Star Equity Holdings Inc (STRR) 2009 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Digirad 2009 Second Quarter and Six-Month Result Conference Call. Today's conference call, July 23, 2009, is being recorded, and you are currently in listen-only mode. (Operator Instructions) I would now like to turn today's conference call over to Matt Clawson of Allen & Caron.

Thank you, Darlene. Thank you all very much for joining us today. 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 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, reimbursement and regulatory trends, radiopharmaceutical supply and competition. More information about these 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 today's press release.

The information discussed on 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 second quarter results, update us on the Company's key initiatives for 2009, and comment on the Company's outlook for the remainder of the year. A question-and-answer period will then follow. And with that, I would like to turn the call over to Todd Clyde. Good morning, Todd.

Thank you, Matt, and good morning, everyone. We appreciate you joining us. I look forward -- I'd like to thank you all on today's call for your interest in Digirad. We hope to make the next few minutes worth your time and attention.

In the second quarter, we built on our solid start this year, generating net income of nearly $800,000, an increase in our cash position in the period to more than $31 million despite the economic headwinds that you're all familiar with.

During the first six months of 2009, we have managed to generate $2 million of additional gross profit on nearly $2 million less revenue compared to the first half of 2008. As a reminder, the 2009 goals we laid out at the beginning of the year were to create greater efficiency by selling or closing under-performing hubs, improve our approach to launching and growing Centers of Influence, introduce new technologies, develop new technology platforms and, lastly, make progress towards consistent profitability and positive cash flow.

At mid-year we are ahead of our plan on nearly all of these goals. In the second quarter we closed the last of our under-performing hubs, completing that process. And while the elimination of seven hubs has had an impact on our top line revenues, the impact to our profitability is exactly what we had planned.

We are targeting revenue through the existing DIS teams and equipment. This increased utilization has been a key factor in our gross margin improvement in DIS during the first half of 2009. We continue our assessment of our Centers of Influence approach, and we have just completed some key hires instructional enhancements in both at the Chicago and Los Angeles regions. We'll be validating these improvements in the coming months.

On the product side of the business we experienced a rebound in our camera sales in the second quarter with a mix following the first quarter trends be weighted towards more used cameras than new cameras.

We also continued developing new imaging technologies. The launch of our Cardios X-ACT, rapid imaging SPECT volume attenuation correction system, is receiving a warm response in the marketplace despite economic and reimbursement concerns among physicians. As those conditions resolve in coming periods, we are optimistic that this camera will be one of the more exciting new products in the market.

In addition, we still anticipate releasing one more new product in this calendar year. At midyear, we have succeeded in doing what we said we would do six months ago -- creating a more profitable core DIS business and make product advancements that we believe will open new markets and provide better and more accurate diagnosis of disease. These are significant achievements given the difficult economic conditions, and I believe it is a solid first step in creating the kind of company that will capture the imagination of a much larger audience both in our target markets and in the investment community.

During the remainder of 2009, we will keep our focus on cash generation and profitability. Our key programs are not only being done on time, but are having the positive impact on our profit and cash objectives, and are placing Digirad in a financially firm platform.

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. During the second quarter we successfully repurchased approximately 200,000 shares of our own common stock, which was a maximum possible due to open window restrictions and trading volume limitations. Our intent is to continue to repurchase shares in the open market and we will keep you updated on our progress.

I am very pleased with the continuing strength of our core DIS business, our emerging leadership in the nuclear cardiology product segment, and I continue to be encouraged and grateful for the creativity and commitment of our employees as we face challenges and go after new opportunities.

Macroeconomic conditions and lingering questions about reimbursement rates will continue to pose a challenge to our customers and to Digirad in the near term, and the summer quarter is traditionally soft. So, seasonality is a consideration as we look forward in the near term. That said, we are clearly on the right path and have solid momentum in reaching our goals. I am confident we will continue to strengthen Digirad as a premier healthcare company now and in the future.

