having generated net income in the first quarter and our cash burn during the quarter was less than we had expected. As a reminder, the 2009 goals we laid out at the beginning of the year are create greater efficiency by selling or closing underperforming hubs, improving our approach to launching and growing our Centers of Influence strategy, introducing new technologies, developing new technology platforms and lastly, making progress towards consistent profitability and positive cash flow. We are already ahead of our plan on nearly every one of these goals.

In addition to recording net income in the first quarter and burning less cash than anticipated, we have sold or closed all but one underperforming hub, achieved double-digit growth in our current Centers of Influence locations and launched our Cardius X-ACT rapid cardiac SPECT/VCT imaging system to help us open the hospital and large cardiology practice markets.

Net net, we did what we said we would do in creating a more profitable core DIS business and continuing to make product advancements that we believe will open new markets and long term, help provide better and more accurate diagnosis of disease. I believe these were significant achievements given the difficult economic conditions and our early indications that the steps taken since I took over as CEO in the late fall of last year are moving Digirad forward and I believe in a position of regular and growing cash flow and profits.

On the camera side of the business, the momentum that was there at the end of the year was much weaker during the first quarter as buying decisions were put off or pipeline opportunities were canceled due for the most part to economic uncertainty. Although we don't believe the economic trends will return to normal anytime soon, we expect to set the stage for the future, gain an increased acceptance in credibility of our X-ACT system with the more sophisticated users in the hospital in large practice markets.

We also remain committed to long-term expansion of our DIS leasing of personnel and equipment business through our Centers of Influence strategy. While we do not have specific plans to expand beyond the current locations in 2009, we continue to further penetrate the markets of our existing Centers of Influence as evidenced by double-digit revenue growth and strong profitability in the first quarter. We believe this strategy is working and are pleased with our progress thus far.

Our restructuring efforts have allowed us to focus our efforts on a core group of hubs, driving margins as we improve utilization and density or essentially capture more customers in a smaller area. We believe as we put these around Centers of Influence locations and partner with these great influencers and then reach out to community physicians that we will continue to strengthen that DIS platform as a whole.

We announced in February that our Board of Directors had authorized a stock buyback program to repurchase up to an aggregate of $2 million of outstanding common stock. Due to open window restrictions and trading volume limitations, we were only able to repurchase approximately 11,000 shares thus far. Our intent is to continue to repurchase shares in the open market each quarter and we will keep you updated on our progress.

I am very pleased with the strength of our core DIS business, our position as a leader in the nuclear cardiology market in our product segment and our ever committed employees. We are clearly on the right path and have solid momentum in reaching our goal of consistent profitability and cash flow. I am confident we will continue to strengthen Digirad as a premier healthcare company now and in the future.

I will now turn the call over to Richard Slansky who will review some of the financial results more specifically. Richard?

Thank you, Todd and good morning, everyone. First, let me say it is a pleasure to be here. I am very excited about the prospects for Digirad and I am honored to be a member of Todd's management team. As Todd mentioned, we will have time allocated for questions later, but I would like to share with you some of the financial results.

The first-quarter results were strong, especially given the difficult economic environment. While total revenues declined slightly from last year's first quarter, we achieved marginal profitability during the quarter and the cash consumed during the quarter was within our expectations and significantly improved in comparison to the prior year's first quarter. Revenues were $17.7 million during Q1 of '09, which represented a decrease of $600,000 or 3.1% of sales compared to the quarter one of '08 due to a decrease in revenue in our product segment. We experienced improved utilization and profitability from our core group of DIS locations and solid contributions from our Centers of Influence locations.

Imaging revenue was essentially unchanged from the prior year at $13.9 million while product revenues decreased 12.6% from $4.4 million last year at this time to $3.9 million this year as economic factors contributed to a decline in the number of cameras sold from 11 cameras in Q1 of '08 to 9 cameras in Q1 of '09 and as our average selling prices for our gamma cameras declined as a comparatively large number of refurbished cameras were sold this year.

