Star Equity Holdings Inc (STRR) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Digirad Corporation 2009 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).

Now I would like to turn the conference over to Mr. Matt Clawson of Allen & Caron, the Company's Investor Relations firm. Please go ahead, sir.

Thank you, Josh, and thank you all very much for joining us this morning. 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'll 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 share, and other topics related to the Digirad 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 report 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 on this morning's 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 fourth-quarter and year-end results, update us on the Company's new strategies, and comment on the Company's outlook for the 2010 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. I would like to thank all of you for being on today's call and for your interest in Digirad. Whether you are listening live or via replay, we hope to make the next few minutes worthy of your time and attention.

Before I talk about our plans for 2010, allow me to discuss some of our key results and accomplishments in 2009. I will then end with a glimpse into the future.

At the start of 2009, we created a specific set of strategic goals based on managing Digirad through a very difficult and fragile economy, as well as overcoming the disappointing historical financial results of the Company. We promised to number one, create greater efficiency by selling or closing underperforming hubs. We did that at the beginning of 2009, and continued to drive improved margins in our DIS services business throughout the year.

Number two, we promised to improve our approach to launching and growing our Centers of Influence. We did that.

Number three, we promised to introduce new technologies. We did that by launching our Cardius X-ACT attenuation correction system, and our c.pax software package.

Number four, we promised to develop new technology platforms. We did that, as well, and you will see that by further evidence of the new system that we talked about on our press release this morning, which is a large field of view portable camera that we will launch in the summer of 2010.

And lastly, we promised to make progress towards consistent profitability and positive cash flow. We did this as evidence by increasing our cash and investment position to nearly $32 million at the end of the year compared to $28 million at the end of 2008.

By all accounts, we did what we said we would do in 2009. We were able to fulfill each of our goals successfully, thanks to the hard work and dedication of our entire team at Digirad. I am very proud of the efforts put forth by each member of our team to make this happen.

2009 was a very difficult year. Like many medical device companies, our reimbursement levels were either cut back or cuts have been looming, and there was great uncertainty for the future of health care, particularly as outlined by President Obama's Health Care Reform Plan. I think we succeeded in 2009 despite the many market and environmental challenges before us. I think we demonstrated that we are an agile and innovative company with a solid management team that can create a solid future for Digirad despite the challenges in front of us.

Our management team is very focused on creating value for our shareholders. Operationally, we made changes at every level of the organization in order to become more lean and agile. Those efforts resulted in higher gross margin for 2009 than in 2008 -- $20.2 million or 29% of revenue in 2009 compared to $20.1 million or 25% of revenue for 2008.

Our CFO, Richard Slansky, who is also with me this morning, will review more of the numbers in a few minutes, but we are very proud of the fact that we turned a profit this year -- more than $600,000 in net income compared to a loss of nearly $7 million in 2008. We believe attaining profitability in 2009 was a substantial success, considering it was one of the most difficult economic conditions in recent history and despite substantially lower revenue levels.

As I mentioned, one of our strategic strategies for 2009 was to sell off underperforming hubs and streamline DIS operations, while, concurrently, creating momentum and positioning ourselves for growth when our industry and the economy turns around.

One of the keys for future growth was then, and still is now, to continue to develop our technology platform, design new products and introduce new service offerings through our current channel. We have pushed forward on all three fronts, and we will continue to bolster our reputation through the steady development of our technology and service offerings.

Specifically, on the camera side of our business, we focused on developing and introducing two significant new products that have already gained preliminary acceptance from our customers. We believe these two products are web-based c.pax imaging management system, and our proprietary Cardius X-ACT imaging system will prove to be important revenue drivers in 2010 and in years to come. They both demonstrate to our customers and our investors that we are an innovative and evolving company that can continue our leadership in the cardiac imaging industry.

We believe the Cardius X-ACT imaging system will prove to be a measurable step forward in our strategy to drive the evolution of nuclear cardiac imaging and penetrate the large cardiology practice in hospital markets in 2010. The innovations in the exact Cardius X-ACT system were designed to increase diagnostic accuracy and clarity. Overall, it provides new clinical information that raises sensitivity and specificity of nuclear cardiology procedures that will increase diagnostic confidence in nuclear cardiology and raise the standard in the industry for spec system performance.

