Star Equity Holdings Inc (STRR) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Digirad Corporation 2010 first-quarter 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)

This conference is being recorded today, Thursday, April 29, 2010. I would now like to turn the conference over to our host, Mr. Matt Clawson, with Allen and Caron, the Company's investor relations firm. Please go ahead, sir.

Thank you, Camille. 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 will 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 divisions, 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 these risks and uncertainties is available on 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 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 first-quarter results, update us on the Company's new strategies and comment on the Company's outlook for the remainder of 2010. The question-and-answer period will then follow. And what that, I'd like to turn the call over to Todd Clyde. Good morning, Todd.

Thank you, Matt, and good morning to everyone. I would like to thank all of you for being on today's call and for your interest in Digirad. In summary, the quarter has proceeded much as we had anticipated. We have been busy digesting the cuts and reimbursement by adjusting our DIS business model as planned.

Our product business revenues were on plan and contributed to our strong cash position. We expect that the market will stabilize midyear and that we are still on track for a stronger second half of 2010, showing a return to positive cash flow and profitability.

Perhaps of equal importance, the new healthcare environment is driving change with our physician and healthcare institution customers. We believe these changes will allow us the opportunity to introduce new services and technologies in the future.

Finally, we are pleased that our investments in product innovation continues to pay off in the first quarter. Our new products are gaining greater interest from new and existing customers and the FDA approval of our ergo general-purpose portable imaging system has paved the way for a launch of that device in which we believe is a hospital market that has a growing need for such a flexible imaging technology. We expect a formal launch to happen in the middle of this year.

As most of you know, at Digirad we have focused our entire organization on delivering results and fulfilling commitments no matter what the circumstances. In 2009 in a tough environment, we were able to fulfill each of our core financial goals, thanks to the hard work and dedication of our entire team at Digirad. We plan to continue to build on that track record as 2010 progresses.

As we discussed on our fourth-quarter call, 2010 ushered in a few new challenges that we are presently working through. Reimbursement for our nuclear imaging services has been cut by 36% and ultrasound by 10% as it stands today.

The situation in Washington still seems to be fluid, but we are keeping our assumptions conservative and are aggressively tackling the situation as if we and our physician customers will not get any relief from those levels and in fact, they could still see greater cuts if the sustainable growth rate or SGR were to be enacted as is. Thus far, Congress has taken a kick the can approach to delaying the implementation of the 2010 SGR.

This delaying one or two months at a time has left physicians a little short of paralysis and uncertainty. However, recently the Senate Budget Committee passed a budget resolution which includes a reserve fund for a five-year offset to the SGR impact.

Now the Senate needs to craft and pass the actual SGR or a doc fix bill. These are certainly positive signs to address this issue, helping the physicians return their practices to some degree of normalcy.

Digirad continues to demonstrate that we are an agile and innovative company with a solid management team and we expect this newest challenge to be largely overcome as the year progresses. There is no way that such a drop in reimbursement would not have an impact on our results but our goal is to minimize the impact and continue forward as planned, serving our customers and broadening our market.

As we are in the field helping our physician customers navigate through the new healthcare environment, we are getting continuous feedback that physicians are looking for new sources of revenue in an effort to make up for the cuts in the physician fee schedule and other reimbursement levels while at the same time providing better patient care. We believe our customer channel and delivery expertise gives us a unique opportunity to be a service partner as these opportunities unfold. We like that dynamic. We are committed to becoming a diversified healthcare company focused on providing our customers the tools necessary to detect disease earlier and better.

On the camera side of our business, our new products continue to gain acceptance from new and existing customers. Our Cardius X-ACT imaging system will prove to be an important revenue driver this year, especially as the economy continues to firm up and buying patterns for capital equipment return to close to normal levels within hospitals.

There are new and compelling reasons that we are optimistic about product growth in the coming periods and we are beginning to see some signs that the second half of the year is looking up. One result of healthcare reform is that there are many more patients funneled through hospitals for diagnostic work.

This is a result of the reform driving more integrated healthcare into hospitals where today imaging reimbursement is higher. There is also a large percentage of imaging equipment in hospitals that is rather aged.

As an example, nearly 50% of SPECT cameras in hospitals are seven years or older. These two factors not only are anticipated to put a strain on the imaging resources within the hospital system, but should drive an accelerated replacement cycle in the coming years.

Digirad is in a great spot to capture some of those new camera deals. We have some of the most novel, most efficient solid-state nuclear cameras on the market today that allow hospitals to achieve much greater flexibility than they have achieved in the past. Our cameras are less expensive to purchase and operate than the larger fixed camera systems sold by our competition. And finally, our camera flexibility, ease-of-use and size make them ideal for use in the satellite clinic environment.