We believe that the decrease in gamma camera sales is primarily due to the slowing economy, the reduction in credit available for potential buyers and continued pressure on imaging reimbursement rates. Although a portion was due to timing of first-quarter sales slipping into the second quarter. The decline in our camera sales revenue was partially mitigated by a 13.5% Q1 '09 increase in maintenance contract revenues compared to Q1 of '08.

Consolidated gross profit was $5.1 million for 2009, representing an increase of $700,000, or 15.8% compared to the prior year quarter. The increase in consolidated gross profit is principally the result of the realignment of our DIS segment, which began in the fourth quarter of 2008 and continued into the first quarter of 2009. Consolidated gross profit as a percentage of revenue increased to almost 29% for 2009 from 24% in 2008.

Costs of DIS revenue consists primarily of labor, radiopharmaceuticals, equipment depreciation and other costs associated with providing services to our customers. Costs of DIS revenue were $10.2 million for 2009, representing a decrease of $700,000 or 6.6% compared to the prior year quarter. The decrease of DIS revenue is primarily a result of decreased labor, radiopharmaceutical and depreciation costs.

DIS gross profit was $3.7 million for 2009, which represents an increase of $700,000 or 24%. DIS gross profit as a percentage of revenue increased to 26% for 2009 compared to only 21% for 2008. The improvement in operational performance was primarily associated with the realignment of the services business, which did include the sale or closure of underperforming DIS hub locations.

Cost of product revenue primarily consists of materials, labor and overhead costs associated with the manufacturing and warranty of our products. Cost of goods sold for the product segment was $2.4 million for 2009, representing a decrease of $500,000 or 18.3% of sales compared to the prior year's quarter due to the decrease in gamma camera sales activity.

Product gross profit was unchanged from the prior year at $1.5 million. Product gross profit as a percentage of revenue increased to almost 38% for 2009 from 33% in 2008 due to the change in the relative mix of camera and maintenance contract revenues.

System utilization for the quarter was 62% of 154 nuclear and ultrasound systems compared to 64% of 143 last year. Operating expenses included $145,000 in restructuring charges recorded in this year's first quarter, decreased 17% to $5.1 million from $6.1 million in the prior year quarter.

Loss from operations in the first quarter, which included a restructuring charge of $145,000, decreased significantly to $95,000 from $1.7 million in the prior year quarter. Without the restructuring charge, we would have reported an operating profit in the first quarter. So let me repeat that. Without the restructuring charge in the first quarter, Digirad would have reported an operating profit in the first quarter.

As it was, our consolidated net income for the first quarter of 2009 was $44,000 or $0.00 per share compared to a net loss of $1.4 million or $0.07 per share during the first quarter of 2008. The improvement in our operating results was mainly due to increased DIS gross profits and a reduction in our operating expenses, which were primarily achieved through the restructuring initiatives implemented by us in the fourth quarter of 2008 and the first quarter of 2009. Our net income would have approached $200,000 or $0.01 per share without the first-quarter restructuring charge.

And finally, let me touch upon cash. We consumed less than $200,000 of cash during the first quarter, which was in line with our expectations and a significant improvement when compared to the $5.3 million of cash, cash equivalents and securities available for sale used during the first quarter of 2008. We continue to hold more than $28 million in cash, cash equivalent and securities available for sale or approximately $1.48 per share at the end of the first quarter.

Our strong start in the first quarter gives us a foundation on which to continue to execute our plan to attain profitability and generate positive cash flow. The impact of the economy on physician and hospital purchase decisions is clearly the wild card for many healthcare companies and we are not immune to these trends. We do believe our strong balance sheet is an advantage during these uncertain times and will be a real value driver in the months and quarters ahead. With that, I will turn it over to the operator for questions. Carol?

(Operator Instructions). Stephen Silk.

Yes, it is Stephen Silk. My question is why were you not more aggressive on the share repurchase of the common stock?