In October of 2009, we introduced our c.pax imaging management system, a product for both our camera and DIS customers. C.pax is an online structured reporting and picture archiving and communication system. It is designed to reduce capital information technology, support and maintenance costs while increasing practice workflow activity. In brief, it allows our cardiology clients to instantly access their patients' imaging studies and reports via the Internet from anywhere. We plan on rolling this product out to our DIS customers in the middle of 2010.

Also, in 2009, we worked very hard to create a leaner and more productive organization. That meant taking a hard look at our DIS hubs whenever and wherever possible, either selling or closing any we considered underperforming. We knew the loss of revenue from those hubs would impact our top-line revenue, but the net result has been higher collective utilization and profitability in the remaining customer network.

We also began a new initiative to create a local ownership-type model within DIS. To this end, we created business managers in nine locations and are rolling out a passion to care and serve the customer model for 2010 and beyond.

We believe that there is great value in the customer relationships that exist via our DIS network, and our existing Centers of Influence. While we have streamlined that organization, we are working hard to increase its value and the value of the Digirad relationship to those physician groups. We believe that our channel, if you will, into our many physician offices across the country can and will be a great source of information and potential revenue in the future. We plan to explore this heretofore mostly untapped channel in 2010.

I will turn the call over to our CFO, Richard Slansky, to go over our numbers in more detail. I'll return after Richard's remarks and offer some closing thoughts before we open up the call for questions. Rich?

Thank you, Todd, and good morning, everyone. I would like to take a few minutes to provide you with some detail and color on our fourth-quarter and year-end 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 will get to them shortly.

2009 was a difficult but breakthrough year for us. During 2009, we achieved our goal of attaining profitability and positive cash flow despite a downturn in the economy, declines in reimbursement rates from federal health care programs and a shortage of radioisotopes and radiopharmaceuticals used in the leasing of our equipment. Our consolidated operating profit increased by $7.7 million to $58,000 in 2009 compared to a loss of $7.6 million in 2008. We worked very hard to achieve this result, and we are very proud of this huge turnaround in operating profit from a sizable loss in 2008 to a profit, albeit small, in 2009. We also increased our cash and investments in securities by $3.5 million in 2009 to over $31.8 million, another very good indicator of our strengthening balance sheet.

Total revenue for the 2009 fourth quarter was $16.4 million, compared to $22 million in the fourth quarter of 2008, which was mainly due to fewer nuclear gamma camera sales, the disposition of certain DIS hubs earlier in 2009, and a generally weaker economic climate. DIS revenue in the 2009 fourth quarter declined to $12 million compared to $14.2 million in 2008 fourth quarter.

Product revenue in the 2009 fourth quarter declined to $4.4 million compared to $7.8 million in the same quarter of 2008. We do expect to DIS revenue to continue to represent the larger percentage of our consolidated revenues in the future.

Consolidated gross profit decreased to $4.7 million compared to $6.3 million in the fourth quarter of 2008. However, our overall gross margin as a percentage of sales for both periods were 29%. And gross margins in our DIS business improved substantially from 20% a year ago to about 26% in this year's fourth quarter. This was due both to our restructuring efforts and the sale of our underperforming hubs.

I'm happy to report that we have net income for the fourth quarter of 2009. Our net income was $194,000 or $0.01 per share compared to a net loss of $3.4 million or $0.18 per share in the fourth quarter of 2008. That's a $3.6 million swing in quarterly net income in a year. As Todd stated, our mission in 2009 was to make money and generate cash. We did just that in the quarter.

Throughout this 2009 fourth quarter, we continued to focus on fundamentals, including a strong focus on collections. As mentioned earlier, cash and cash equivalents and securities available for sale totaled $31.8 million, or approximately $1.67 per share at December 31, 2009. This can be compared to our cash and cash equivalents and the securities available for sale balances of $28.3 million at December 31, 2008, and $31.1 million at September 30, 2009. So our cash was slightly up from the third quarter.