This brings us to some recent and exciting news on the technology front. On Monday, we announced that we had received 510(K) clearance from the US Food and Drug Administration, enabling the Company to market and distribute its ergo large filter view general-purpose portable imaging system.

The availability of a large field of view solid-state portable general-purpose camera makes it possible to provide high-quality nuclear imaging across a diverse range of procedures and in a diverse range of locations, signals in breakthrough for the nuclear specialty. ergo's lightweight portable design enables imaging to be performed in the nuclear department with a lot of flexibility as well as the ICU, CCU, OR, ER, pediatrics, trauma center and literally all areas of a facility.

To add to the flexibility, the ergo also is capable of delivering better, more clear imaging than its competition and predecessor cameras. Our belief is that the time is right for this device.

Healthcare reform will likely drive additional throughput at hospitals and hospital clinic-based locations. At the same time, these organizations are constantly looking for new ways to drive efficiency, improve workflow and increase their ability to care for the patient. As those organizations look to do all of this, our ergo system will be a natural choice.

We will be marketing its features and values aggressively as we prepare for a launch into the market this summer. While we have made significant investment in driving the technology curve in nuclear imaging, we believe the combination of the improving economy and healthcare reform will create a tailwind that we can take advantage of, hopefully beginning in the second half of this year. With that, I'll turn the call over to our Chief Financial Officer, Richard Slansky, to go over our numbers in more detail. I will return after Richard's remarks and offer some closing thoughts before we open the call up for questions. Richard?

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 first quarter 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 there's something that you're interested in, please keep track of your questions and we'll get to them shortly.

The first quarter of 2010 was a challenging quarter for us, but there were some very positive aspects mixed with some very difficult times. On the positive side, we met our target in camera sales, both in terms of mix and in terms of numbers.

Our DUF business performed well and our customer service business, which primarily consists of our field services, performed well also. Also on the positive side, our balance sheet remains strong with our cash position staying at over $30.8 million.

On the more challenging side, our DIS business, as Todd indicated, was affected by the decline in reimbursement rates, a shortage in radioisotopes and radiopharmaceuticals used in the leasing of our equipment, fewer lease days due to the inclement weather in the East and Midwest in January and February, pre-certification requirements and general market uncertainty including but not limited to the indecision around SGR which is the sustainable growth rate that Todd mentioned earlier which is a factor in the relative value unit or RVU which CMS uses for calculating reimbursement.

Total Company revenue for our 2010 first quarter was $15.1 million compared to $17.7 million in the first quarter of 2009 which is mainly due to the headwinds in the DIS business environment. DIS revenue in the 2010 first quarter declined to $10.7 million compared to $13.8 million in the 2009 first quarter.

Product revenue in the 2010 first quarter increased to $4.4 million compared to $3.9 million in the same quarter of 2009. We do expect DIS revenue to continue to represent the larger percentage of our consolidated revenues in the future and we are working to adjust our plan to overcome the challenges that face this segment of our operations.

Consolidated gross profit decreased to $3.4 million compared to $5.1 million in the first quarter of 2009. The decrease in consolidated gross profit is primarily the result of certain one-time manufacturing variances in our camera segment and a higher relative labor cost in our DIS segment, higher relative to our lower sales volume in the quarter.

Costs of DIS revenue consist primarily of labor, radiopharmaceuticals, equipment, equipment depreciation and other costs associated with providing services to our customers. Cost of DIS revenue were $8.8 million for our 2010 first quarter, representing a decrease of $1.4 million or 13.6% compared to the prior year quarter. The decrease in the cost of DIS revenue is primarily the result of decreased labor and radiopharmaceutical costs.

Cost of product revenue consists primarily of materials, labor and overhead, costs associated with the manufacturing and warranty of our products. Cost of goods sold for the product segment was $2.9 million for our 2010 first quarter, representing an increase of $500,000 or 20.3% compared to the prior year quarter.

Now loss from operations in the first quarter was $1.2 million or $0.06 per share for that first quarter compared to a profit of $44,000 or $0.00 per share in the same quarter of last year. This loss was expected and as Todd mentioned, we believe that we will return to profitability and positive cash flow from operations by the end of the year.

Throughout this 2010 first quarter, we continue to focus on fundamentals, including a strong focus on collections. Our cash and cash equivalents and securities made available for sale totaled $30.8 million or approximately $1.60 per share at March 31, 2010.

This can be compared to our cash and cash equivalents and securities available for sale balance of $28.1 million at March 31, 2009 though our cash was higher by over $2.7 million from the same period last year. Going forward, we plan to continue working on increasing collections and reducing DSOs or days sales 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.

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

Now in conclusion, despite the challenges and a changing healthcare environment, we are working our business plan to stabilize our Company. The impact of the economic downturn and the changes in healthcare regulations remain variables that create uncertainty for many healthcare companies and we are not insulated from those uncertainties as we saw in this first quarter.