Stephen, this is Todd. We were as aggressive as we could be based on our limitations that were in place. This is a [18b] plan and we are able to purchase only a certain amount that represents approximately 25% of the trading, the average trading volume over the previous 30 days, I believe and those limitations kept the number pretty low. And we also had a Board member who was buying and we let his shares be purchased first before we got into the market.

The way that we can buy a larger chunk is through blocks and so we will continue to look for blocks as we are out into the market over the next 30 days. But generally in a quarter, we are closed 60 days out of the 90. So we are hoping to be a lot more active this coming quarter.

That is one of the limitations, Stephen, in the 18b plan is the open window trading period. There is a very limited open window trading period where we could go out and buy the shares.

Will you continue to be as aggressive as possible going forward?

Absolutely.

Okay. I came onto the call a little bit late. Could you talk a little bit more about the Centers of Influence and how things are progressing there?

Yes, things are progressing very well. We saw double-digit growth in our Centers of Influence locations. We believe that we continue to not only entrench ourselves more with the relationships of those centers, but also we continue to have good penetration with the community physicians in and around those regions.

So what our goals are this year is to continue to learn how to strengthen those relationships even further, make sure we know how to launch them correctly and then as we have gone through the restructuring, making sure that we have the right personnel in the areas where we have centers. So we still have a few centers that we are trying to get up and running to be more effective. And then as we do that and we gain that confidence, we will then advance into new centers.

Yes, that actually feeds into my next question about the growth in revenue from the Centers of Influence. Has that been the more established ones continuing to grow or how have the ones that came on later proceeded? Have they started to kick in more substantial revenue or are they kind of laggard to the early ones?

There are a couple that came out a little bit later that have lagged, but that has been based on our lack of having the right personnel in place. I think we have talked about this a few times on different calls where you have got to really have the right salesforce infrastructure and also operations infrastructure personnelwise to manage and foster the relationships and develop the business effectively. And we have had some turnover in a few of those areas.

So we don't look at it as not the right market, not the right COI, but really our internal personnel not being in place. So we have been working on that over the last few months. We still need those people to come up to speed and in a few spots, we don't have the right people yet and we will continue to drive that. But the other centers -- very, very pleased with what we are seeing and no question, there is great value in this strategy.

Okay. Has all the cash been recognized from the sales of the hubs or did some of that occur in the first quarter, but you haven't received the cash yet?

The transactions that we did were a mix of cash and debt and so we hope that, over time, we will be able to recognize as they service that debt essentially to us and we receive that asset.

And finally, within the quarter, you got the FDA clearance from your latest product. I know your goal was to start -- some (inaudible) you had been testing some. Could you bring us up to date on when that can be available for sale and the demand for it perhaps?

It is launched now. We just barely launched it here at kind of the tail end, middle of April and we are really excited about that product. The thought leaders that we are interacting with and those that are using it right now have been extremely positive on the feedback that has been provided. We will continue to market that product. We have a lot of interest.

Clearly, the challenge is what is happening with the economy and as you try to open up the hospital market, that is the sector that isn't really purchasing right now because their CapEx budgets have been just shut down. In fact, a lot of their budgets have really been delayed dramatically. But regardless of that, we also have a number of deals that we are working on right now and we expect to be able to place a number of those cameras, continue to gain more insight clinically on the camera and acceptance and adoption. And that is going to be really a strong marketing thrust for us during the balance of 2009.

What would the general range of the cost of that camera be maybe in relation to the existing -- I know they are not comparable, but how much in the general area would these new cameras cost and what type of margins would you be hoping to get?

Yes, I mean I guess my comment on the margins -- I will just take a much more general comment that we believe that the camera segment needs to continue to drive towards the 40% margin. And I think about that kind of more on the mid to longer term versus what you might see in this dramatic economy situation over the next handful of months or however long it lasts.

As far as the spread, yes, this camera is clearly a more expensive camera, but that is because there is much more value to the physician clinically as far as the clarity of what the camera provides. And it is probably in the range of the kind of mid to high $200,000 range where this camera will be sold, closer to the $300,000 mark.