I'll now turn the call over to Richard Slansky, our Chief Financial Officer, who will review some of the financial results more specifically. Richard?

Thank you, Todd, and welcome, everyone, to our second quarter conference call. As Todd indicated, we have some very good news to share with you today. I'd like to take a few minutes to provide you with some detail and color on our second quarter and six-month financial results. As was mentioned earlier, we have time allocated for questions at the conclusion of our opening comments, so if we don't cover everything or something that you are interested in, please keep track of your questions and we'll get to them shortly.

Historically, our second quarter results have been strong, and this year was no exception as we take to make significant progress in our business, especially given the current difficult economic environment. Total revenues declined from last year's second quarter as expected due to hub divestitures and lower camera sales.

But what is really exciting is that we achieved significant year-over-year and sequential quarter-to-quarter increases in profitability during the 2009 second quarter. And even though we invested approximately $2 million in inventory and over $250,000 in our stock repurchase program, we increased our cash and cash equivalent balances by more than $3 million from the balances at the end of last year, leaving our total cash and cash equivalent balance at over $31.5 million. So, we did what we set out to do and, as Todd would say, made money and generated cash.

Total revenue for the 2009 second quarter was $18.6 million. This is compared to $19.9 million in the second quarter of 2008, which was due primarily to the sale or closure of certain DIS hubs earlier this year, and fewer camera sales. As a result of these factors, DIS revenue in the 2009 second quarter declined slightly to $13.6 million compared to $14.2 million in last year's second quarter, and product revenues also declined slightly.

Product revenues were $5 million in the quarter, down from $5.7 million in the second quarter of 2008, but up sequentially from $3.9 million in the 2009 first quarter. We did sell more used cameras in 2009 second quarter than in recent prior quarters, which helped both our camera sales and positively impact gross margin.

Consolidated gross profit increased $1.3 million to $5.9 million, or 32% of revenue, up significantly from $4.6 million, or 23% in the second quarter 2008, and up sequentially from 29% of revenue in this year's first quarter. Net income was $784,000, or $0.04 per share, compared to a net loss of $1.2 million, or $0.06 per share in the second quarter of 2008.

Please allow me to repeat that. Net income was $784,000, or $0.04 per share, compared to a net loss of $1.2 million, or $0.06 per share in the second quarter of 2008, a substantial result.

Throughout this year's second quarter we continued to focus on fundamentals, including a strong focus on collections and those efforts helped to substantially increase cash and reduce our DSOs to 47 days, which was an improvement of seven days from their first quarter level.

As mentioned earlier, cash and cash equivalents and security available for sale totaled $31.5 million, or $1.66 per share at June 30, 2009. This can be compared to our cash and cash equivalents and securities available for sale balances of $26.9 million at June 30, 2008, and $28.3 million at December 31, 2008.

Going forward, we will continue to work on increasing collections and reducing DSOs, while we also set up our focus on reducing inventory. We believe these ongoing efforts will positively impact our ability to increase liquidity and generate incremental cash. DIS asset utilization was 63% on 155 nuclear and ultrasound systems in the second quarter, compared to 57% on 164 nuclear and ultrasound systems during the second quarter of 2008.

Cost of DIS revenue consists primarily of labor, radiopharmaceuticals, equipment depreciation, and other costs associated with providing services to our customers. Cost of DIS revenue was $9.5 million for the second quarter of 2009, representing a decrease of $1.9 million, or 16.3%, compared to the prior year comparable quarter. The decrease in cost of DIS revenue is primarily a result of decreased labor, radiopharmaceutical and depreciation costs.

DIS gross profit was $4 million for the second quarter of 2009, which represents an increase of $1.2 million, or 42.3%. DIS gross profit as a percentage of revenue increased to 30% for the 2009 second quarter from 20% for the same period in 2008. The improvement in operational performance is primarily associated with the realignment of the services businesses which included the sale or closure of under-performing locations as mentioned by Todd earlier, along with improved DIS asset and team utilization.