Also, please note that we did continue to buy our own stock back during the quarter. Going forward, we will need to continue to work on increasing collections and reducing DSOs, or days outstanding, particularly in light of the beginning of the year challenges, while we also focus on reducing inventory. We believe these ongoing efforts will positively impact our ability to increase liquidity and generate incremental cash in 2010.

I would like to now briefly review our financial results for the 12 months ended December 31, 2009. Although our revenue was down in 2009, we generated operating profits and net profits for the first time in a long time. Our consolidated revenue was $69.6 million for 2009, which represents a $10.8 million decrease or 13.4% compared to the prior year. The decrease was due primarily to the sale and closure of certain DIS hubs, a larger than normal number of DIS canceled days, combined with weak camera sales.

Our DIS revenue was $52.3 million in 2009, which represents a decrease of $3.9 million or 6.9% compared to the prior year. The decrease resulted from the sale or closure of underperforming locations in connection with the restructuring plan initiated in the fourth quarter of 2008, partially offset by revenue increases from our current locations. DIS revenue accounted for approximately 75% of total revenue in 2009. This is compared to approximately 70% for 2008.

Our product revenue was $17.3 million in 2009, which represents a decrease of $6.9 million or 28.5% compared to the prior year. This decrease in revenue was primarily due to a decrease in the number of gamma cameras sold in 2009 to 45 cameras compared to 85 cameras sold in the prior year, and the lowering of average sales prices as our product sales mix was represented by a larger percentage of refurbished cameras.

The decrease in revenue was partially offset by an increase in maintenance contract revenue to $10.3 million in 2009 from $9.1 million in the prior year due to the expansion of our installed base of gamma cameras. We believe that the decrease in gamma camera sales and the demand for refurbished cameras was due to the slowing economy, the reduction in available credit for potential buyers, lower levels of available capital budgets, and the continued downward pressure on healthcare imaging reimbursement rates.

To offset continued price pressures and declines in reimbursement rates on our gamma cameras, we introduced our new Cardius X-ACT product in 2009, which we believe will increase sales to the hospital and larger cardiology market in 2010 and beyond.

Consolidated gross profit was $20.2 million for 2009, which was essentially unchanged in comparison to the prior year as the increased gross profit in our DIS segment were offset by decreases in gross profit in our product segment. Consolidated gross profits as a percentage of revenue increased to 29.1% in 2009 compared to 25% in 2008.

Cost of DIS revenue was $38.5 million for 2009, representing a decrease of $6.2 million or 13.9% compared to the prior year. The decrease in cost of DIS revenue was primarily a result of decreased labor, radiopharmaceuticals for most of the year, and depreciation costs predominately attributed to the increased utilization of our personnel and assets.

Radiopharmaceutical costs did increase in Q4 due to the shortage of supply. DIS gross profits were $13.8 million in 2009, which represented an increase of $2.3 million or 20.3%. DIS gross profit as a percentage of revenue increased to 26.5% for 2009 from 20.5% in 2008.

Cost of goods sold for product segment was $10.9 million for 2009, which represented a decrease of $4.7 million or 30.1%, compared to the prior year as fewer gamma cameras were sold and as our product mix was represented by a larger percentage of refurbished gamma cameras.

Product gross profit was $6.4 million for 2009, representing a decrease of $2.2 million or 25.5% compared to the prior year. Product gross profit as a percentage of revenue increased to 36.9% for 2009 from 35.5% for 2008, primarily due to the sale of proportionately more higher-margin refurbished cameras and a decrease in personnel and manufacturing overhead costs as a result of our cost reduction initiatives.

Now operating expenses consist of costs such as research and development costs, marketing and sales costs and general and administrative expenses. Research and development expenses were $3.4 million in 2009, which represents an increase of about $600,000 or 21.6% compared to the prior year. The increase in research and development expenses was primarily attributable to higher personnel and development costs, as well as certain clinical evaluation costs related to our new Cardius X-ACT imaging system.

Marketing and sales expenses were $7 million in 2009, which represents a decrease of $1.6 million or 18.4% compared to the prior year, principally as a result of lower personnel costs. Marketing and sales expenses as a percentage of revenue were essentially flat in 2009.

General and administrative expenses were $8.9 million for 2009, representing a decrease of $2.9 million or 24.4% compared to the prior year, principally as a result of lower personnel costs. General and administrative expenses were 12.8% of total revenue for 2009 compared to 14.8% for 2008.

