Star Equity Holdings Inc (STRR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Digirad Corporation's 2010 second quarter and six-month results conference call. (Operator Instructions) This conference is being recorded today, Thursday, July 29, 210. I'd now 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, Lisa, 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'd be happy to send you one. Also, this call is being broadcast live over the Internet and may be accessed at the Digirad website at www.Digirad.com. Shortly after the call, a replay will also be available on the Company's website.

I'd like to remind everyone that certain statements made during this conference call, including the question-and-answer period, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements include statements about the Company's revenues, costs and expenses, margins, operations, portable imaging service hubs, centers of influence, product divisions, financial results, estimated market share 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. The consolidated financial statements and notes included in those reports speak only as of the day 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 new strategies and comment on the Company's outlook for the current year. The question and answer period will then follow. What that, I'd like to turn the call over to Todd Clyde. Good morning, Todd.

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

The business environment in medical imaging continues to pose challenges for the industry and specifically for Digirad during the second quarter. Reimbursement, radiopharmaceutical supply shortages, and continued lower-than-historical spending levels in both the hospital and cardiology segments topped the list of key contributing factors, resulting in fewer cameras being sold and fewer and less efficient DIS service days being ran.

As in the past, we reacted quickly to these challenges and have further reduced our annualized expense base by approximately $3.0 million and took restructuring charges of $352, 000 and additional inventory reserves of $920,000. Obviously the magnitude of the operating losses incurred in the first half of 2010 will not make it possible to hit our goal of generating an operating perfect in 2010, but we believe the losses will be lower going forward.

Our physicians have been plagued by the delay and inaction of Congress in finding a solution to the sustainable growth rate factor, or SGR, which, if allowed to be implemented, would result in an additional double-digit reimbursement reduction not only in the main cardiac nuke and ultrasound codes our physicians bill, but most services they bill under the physician fee schedule.

Thankfully, the SGR has been delayed until November 30th and we are actively supporting groups like the American College of Cardiology, the American Medical Association and other advocacy groups who are lobbying in Washington to find a permanent solution.

Further, the two largest high flex nuclear reactors in the world have been offline for all of the second quarter. The Chalk River reactor in Canada has been down since May of 2009, which produces approximately 50,000 or 50% of the medical radiopharmaceuticals for North America and the Petten reactor in the Netherlands has been down since February of 2010. This resulted in significant shortages, much more than anticipated during the second quarter and all of July.

Although the Chalk River reactor has been approved to restart producing product, it has yet to do so as of today. The most recent information would suggest it will do so some time over the next few weeks. The Petten reactor is scheduled to come back online near the end of August.

The inability to source radiopharmaceuticals resulted in cancelled days in our DIS business and the need to use other non-reactor generating isotopes such as thalium, which negatively impacted our DIS margin. We estimate the margin impact to be greater than 5.0 gross margin points in the quarter. We expect the shortage to finally come to an end in the coming weeks, allowing us and our physicians to get back into a normal service rhythm.

In our product business, we continue our focus on selling into the hospital market and I am happy to report that we booked our first commercial orders of our new ergo General Purpose Portable Imaging System in the second quarter, after a positive reception by physicians at the Society of Nuclear Medicine conference held in Salt Lake City in early June. This was the Society meeting where we commercially launched the camera and the interest level was greater than we had anticipated.

As most of you know, an important part of our strategy for growth in our product business has been moving beyond the cardiology suite into the hospital market. ergo is the kind of substantial product that allows us to do that - a lightweight, portable, advanced imaging device that can be moved and use all over the hospital, unlike anything else on the market. These unique qualities provide the hospital the means to dramatically reduce costs for many procedures, improve patient satisfaction, raise productivity, flexibility and generate revenues from new procedures, all critical considerations for hospitals in today's new healthcare environment.

Thus, while our capital equipment hospital sales cycles can be long, the initial response and growth in our sales pipeline for the ergo camera is very encouraging. We expect this camera to be successful in the months and years ahead. I should highlight also that our X-ACT camera, our cardiac-specific camera that we have been selling into the hospital also, continues to get good interest.

We also know that the next step is to use our resources to grow and diversify the Company. We have engaged advisors to help us assess various opportunities out in the marketplace, looking at both technologies and other services that we could drive through our existing channels. To date, we haven't been able to determine the best option and it would be counterproductive to rush into any strategic decision. We will continue to make stabilizing and driving our current business during this volatile time our top priority, as we look to minimize our losses and cash burn, focusing on returning to more positive results.

The good news is our cash position has held up nicely through the challenging period and tough economy. We have actively managed our resources and infrastructure, cut costs wherever possible, and reduced our run rate as a response to the economic environment. We have nearly $30 million in cash as of the end of June.

Now I'll turn the call over to Richard Slansky, who will go over the results of operations and then back to me for a few closing remarks. Richard?

Thank you, Todd, and good morning everyone. I'd like to take a few minutes to provide you with some detail and color on our second quarter and six-month results.

As was mentioned earlier, we will have time allocated for questions at the conclusion of our opening comments. So, if we don't cover everything or something that you're interested in, please keep tract of your questions and we'll get to them shortly. If for some reason we cannot answer your questions this morning, we will take a note and post them on our website for your review.

The second quarter of 2010 was an even more challenging quarter for us than the first quarter, but there were some very positive aspects mixed with some very difficult ones. On the positive side, we have generated a great deal of interest in our ergo camera and hopefully, and hopeful, to see sales of this camera in the second half of 2010 and beyond.

Our customer service and our DIS, or ultrasound businesses, continue to perform well. Also on the positive side, as Todd mentioned, our balance sheet remains strong with our cash position at nearly $30 million.

Now, on the more challenging side, our DIS, or nuclear services business, was significantly affected by the decline in reimbursement rate, the dramatic worldwide shortage of medical isotopes resulting in a significant number of lost days within the quarter.