However, knowing is better than not knowing and now we can execute our plans accordingly. It is our intent to return to operating profitability later in 2010. Our cash and cash equivalent balances remain above $30.8 million, including our investment of $1 million in our own stock over the past year or so.

Our management team remains focused on building shareholder value one step at a time. We do believe in our teams and we are looking forward to a successful and rewarding year. With that, I'll turn the call over to the operator for questions. Camille?

(Operator Instructions) Dennis Van Zelfden, (inaudible) Research.

With respect to your goal of $2 million in cash flow this year, can you define cash flow?

Define it in terms of how we determine our free cash flow activity?

Is that what you meant, $2 million in free cash flow?

$2 million in free cash flow is what we had stated on our last call and that's what we are referencing, yes.

In other words, that would be after CapEx?

Yes.

And how much is the CapEx?

Well the budgeted CapEx is about $1 million.

In your comment about positive earnings in the back half of the year, do you mean just turning positive in some quarter or do you mean generating positive earnings for the entire year?

Our projection right now is that we are going to get back into profitability for the year. It will depend on the amount of the turnaround in the second half of the year, but that is what we are talking about, being profitable for the entire year.

Okay, so I guess you would expect the second quarter still to be unprofitable but less -- I mean I guess less losses than the first quarter?

I think the way to think about this, Dennis, is the plan that we have is something that's working through all of the challenges of healthcare reimbursement primarily in the first half of the year, we expect definitely improvement in the second half of the year. We're not necessarily giving guidance on a quarterly basis, but we will allow you to kind of make those references and assumptions as you think about it on a quarterly basis. But we're certainly driving the business to be profitable once again as we work through those challenges.

Okay, well just looking at the magnitude of the first quarter loss and expecting a loss in the second quarter, I mean you are really expecting the back half of the year to produce some pretty big profits, whether it all comes in the fourth quarter or spread out over the third and the fourth quarter. Is the environment going to improve that much?

There's a couple of things that have played that you might consider when you're working through that type of modeling. Number one, we believe that the first quarter probably does represent a troughing of the losses and the impact.

There were a number of things that were going on. Isotope shortages are one area that Rich had mentioned. That will also continue in the second quarter because there are some very key reactors that are still down. There's a Canadian reactor that's down and there's a reactor in the Netherlands that is down.

But that should definitely improve as we head into the third quarter. There were weather activities that hit us much harder than usual in the Northeast in the first quarter. And then we have been working the hospital market really, really hard on the camera side and we would expect to see improvements, marked improvements in the back half of the year as those deals start to germinate and turn into actual orders and shipments, whereas today you're really in the pipeline VOC part of the equation. So we do expect strong improvement in that area in the back half of the year.

You know, the first half, Dennis, has been really been plagued by both the uncertainty in the SGR area, and Todd mentioned the concept of Congress just kicking the can down the road. That uncertainty combined with the reduction in reimbursement has really created an environment for our physicians where they haven't been willing to make any decisions.

There's still been limited capital funding in the hospitals and we hadn't come out with our new camera. So I think that there are a number of issues. Obviously the inclement weather issue that Todd mentioned, that was fairly significant for us. We lost quite a number of days.

We've estimated that to be several hundred thousand dollars of lost revenue and lost margin as a result of it, which will not be recurring. The isotope was equally somewhat devastating and actually that may continue on in the second quarter as the whole isotope issue stabilizes, as Todd mentioned.

So there are a number of issues there that really affected us in the early part of the year. Now those things are starting to change. It's much better to have a known environment than an unknown environment.

The one uncertainty that still remains is the SGR. There's supposed to be a decision by June 1 and we hope that Congress will come up with a solution whether that is pushing it out of this year or actually resolving it. But that would be sort of the last element that we would like to see stabilize out before we can confidently say what our results were for this year.

But with the SGR issue aside, all the other items that we have mentioned will not be recurring and we will actually see some really strong performance, including a much stronger camera performance in the second half of the year than we saw in the first quarter.

I hope everything works out. Good luck.

Thanks, Dennis.

(Operator Instructions) I'm showing no further questions at this time. Please continue with any closing remarks you may have.

Thanks, Camille; appreciate it and we appreciate the interest in the Company and the comments -- or the question that was made here today by Dennis. I certainly appreciate that interaction and want you to know that we are very committed to making the difference.

We appreciate the environment is a bit volatile right now, but we are committed to finding solutions to that volatility. Digirad as an organization continues to be headed in the right direction. We are working our plan and we continue to make progress. We look forward to updating you on our progress during the second quarter at our July call. We appreciate all of you who have joined us today. Thank you very much and good bye for now.

Ladies and gentlemen, this concludes the Digirad Corporation 2010 first-quarter results conference call. Thank you for your participation. You may now disconnect.