Now, cost of product revenue primarily consists of material, labor and overhead costs associated with manufacturing and warranting our product. Cost of goods sold for the product segment was $3.1 million for the second quarter of 2009, representing a decrease of $800,000, or 20.5%, compared to the prior year quarter, as fewer gamma cameras were sold, and as our product sales mix is represented by a larger number of refurbished or used cameras.

Product gross profit was $1.9 million for the second quarter of 2009, which represents an increase of $100,000, or 7.7%. Product gross profit as a percentage of revenue increased to 37% for the 2009 second quarter, from 30% for the same period in 2008, primarily due to the change in the change in the mix of cameras sold, along with certain deficiency and cost improvements.

I would like to now briefly review our financial results for the six months ended June 30, 2009. Total revenue for this year's first six months is $36.3 million compared to $38.2 million for the first six months of 2008, down slightly due to the reasons that I mentioned before. DIS revenue was $27.4 million compared to $28.1 million for the first six months of 2008, and product revenues were $8.9 million compared to $10.1 million for last year's first six months.

Gross profit for the 2009 first six months was $11 million, or 30% of revenue, up from $9 million, or 23% of revenue for the first six months of '08, a significant improvement. This year's first six months' net income was $828,000, or $0.04 per share compared to a net loss of $2.6 million, or $0.13 per share for the first six months of 2008. That represents a $3.4 million swing, from a loss of $2.6 million to a profit of $828,000 in one year for the six-month period.

DIS asset utilization in the first half of 2009 was 63% on 155 nuclear and ultrasound systems compared to 60% on 164 nuclear and ultrasound systems during the first six months of '08.

Finally, as an additional note of information, we had indicated in our recent proxy materials that we intended to offer eligible employees the opportunity to participate in an option exchange program whereby they surrendered old options under the Company's existing equity incentive plans that were well underwater. In return, those eligible employees had the opportunity to receive an exchange option award for a smaller number of options at a lower exercise price.

On July 9, we canceled options to purchase an aggregate of approximately 1.1 million shares of our common stock, and in exchange we granted those employees new options to purchase an aggregate of approximately 400,000 shares of our common stock with a two-year vesting. This program has been successfully completed and we believe it will be a key factor in retaining a talented and engaged employee base going forward.

In conclusion, we had a good first quarter start, which we followed up with an even stronger second quarter. We are building a solid foundation on which to continue to execute our 2009 plan. Our focus is to continue to increase profits and generate cash. The impact of the economic downtown and the timing and strength of any future recovery, however, remain variables that create uncertainty for many healthcare companies, and we are not insulated from those uncertainties. We do believe our strong balance sheet and our progress to date for generating consistent and increased profitability and positive cash flow are advantages during these uncertain times, and will be real value drivers in the months and quarters ahead.

With that, I'll turn it over to the operator for questions.

Thank you very much, Matt. (Operator Instructions) Okay, it looks like our first caller is Stephen Silk from C. Silk and Sons, Inc. One moment as I transfer the caller.

Good morning. A couple of questions that are somewhat all over the board. Shares outstanding and the share repurchase, the diluted number of shares that has increased by about 400,000, as well as -- which should have been somehow a reduction of 200,000 shares that you bought in the quarter. I would have thought -- well, I understand that you could have been more aggressive because of the timing or what-have-you, but shouldn't we see the number of share stock going down instead of increasing?

On the balance sheet, are you looking at the separate line that we're talking about treasury stock?

No, I'm looking at weighted shares outstanding. Diluted went from 18.9 to 19.3.

Well, okay. If you look in the 10-Q that we filed, you'll notice the actual number of shares outstanding, which is a weighted average balance,, is identified on the balance sheet, and we separated out the treasury shares that we're buying back from the number of shares outstanding. So, it's two different items. But on average, what you'll see is that number going down in the future. We still have not retired those treasury shares. Those treasury shares will remain registered and outstanding, but they will show up separately on our balance sheet going forward.