This all lead to an increase in operating income from a loss of $7.6 million to an operating profit of $58,000, as I mentioned before. We continue to look for ways to reduce operating expenses and focus our resources on revenue-generating activities.

Now our net income was approximately $600,000 for 2009 compared to a net loss of $6.9 million for 2008, or an improvement of $7.5 million, primarily as a result of the increased DIS segment gross profits and a substantial reduction in our operating expenses.

The reduction in our operating expenses was primarily achieved through the reduction of personnel costs and other restructuring initiatives implemented by us in the fourth quarter of 2008, the first quarter of 2009, and the third quarter of 2009.

Now as of December 31, 2009, we had cash, cash equivalents, and current securities available for sale of $31.8 million. Net cash provided by operations totaled $4.7 million in 2009 due to cash flow from net income plus nonoperating charges such as depreciation, amortization, and stock compensation.

Net cash used by investing activities amounted to about $3.7 million in 2009, primarily due to purchases of property and equipment and net purchases of securities available for sale. Net cash used in financing activities amounted to approximately $1 million in 2009 and represents the repurchase of common stock and repayment of capital lease obligations.

By way of an update, we announced in February of 2009 that our Board of Directors had authorized a stock buyback program to repurchase up to an aggregate of $2 million worth of our outstanding common stock under a 10b-18 plan. In 2009, we successfully repurchased about 500,000 shares of our common stock at a cost of approximately $1 million. We will be continuing this program in 2010.

So in conclusion, we are building a solid foundation and stabilizing our Company despite the uncertain health care environment and turbulent economic times. Our consolidated operating profit increased by a $7.7 million in 2009. Our cash and cash equivalent balances remain above $31.8 million despite our investment of $1 million in our own stock, which by the way, is now recorded as treasury stock in the equity section of our balance sheet.

Our management team remains focused on building shareholder value one step at a time. We are committed to achieve positive earnings and generate cash in 2010. The impact of the economic downturn and the timing and strength of any future recovery remain variables that create uncertainty for many healthcare companies, and we are not insulated from those uncertainties.

We are excited to take on the challenges before us in 2010. We do believe in our team, and under Todd's leadership, we're looking forward to a successful and rewarding year. With that, I'll turn it back to Todd.

Thanks, Richard. We are proud of our successes in 2009, but are not resting on our laurels. We have strong plans for 2010 and beyond. My vision for Digirad is to advance the Company into a profitable, diversified healthcare company specializing in early detection of disease through effective, insightful diagnostic testing by enhancing quality of life and driving positive healthcare economics for the provider and the patient.

In 2010, we will be working very hard to penetrate the hospital and large cardiology practices with our new Cardius X-ACT camera and the new portable camera that we plan to introduce in the middle of 2010. We will continue our development efforts and we will roll out our c.pax imaging system to our DIS customers. We will be restructuring our contractual relationships with our DIS customers to address the declining levels of reimbursement from CMS and the private payers so that both the physician and Digirad can make money and generate cash in a year in which cardiac nuclear reimbursement is being cut 36% and ultrasound echoes are being cut another 10%, coming off a year when echocardiography studies were cut 30%.

We expect these cuts to have a negative impact on our financial results during the first part of 2010. As I alluded to earlier, we are not without new challenges as we enter 2010. We have experienced some radioisotope shortages throughout much of 2009 that remain with us in the early months of 2010. These shortages increased our supply costs starting in November of 2009 and will have a continued impact on our DIS margins of nearly 300 basis points in the foreseeable future.

But we are confident these challenges can be met. We will continue to focus on stabilizing our business throughout 2010. The first half of 2010 will be tough as we transition toward a new DIS plan for our physicians in light of the reimbursement cuts. We recognize the need to increase utilization, both camera and people utilization, by strategically adding more revenue per day on our services model. This will be accomplished by adding additional imaging platforms such as vascular and general imaging in our ultrasound section of our business, especially in our general practitioner segment, further diversifying our product offerings and the range of services.