I will give somebody else a chance. Thanks, Todd and good luck going forward.

Thanks, Stephen. I appreciate it.

[Anthony Giranza].

Good morning. A little bit more, if you can, on the market conditions. I understand it is getting more difficult to sell cameras and financing, but what do you see on a sequential basis? Do you see conditions getting more worse or the visibility is very low? I'd like to try to get a better picture.

That's a good question. I mean the NEMA data, which is a provider of industry information, came out with their first-quarter information and said that kind of the segment that we play in was down 40% in the first quarter of '09. So that is some information that clearly we felt in a real strong way.

The question is what is the crystal ball looking forward and how do we think about that and what are some of our thoughts. We believe that the market, in some ways, is starting to respond a little bit better. We appreciate that when you go into a practice that doesn't have nuclear cardiology, this is a moneymaking proposition for that physician. So even as they have a lot of economic challenges, this can bring income into the practice.

When you look at the larger hospital market, they are kind of backpedaling dramatically. I don't know that we would suggest that that is getting worse, but it would be a guess to say if it is getting a lot better. So we are looking at strategies that might take advantage of operating budgets versus capital budgets within those hospital markets.

We are working with financial groups to see if there are some creative ways to get the financing deals done and ultimately trying to put an arm around these physician groups and look at ways to enhance their asset utilization because they may have four or five cameras that they have had for a lot of years, many of them that are pretty old and they carry some pretty strong service contracts.

With our X-ACT system, you can scan so much quicker that you could replace multiple cameras at the same time and really make it so that your overall cost is lower. So those are the types of things that we're doing. It takes a lot of education and it takes a lot of discussion, but we are hopeful that we will continue to move forward. I would say that the camera segment was hit a little bit harder than we had expected and so we are making sure that we adjust our plans accordingly throughout the year.

That doesn't mean we are sitting on our laurels and we are going to just let that happen to us. We are going to do all we can to try to succeed regardless of the market. But it is going to be a dogfight and I guess it is a bit of a crystal ball to determine what will happen with the market over the next few quarters.

And Anthony, as you look at our financial statements, you will notice that a majority of the revenues are still being generated out of the service side of the business and that has not been hit as hard as the product side. The market numbers that you are asking about are certainly on the camera side for product sales, which is a smaller portion of our overall business. And we have seen a stronger movement on the service side, which we reported in the numbers, to somewhat offset, not completely offset, but to at least somewhat offset the declines we are seeing on the product side.

A question in terms of -- obviously the market conditions are impacting things, but in terms of the technology, I mean I have heard some discussion that certainly some of the CT scan technologies and things like that have improved in terms of cardiology and may put some pressure on your business. I mean are you concerned about technology change or pressure from other technologies at this point?

You are referring to other modalities in the cardiac space. And PET and CT angiography, for example, or cardiac MR would be maybe some of those larger pieces of iron that you might be referring to. I guess there is a couple of things. One, nuclear cardiology is really one of the front-line gold standards today. I do appreciate that investment is happening in those other modalities and they will continue to advance them.

If you look at what we're trying to do on the technology side in advancing that platform, we are trying to move it forward so that you can improve the diagnosis of disease, even what you able to accomplish today. I don't think that nuclear cardiology will suffer, but what we would like to do is make sure that as the technology advances happen in the other modalities that they are also continuing to happen in cardiology, so that certainly in the in-office space, it is absolutely the natural place where you would go. And for the majority of cardiac-related diagnoses in the hospital and large imaging space, that would still be the front-line diagnostic test.

And then sometimes, there is follow-up and there is other things that might happen, more acute situations that would go to those other modalities. But nuclear is definitely here to stay and I think that is the case. People thought that x-ray would receive its demise many, many years back, but it continues to be a real front-line diagnostic test. And nuclear provides perfusion information and the others are not there today where they can really provide that information.

Great. Thank you very much. Good luck.

Yes, thanks a lot, Anthony. I appreciate it.