When you do an exchange with the employees, would you have a reduction in shares outstanding on a diluted basis by the 1.1 million, and the increase by 400,000?

No, the number of shares outstanding is not going to reflect the number of options that are available. The number of options that are available remain the same. Actually, the 1.1 million, although we bought those back and we issued 400,000 shares, the 700,000 share difference is going to remain available for a grant and has not been affected in any way on the financials.

Okay. Could you talk about how much of the cash flow that you've added, the $3 million, came from sales of the hubs? And how did you record either the profit or loss from the sale of those hubs?

We didn't go into the specific detail of how much cash was generated off the sale of the hubs. The amount that -- the gain or loss on the sale of the hubs was put into the restructuring line on the P&L. If you focus on that number, you'll see that. The reason why we hadn't announced historically how much we sold the hub for is because we had continued to be in negotiation with other individuals.

Okay. Let me maybe ask that a different question. What would be the free cash flow from operations?

It's still well over $2 million.

Okay. So, you're buying about $250,000 worth of stock to buy 200,000 shares, and you've increased the cash nicely from continuing operations. So, what would you say now would be the best use of your cash at $31 million, if it continues the way -- you continue to be able to add onto the existing cash?

I think the first comment I would make is we're really pleased to be able to get into this type of a conversation, and we want to continue to drive the business so that it can generate cash. We appreciate that we're not spending a lot of money right now on CapEx. But regardless, even if we're at a run rate CapEx level, we believe that we would be generating positive cash, and we remain committed to our goal of generating consistent cash and profitability in the Company.

Once you do that, then you really open up a lot of opportunities, as you are highlighting, to utilize the cash in new ways. I think that in the marketplace there are a lot of ways that you could utilize that cash, and we won't be focusing on that during the remainder of this year, but in the near future thereafter we will start to move our discussions and our strategic viewpoint into how to utilize that cash even more effectively.

Okay. I have questions about trends in two areas. The growth and more interest in the camera sales, the sales that occurred in second quarter, did that eat a lot of your backlog, or have you maintained a backlog? Have you increased the backlog? Has the sales cycle been longer so that you might have more availability that has taken a little bit longer to recognize?

And then my other trend question would be in the Centers of Influence, has the revenue increased through the Centers of Influence, and has it continued to be a growth mostly from the ones that have been best established and continue to grow, or have you started to see some growth in the later Centers of Influence that have started may be a little bit slower than you thought and maybe could be picking up some?

So, there are roughly 10 questions there. Let me see if I can try to navigate through those questions, and I'll start on the product side, okay? First of all, we always have book and bill activity that happens in any given quarter. We still have a significant amount of backlog in relationship to these depressed levels. We believe that we will be able to push more of that backlog out during the third quarter.

So, the big swing vote for us is how do you on your bookings, right? And either fill in the gap where you're short on the third quarter, and then certainly setting yourself up for a stronger fourth quarter. And unfortunately we continue to have a mix that is much more related to buyers looking to buy used cameras than they want to pay the price of a full camera.

When you look at sell cycles, yes, the sell cycles have been pushed out and delayed. Uncertainty and economic conditions have created that for buyers. If you look at the hospital market, their budgeting constraints have really, really tightened down and they are not spending a lot of money. And we're trying to actually open up that market as one of our initiatives with our Cardios X-ACT camera. We're pleased with the reception that we're getting. It's been very well received as a camera, but that's not going to necessarily translate into a high volume of sales during this period because of all these challenges that they're facing.

So, what we're trying to do is spend our time with these groups and either the hospital administrators and physicians or large cardiology practices, and making sure they understand this product, that they're well aware of it, and it does get into some buying cycle, even if those buying cycles are delayed and being pushed out significantly. So that once the market turns back around, Steve, we're in a great position to really take advantage of that.

So, I'm really pleased with what we're seeing. We were hoping that the market would be stronger than it is, but we're having to deal with it that way, okay? So, that's kind of how the product dynamics are impacting our business.