Overall, our strategy for 2010 is similar to what we did in 2009, creating financial stability through streamlining operations, signing on new contracts and customers with refined terms and designing and introducing new products. However, this year, we will do so under an umbrella vision that will provide more diversification and services and products than what we have been able to accomplish in the past.

We are instituting a new philosophy of Passionately Digirad-ius Customer Service, which is more than a slogan. It will be a way of life for us and our talented technologists and employees across the country.

I cannot tell you what will happen in 2010, nor can I tell you the ultimate impact that healthcare reform may have on us or in what shape it will ultimately be passed by Congress. I cannot tell you whether reimbursements will stabilize or go up or down.

What I can tell you is that this management team and Board of Directors are dedicated to making something of significant value for our Company. I can tell you that we plan on expanding Digirad into a more diversified healthcare company. I can tell you that every man and woman at Digirad is committed to providing Passionately Digirad-ius Customer Service to our valued physician customers. And, I can tell you that you have my commitment to lead us forward to a success in 2010, despite the many roadblocks that are before us.

With that, let me turn the call back over to Josh, our operator, for questions.

(Operator Instructions). [Jeremy Chase], D2 Capital.

Hey, Todd, good morning. A couple of questions. First of all, congratulations on achieving positive cash flow under such difficult conditions this year.

But, I had a couple questions about the guidance for being cash flow positive in 2010. I gather that there's a lot of unclarity at this point about reimbursement, but can you just talk a little more detailed about what this guidance assumes relative to sales? And maybe as a follow-on to that, what kind of trends you are seeing in the early part of this year since the cuts were finalized?

Good question. What we experienced, even in the fourth quarter, the tail end of the fourth quarter, is that physicians really started to slow down.

There's probably a couple of things that happened even then. One, they were preparing for what their reimbursements would look like in 2010.

Number two, various preauthorizations, various credentialing requirements seem to ratchet up in a few areas of the United States, such as in the Northeast. And that puts pressures on doctors when they have to get pre-certifications for example for every procedure that's performed. And so even if they were regularly scheduling eight to 10 patients, they may have lost two or three in that process of the certification or some practices are still waiting for certain credentialing capabilities from some of their payors. And so they are sitting on the sidelines.

So, although it would have been a natural viewpoint that physicians should have doubled down in the back part of 2009 in preparation for lower reimbursement rates in 2010, some of those challenges started to face those physicians.

What we expect to happen in 2010 and we are seeing it already through the first month is revenue contraction as we move our physicians to performing essentially more of their activity on a per day basis so that the per day revenue remains at a high level, which ultimately allows them to make a decent return and allows us to make a decent return. But it does create contraction. Some of the smaller physician groups may stop doing the services in their practices at all. So far, our closure rate has actually been stronger in that regard, but it's still very early.

And the reason why it's still early, although we're a month plus now into the new year, is because the sustainable growth rate, or the SGR, conversion factor was delayed until the end of February by the President and Congress. And so others are still waiting to see if that gets completely overturned, if it gets put in place with some modification, or if it gets completely turned back and so that it's a full 21.2% impact on the conversion factor, which could move the nuclear reimbursement cut, for example, from 36 to 51 if nothing happened at all.

Most of what you read in the market would indicate that that SGR rate will be overturned. But even today as we sit here on the 11 of February, nothing has happened yet. There's a lot going on, but nothing has happened. And so that's created that continued uncertainty from the physician group.

We believe that what we will be able to do is continue to provide services that will find a solution that works for the physician customer and for us. We've budgeted very specific assumptions around that. But, as you highlighted, it's an incredibly volatile situation in the front part of the year as that gets stabilized out. But ultimately, these are excellent tests that need to be performed for these underlying patients. And the physicians need to continue to capture ancillary revenue streams in order for their practices to be profitable. Otherwise, in cardiology, it's about a 30% overall cut across the board, not just imaging. And that's a pretty dramatic cut.

So, we are bullish about what we are doing. I know my answer is long-winded, but I wanted to suggest that what we are doing an ultrasound, for example, is opening up the number of, and I refer to them as modalities, or imaging that we are able to do. So historically, we really did echocardiograms and carotids only. Now, we will be doing by thyroids, some other general, some other vascular, limited venous Doppler, those types of procedures, which gives the physician a larger capability of imaging services in his or her practice, and helps them maintain really a much more attractive revenue stream and makes our day more profitable in relationship to what it would be otherwise.