[Allen Greshkin].

Hi, guys. My question is more of looking out to 2010. What other new products are you expected to launch later this year or early next year?

We talked about launching really two products during 2009. And X-ACT is the first one, so we actually launched that a little bit ahead of schedule, so we are really pleased with what is happening there. And then there are other products in the pipeline. Probably the one that I would focus on today is a product that we demonstrated down at the American College of Cardiology in Orlando last month in which it is a system that we refer to as [cPAX] and essentially it is an image management system. You can think of it as a real mini [PAX] solution.

But the key is hospitals in these large areas always had these image management capabilities, but the physician office really did not and still does not have necessarily access to great online reading solutions. Many of them are more desktop-oriented and so as physicians out of the office or on vacation or something like that, the technology just simply needs to catch up to meet the needs of those physicians. So we have been working with some outside groups to really have a product that we believe will be very, very clean, very streamlined and very sexy for the needs of those physicians and we expect to launch that in the coming months during 2009.

The other products that you would look if you are thinking about 2010 and further are products that continue on our roadmap to advance nuclear cardiology and objectively to try to drive new clinical protocols or really what I mean by that is how do you provide improved diagnosis versus what you are able to see today with this type of modality. And X-ACT is a first step in that process and in the future, will also be in that same vein.

We are really excited about it. We have a great R&D team. They have been able to produce some great products historically. We see no reason why that won't continue and that is why I think we will be really the premier technological advancing company in this industry.

Now the cPAX, it sounds like that almost expands your market a little bit?

Yes, a little bit. I think how I think about it is really bringing additional revenue per contract into play for us and meeting the needs of the physician. So you're a little bit more of a partner because you are giving them a great imaging tool, but then you are also facilitating the reading process as well.

Is there anything else out there that is similar?

Yes, there are. Absolutely. I mean the hospital PAX systems have been around for many, many years, but they have been very expensive and so cost has really prohibited the smaller practices from really participating in image management in a more robust way. We think today is really the right time to open that up. So from our model, it is meeting the needs of the physician and in turn, driving a little bit more revenue and more profit into kind of the average contract for us.

And lastly, who do you bump up against in terms of competition for selling the cameras?

Siemens and Phillips are probably the largest competitors and then GE as well. We don't bump into GE quite as much and I think that is because historically we have been focused on the in-office sector. As we move into the hospital market and larger practices, we will bump into them more. And in 2008, we were successful at actually displacing a number of those cameras.

That is part of our evolution. In the past, we were really the camera selling to the guy that was bringing cardiology into his or her practice for the first time, not necessarily displacing competing technologies. But we have certainly had nice success of doing that in 2008 and that will continue. And I think part of that is because we are the group that is innovating so rapidly on a practical basis.

Okay. And for 2010, are we looking at more camera sales to drive growth or Centers of Influence plus DIS I guess?

We continue to be committed to both business segments. And I think our intention is to really stabilize and create a focused core business in DIS, which we have 99% completed that experience and will continue to derive that through the Centers of Influence. We will continue to look at new service offerings to broaden that platform and make that successful.

We provide nuclear, we provide ultrasound and we are looking at ways to continue to mentor and assist the internal medicine physician and cardiologist to be successful with their practice. And then on the camera side, we expect growth there as well. So I wouldn't say that the chips are shifting to one side or the other. We will grow both sides.

Great, thank you so much.

All right, thanks a lot for the questions.

(Operator Instructions). There appear to be no further questions. Are there any further points you wish to raise, sir?

Sure. Maybe just a final comment here. The financial and operating performance in the first quarter continued to be a great indicator that a leaner Digirad organization is adopting changes necessary to move the Company forward and generate greater value for our customers and our shareholders. I believe we are in an excellent position to achieve regular positive cash flow and sustain profitability. I look forward to updating you of our progress on our next call and I appreciate all who have joined us today. Thank you very much.

That concludes today's conference call. Thank you for participating. You may now disconnect.