Shifting to DIS and the Centers of Influence, we have been focusing on driving growth and profitability in the existing locations, and we've done that with the exception of a couple of key markets, where we really haven't had the personnel in place to drive improvement both on the sales side and on the operational management side. And so we've been spending time hiring the right people, getting them onboard, and now they're coming up to speed. So, we talk about the LA and Chicago markets as examples of that, and we recognize we cannot make a COI market successful without those key ingredients. So, now we've got to work over the coming months to bring those folks up to speed and drive energy and activity in those key markets.

I'm pleased with what we're seeing in markets such as up in Baltimore at Johns Hopkins, in Houston with Methodist. We continue to have good experience with Emory in Atlanta, for example. So, I feel like this is a really good program. I think it's a good sell and marketing strategy for sure, and we're trying to assess how we do it effectively and what does it possibly do for retaining physicians and customers in our entire network? And we don't know that quite yet. It may take us a much longer period to really articulate if it had a significant improvement on retention of customers, for example.

But we're excited about what we're seeing in DIS, because as we've gotten rid of some of these under-performing locations and focused on a core group, we've really done a nice job of driving much more utilization through the labor, or revenue through the labor and through the system itself, and you're seeing a real significant improvement in the gross margins because of that.

So, we're not going to be probably superstars in every single market. We're also working diligently to make sure we understand all the markets that we really can penetrate so that as we come back out with how we might continue to grow that business and what markets and over what time, we'll be in a much better position than maybe we have been during the front part of phase one, as we're trying to launch and test that market.

I would assume from your perspective it's easier to incubate some of those Centers of Influence in a period where the rest of the business is generating cash and you're not leaking it.

Oh, yeah, absolutely. And I think when you look at a couple of the markets that I talked about, these are very large markets and you need to find strategies to penetrate them. They all have their own personalities, and that's another part of the equation, right? How healthcare is delivered in the LA market is much different than probably how it is delivered in the Atlanta market. And we have to have some flexibility within our approach to address those effectively and launch.

But my comment is that we have so much capacity in the current markets, let's really make sure we drive that capacity, which helps you be more efficient and much stronger before we worry about going into a new market. I don't know, you could pick 10 of them, but let's say Seattle, right? We're not in Seattle right now. That ought to be a good market. We haven't been successful there historically, but let's make Chicago work first. Makes a lot of sense to me.

Okay. So, my final question and I'll give it up to everybody else, is has there been any revenue from X-ACT yet? And the other question to follow on that, was since you have a stronger cash position, would you look at lease-to-own type of situation, where you could somehow use your cash to finance some of these hospitals that might not be so interested in making an initial capital outlay but would be more inclined to be able to look at it on a lease basis?

Sure. The answer is, yes, we have sold X-ACT systems. We feel good about where we're heading there. We've sold one, for example, into a really large cardiology group in New York. We've sold others into several hospital settings, and I think that the adoption is going to be strong. The reception that we had at the Society of Nuclear Medicine was really, really good. I think it's a great camera and I expect success from it.

As far as financing capabilities, I think we're open to that. We have to make sure that we understand the risk in the profile of the physician. It's usually not a hospital that is looking for the financing, it's usually an independent or smaller practice physician group, and we're open to considering some rentals and maybe even some lease financings of some sort. It would not be a massive number, but it's something we're considering.

Well, good luck going forward and it's exciting to see the trend, anyways.

Thanks a lot, Stephen, appreciate it.

Okay.

Okay, thank you. It looks like our next caller is Anthony Chiarenza, and Anthony is from Key Equity Investors, Inc. One moment as I transfer Anthony to live mode.

Good morning. Thank you for taking my question. Following up a little on the cash usage, I appreciate your approach of looking at it next year, but one thought that I do have is given the current market conditions, you would think there would be some real good opportunities to pick up some assets or some companies, or product lines that are available just because people are stressed. So, might it not make sense to even look at things now, given that things are cheap and given that things may become much more expensive next year as opportunities come along?