So that is a little bit simpler model to manage through. And then there are other kind of peripheral arterial-oriented type things that we can do with multi-segmental pressure testing and some things like that. We are still in the early stages. We will continue to roll those things out and try to make them successful in 2010.

And we need to really do the same even for those nuclear customers so that the per day revenue can go up. If it continues to decline, if you look out two and three years, that just is not a success model for driving more margins. So we have to create value for the physician so that ultimately revenue and margins drop through.

Okay, great. Thanks for the detail on that. The other question I had, just on the cash flow positive guidance is, does that guidance contemplate any additional restructuring during the year? Or do you feel like you've got the organization sized correctly relative to what you are seeing in terms of sales?

I mean it's sized correctly right now, but we appreciate there's a lot of volatility. And so our commitment is to generate cash and try to squeak out a modest profit, right? That's what we're going to be doing this year. And how that makes modification to the business plan and the way that we operate it will happen as we go. And we are prepared to make those types of decisions.

But, we much prefer to find ways to maximize that revenue and maximize what we are doing.

When you talk about the cash specifically, when you talk about a volatile experience like that, some additional investment this year in c.pax and putting that into our DIS area, some older equipment that has to be replaced that we've kind of pushed to the brink, there's a little bit stronger CapEx investment in 2010 than you saw in 2009. So that's why we're going to have to work hard at even getting a few million dollars. But if you look at that progress in relationship to the volatility, we think it's a strong goal, but one that we can achieve.

Yes, I think that we did a really good job in 2009 in receivable collection and really watching some of the key drivers of our cash. And I think that you saw that our inventories went up in 2009, certainly, as compared to the end of 2008. We are working very hard to try and reduce those inventories as we go forward. We've got much better controls over the inventory, much better planning. And so I think we will see some cash coming out of inventory.

We are going to have a bit of a probably an uptick in receivables for a short period. There was a part at the beginning of January where CMS was saying don't even submit invoices from our customers to CMS for reimbursement. And so, although our revenue and our receivables don't directly tie to our physicians -- in some cases, physicians tend to think if they don't get paid, we don't get paid, or when they get paid, we get paid.

So we are going to work on that diligently this year as well. I think we will make some really good progress again on receivables, but we're really also focusing on inventory.

Okay. Thank you. One other question on a different topic. Is there a vision at this Company to sell more globally? Maybe the reimbursement environment is a little bit different in some of the international markets?

So, internationally, we would be talking about products themselves, right? And maybe I can take advantage of also answering a bit of a question that got e-mailed to me today, and I'll get to that.

I think that when you think about this new camera that we will be launching in the middle of the year, it's got a much larger field of view head size than the types of cardiac-oriented head sizes that we have on our existing cameras. That allows you to do like a full chest scan at the same time without having to use what's known as a diverging collimator. It really will be the very first large field of use solid-state camera that's ever been launched in the market. And our technology platform allows that to happen.

We utilize a sodium iodide-based crystal technology in our solid-state camera, which is at a much lower cost point than if you look at the two other competitive cameras that are on the market that are solid-state, they use CZT or cadmium zinc telluride, which is at about a 3X price or so versus what you would see in our technology. So that allows us to bring on a much larger field of view head size. That, I think, could give some potential internationally.

We will have to assess that. We do not currently have an initiative right now today that is focusing on international expansion. But we believe that the new camera could open up that potential for us, and that is something that we will look at closer during the year.

We have 31 issued patents today; 12 that are pending. And I think that our IP estate is actually a very valuable component of this business. I mean the entire business from my view is so significantly undervalued, it's hard to say well what's that IP estate worth? I think it's worth a significant amount. Okay?

Okay.

So, first focus, penetrate the hospital market with that camera in the US. Then the second would be to assess international potential.

Okay. Thanks a lot, Todd.

You bet. Thanks, Jeremy.

(Operator Instructions). Dennis Van Zelfden, [Brazos Research].

Good morning, gentlemen. How are you guys doing? I guess my first question is for Rich, some housekeeping information. Do you have EBITDA for the fourth quarter and for the full year?