Yes, sure. I mean, I think that's a very valid viewpoint. From our perspective, we have to make sure that we have the right personnel, the right process, and a foundation to really go out and assess that. We don't want to just start looking at the very first thing that comes along and try to make either an acquisition or bring in a different product line, or look at ways to expand on those assets. We want to make sure that we do it in a methodical way that really adds excellent long-term value for our shareholders. And so we appreciate that we've got some legwork to make sure that we have the infrastructure to do that.

So, we will work on that, but we're first going to make sure that we have that real clear vision for the next step of the business, right? We want to stay focused on this key initiative and make sure that we've really done a firm job at turning the Company around, so that if you went out you wouldn't make a mistake at that next step, as you were highlighting.

I think that the whole focus in the Company, and you've followed this probably the last few quarters, has been to generate cash and actually make money, and create a solid financial foundation so that we can move forward. And certainly we're very encouraged with two quarters of very good performance. And our hope and expectation is that this is going to continue. But two quarters does not a turnaround make, either.

So, we are cautious in that regard. We want to make sure that we're doing the right things. We don't seem to need to protect that cash balance any longer to support historical losses, and so the discussions are centering around what do we do with that funding, how to best increase shareholder value going forward. And whether we do it this year or next year, those discussions are underway now.

I think that's a good answer. The second question is on radiopharmaceutical availability. I know you've mentioned in the queue that there was some issue with availability. Is that an issue at this point, given as you grow?

The availability was an industry-wide challenge. There is a reactor in Canada, the Chalk River reactor, that is down and was down due to some leaks. They talked about it being a short-term scenario, then they came out recently extending that, that it will probably be down until the end of the year. And it's one of the largest providers of technetium, which is the isotope that is utilized in our imaging space. So, it does create some challenges for physicians, hospitals, and certainly our business.

We continue to do a pretty good job of working through it, and we've had very few cancellations based on isotope shortages. There is another isotope thallium that can be utilized as well, and thallium is not generated in a nuclear reactor, but in a cyclotron, so it's a little bit different process, and the accessibility of that is a little bit easier.

Now, it's not really the best agent for a cardiac SPECT image and it has some limitations, and so we keep working through that. There is even some pretty interesting things that we can do with technology to be able to use lower dose, but we're looking at how those protocols may come into play.

So, currently it's not a large impact on our business, but recognize that other reactors will go down for maintenance that will put even more strain on the system as a whole. This is probably not an issue that will be remedied in the short term based on the age of the reactors around the world.

So, the impact now is minimal. So, it could be significant as the business continues to grow. Is that a concern?

You know, I guess it depends on how long-term you're looking out, but my expectation is that those involved specifically in the isotope industry will find solutions to make it so that either less dose is required for certain scans, that different isotopes can be used for other nuclear procedures that open this up more for the cardiac specific area. There are even different levels of reactivity that Covidien is working on, as an example, and they're trying to find new solutions and no approaches. So, I think that over time it will be addressed and solved.

Good. Thank you. Congratulations on an excellent quarter. Good luck.

Thanks a lot. Appreciate it.

Okay, it looks like that was the last question for the call. At this time I would like to turn it over to our management for some closing statements.

Great. Thank you very much. I'd like to make just a final comment or two before we close. The financial and operating performance in the second quarter reflects progress and indicates the Digirad organization is headed in the right direction. Those changes and those we will be rolling out in the second half of the year are aimed at moving the Company forward and generating greater value for our customers and our shareholders. I believe we're in an excellent position to achieve those things in a significant and regular manner.

I look forward to updating you on our progress on our next call, and I appreciate all of you who have joined us today either in person or in the listen mode, or even on a replay mode. Thank you very much for your continued interest and support for Digirad. I'll turn it back to you, Operator.

Thank you, Matt, Todd and Richard. Ladies and gentlemen, that concludes the Digirad 2009 Second Quarter and Six-Month Conference Call. Thank you for joining us. You may now disconnect.