Do I have EBITDA published information? No.

Or do you just have it, so you can give it out?

All right, one second, Dennis. Dennis, we don't have that right here. But I'll be happy to calculate that and put it out as public information.

Okay, thank you. Shifting, what about CapEx for 2010?

CapEx is going to be a higher -- as Todd sort of alluded to, we spent about $1 million in CapEx in 2009. We're looking at probably $2.5 million to $3 million in CapEx in 2010. All of that is related to growing our business or most of it is related to growing our business or most of it is related to growing our business and recovering from some of the lost business due to reimbursement reductions.

Okay.

Todd, getting back to the revenue line, which is pretty critical I think going forward given that you've tightened up the organization. In listening to you, I gather that you're probably looking for losses in the first half of the year followed by profits in the second half of the year.

That's correct. That's correct.

Okay. Does the return to profitability assume a contribution from all of these new products? Or do you think your base business so to speak will bounce back in the second half of the year?

Even when you look at launching a new camera in the middle of the year, your contribution out of that camera is still going to be fairly modest in terms of total camera production in the year, right? You are selling to the hospital market; the sell cycle is much longer. You have to get into that buying cycle and into the budget, period. So we expect to sell some cameras in the year. It's going to be fairly modest.

When you look at the things that we are doing around the services business and adding like expanding the ultrasound capabilities, we believe that a lot of those things are going to help us, number one, shore up the customers and the relationships that we have, and then over time, can they potentially help us increase the revenue per day? I think most of that would get lost in the translation of the revenue contraction this year. So it will not be something where you can start to kind of chart this real growth model out from there.

So we can talk more about those things as we get things stabilized during the year and then start to march forward from there. There's too much uncertainty. But you're ultimately not going to see a lot of impact from that in the current 2010 period. So ultimately you are seeing the impact of the base business, okay?

By rough count, by the way, I did a really fat-finger calc here on my iPhone is that the year EBITDA is probably around $5.2 million, $5.3 million. But Rich will get the exact -- we put out the K this morning so you can calculate the cash flow.

Okay. I have not looked at the K.

Let's see, I lost my train of thought on the revenue. So, you're still looking for a tough year, particularly first half of the year on your traditional base business, given the economy and given the uncertainty regarding the reimbursement rates?

That's right. That's right.

Now if I'm a doctor and my reimbursement is getting cut whatever it's going to get cut, 30%, what is my alternative for these procedures? Is there something else I can do that will be 95% as good as your procedure? I'm not a doctor so I'm probably not framing it correctly.

Yes, so let's talk nuclear cardiology. The alternative usually to nuclear cardiology would be modalities that are in the hospital, like doing a CT scan, CT angiography, or doing a cardiac PET scan, again, which is in the hospital. There is higher reimbursement for a cardiac PET in a hospital.

But a key dynamic to keep in mind is that right now, the way that reimbursement is coming through the pipe, even for a nuclear cardiac scan, it's double the reimbursement in a hospital setting than it is in a private practice in-office setting. Okay?

So for that physician, he could also then go to a modality like ultrasound, which is lower reimbursement, less information. So it's not 95% equivalent in the information that you are getting by any means. Nuclear cardiology is really considered the gold standard and I think we will continue to be the gold standard.

So for that physician, in practice, his or her alternative is to outsource the patient and lose the economics. Okay? But, they still have to structure a relationship if they are bringing in the service where they are making money. Right? And so, if the cut was as dramatic as 50%, they still come back to us and we have to help re-organize the business model in order for them to make money. Does that make sense?

Yes, yes.

So not a great alternative for them, but finding solutions is what we're all about, right? We're the ones that have to put an arm around that physician and help him or her through this challenge and get their practice running smoothly, and allow them to continue to provide very valuable diagnostic tests for their patients. And that's essentially what the patient is looking for. They are always more comfortable with their doctor than they are just going off somewhere else. We are normally talking about patients that are 65 and older and their comfort level usually lands more there.

But does it get to be where the doctors in your company kind of face a standoff, meaning like who is going to blink first? Who is going to take less money, you or the doctors? How does that play out? That's assuming all these cuts go through, these reimbursement cuts.

Yes, I don't think of it that way. I'm sure you always can get into some battle with an individual physician like that. But I look at it that you are trying to find solutions together that allow the economics to work. And if you are able to take a day where the physician was running six patients on average, every other week or every week let's say, and then combine that into just running three times a month, but running more patients through on those three days they actually run, then it works for everyone because we have a triple-headed mobile camera that no one else has in the marketplace and allows us to scan faster. So we can take on a little higher throughput without really adding much cost into our model.

Okay.

So you have to find it -- you can't get to the standoff, right? You've got to find solutions.

Right, right. Getting back to the revenue question, either on a quarterly or annual basis, how far can revenue decline before you cannot reach profitability? What's the break-even, in other words?

You know, it varies totally on what you do with your cost base. We're not giving that level of specificity in our guidance. We've probably given a little bit more even this year than we gave last year by throwing out a cash number.

Look, it's -- we appreciate that it's a dogfight. This team is committed to making it happen. Could we lose 50% of that revenue and make money? I don't know. But could we lose $5 million or $7 million and make money? Yes, probably. But it all depends on how that relationship gets restructured with the physician.

You know, Dennis, one of the things that we saw in 2009 was a very strong movement by our DIS imaging services side of the business, which helped to compensate for the real shortfall on the instrument sales side. And now, in 2010, we are putting a very big push on the X-ACT and our new products which are geared toward the hospital and the larger private practices. And I think that we will probably see more balance coming back on the product side. So it also depends on the mix that we see in our revenue stream between product and service as to the real answer to your question.

Some of the infrastructure that we've got is to support both. We've done a good job I think of identifying what infrastructure we need for either of the businesses, so that if there are dramatic swings, we can start to adjust accordingly. But what we're going to adjust is going to depend on what the market conditions are and how we see physicians reacting to both our plans to compensate these reductions in reimbursements and their own philosophy.

One last question. I heard a comment or a term earlier about DIS cancel days. What is that?

Those are days that are scheduled by a physician that, for whatever reason, are then canceled before we provide the service. For example, what's going on right now on the East Coast. A huge snowstorm, patients were scheduled to come in and because of the weather, the physician would cancel that day because of inclement weather. So, it sometimes is because of vacations or that kind of thing. More likely it's a weather-related item.

Okay, one last question. How many locations were closed in 2009?

We sold off the hub locations in northern California. We sold off the Phoenix, Tucson, and Vegas areas. And then we closed down three or four or five other locations.

And those were done in early 2009?

That's right. That's right. And then it was about a $6.5 million, $7 million revenue pullback from that.

So there was $6.5 million to $7 million -- and that's what they did total, or that was the --?

That was their annualized revenue stream before.

Of the $10 million or so that we had a reduction in 2009, it was about $6 million to $7 million was related to the closure or sale of the hubs.

Okay, so we're still facing a $3 million to $4 million headwind this year. Like in the first quarter -- you had some revenue in the first quarter last year, but you will not have any revenue in the first quarter this year?

Sure, that's right. That's right. Yes, that's right.

Okay.

And then that other headwind you were talking about, it was camera --

A lot of it was camera.

Camera-related, right. Our camera sales were half of what they would've been the previous year.

Right. Okay. Thanks, guys.

Thank you. Management, I'm sure no further questions in the queue. Please continue with any further remarks.

All right, great. Thank you. Appreciate it, Josh. Thank you, everyone. Appreciate the questions and the interaction with us today. I hope you've certainly gained an appreciation for our commitment as a management team. We appreciate that it's a bit volatile right now, but we will find some solutions to that, and we are excited about what we are seeing so far from our physicians out in the market. We hope that this SGR thing gets kind of cleaned up quickly so we can all move forward and build the business from there.

Our financial and operating performance in the fourth quarter and the full year of 2009 reflects both our progress, as indicated, at Digirad as an organization, continues to be headed in the right direction and that we are making strategic progress. We look forward to updating you about that progress on our next call in April, and I appreciate all of you who have joined us today. Thank you very much and good bye for now.

Ladies and gentlemen, that concludes the Digirad Corporation 2009 fourth-quarter and year-end results conference call. Thank you for your participation, and you may now disconnect.