And general market uncertainty, including but not limited to the indecision around the SGR, or sustainable growth rate, which for many of you know is a factor in determining reimbursements. The SGR is part of the relevant value unit, or RVU calculation, at the Center for Medicare/Medicaid Services uses in determining reimbursement rates for physicians and hospital services.

Our consolidated revenue for the 2010 second quarter was $13.2 million. This is compared to $18.6 million in the second quarter of 2009. The $5.4 million decline was due to the headwinds in our DIS business, combined with low camera sales in the quarter. DIS revenue in the 2010 second quarter declined $9.8 million compared to $13.6 million in the 2009 second quarter.

Product revenue in the 2010 second quarter decreased to $3.4 million compared to $5.0 million in the same quarter of 2009. We do expect DIS revenue to continue to represent the larger percentage of consolidated revenues in the future and we are working our adjustment plan to overcome the challenges that face this segment of our operations.

Consolidated revenues for the first six months of $28.2 million, compared to $36.3 million for the prior year period. DIS revenue for the first six months of 2010 was $20.5 million. These is compared to $27.4 million for the prior year period and product revenues for the first six months of 2010 were $7.7 million, compared to $8.9 million for the prior year period.

Consolidated gross profit for our 2010 second quarter decreased to $1.9 million, compared to $5.9 million in the same quarter of 2010. The $4.0 million decrease in consolidated gross profit is associated with the reduction in scan days in DIS due to the worldwide shortage of radioactive isotopes, as well as significantly fewer camera sales in the second quarter 2010 versus 2009. For example, the number of cameras we sold in 2010's second quarter was five versus 18 in the prior year quarter.

Consolidated gross profit for the first six months of 2010 was $5.3 million or 18.7% of revenue, compared to $11 million or 30.3% of revenue prior year period. Cost of DIS revenue consists primarily of labor, radiopharmaceuticals, equipment depreciation and other costs associated with providing services to our customers.

Costs of DIS revenue were $8.2 million for our 2010 second quarter, representing a decrease of $1.3 million or 14.2%, compared to the prior year period. The decrease in the costs of DIS revenue is primarily a result of decreased revenues.

Cost of product revenue consists primarily of material, labor, overhead costs associated with manufacturing, and warrantying our products. Cost of product revenue was $3.1 million for our second quarter this year, flat, pretty much, compared to the prior year quarter. Although the cost of product revenue had remained consistent as a percentage of revenue, it decreased [not] to 91.3% from 62.9% for the 2010 second quarter and prior year same period. The increase was primarily the result of increased excess and obsolete reserves, as Todd mentioned earlier, in response to a changing forecast for future camera build requirements.

The net loss in the second quarter of 2010 was $3.1 million, or $0.16 per share, compared to a net income of $800,000 or $0.04 per share in the same quarter last year. Net loss for the first six months of 2010 was $4.3 million or $0.23 per share, compared to a net income of $800,000 or $0.04 per share for the prior year period. Although this is clearly not the result we were hoping for we continue to work extremely hard in the face of many environmental headwinds to minimize the loss and maximize our chance of regaining profitability.

Throughout this 2010 second quarter we continued to focus on fundamentals, including a strong focus on cost reduction, as evidenced by our June reduction in force and executive and board salary reductions. Our cash and cash equivalents and securities available for sale totaled $29.9 million or approximately $1.60 per share at June 30th. This can be compared to cash and cash equivalents and securities available for sale balances of $31.8 million at June 30, 2009, so our cash was lower by $1.9 million from the same period last year.

Our DSOs did creep up during the quarter as reimbursement pressures were being felt by our physician customers. Going forward, we plan to increase collections and reduce DSOs, or day sales outstanding, while we also focus on reducing inventory levels.

In conclusion, the challenges that we are facing in our changing healthcare environment are significantly affecting our financial results. Our management team is working incredibly hard to adapt to this changing situation and re-stabilizing 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 isolated from those uncertainties, as we have seen in the first half of 2010.

However, as I mentioned last quarter, knowing is better than not knowing and we are executing plans to adapt, although we no longer believe that we will achieve positive cash or earnings this year. Our cash and cash equivalent balances remain at nearly $30 million. Our teams, our management teams remain focused on building shareholder value, and we believe in our team's ability to persevere in these challenging times.

With that, I'll turn it back to Todd.

Thanks, Richard. As I mentioned earlier, we spent the first half of the year battling the headwinds in the economy, the industry and the isotope shortage while continuing to focus on our product development and build for our future.

We are focused on profitability and generating cash in our base business and we have good reasons to be cautiously optimistic. The Canadian reactor should come back online in the coming weeks and this should stabilize the radiopharmaceutical supply and help bolster our margins.

We continue to deploy cutting edge technology and the reception for our ergo has been encouraging. We've been penetrating the hospital market with this novel device and while the buying cycle is and can be long, we know hospitals need the flexibility of this great device. Our funnel is active and we expect this to be a growing market for us. We have an experienced and a commented team. Our entire organization is focusing on delivering results and fulfilling our commitments.

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

(Operator Instructions) Dennis Van Zelfden, Brazos Research

Todd or Richard, could you go over a little more the restructuring and what it entailed?

Certainly, Dennis. We did a restructuring both at the margin level and at the operating expense level, so we went through the organization and we moved quite a few number of our clinicians from what we call full time or part time, or occasional work, which then reduced our labor in response to the decline in the DIS demand, which came from both the reimbursement and the shortage of isotopes.

We also went through our G&A expenses and tried to reduce wherever possible some of those expenses as well. So, in total, of the $3.0 million that we indentified, we had some restructuring charges that were about $200,000 of people-related costs of severance and termination fees. And then some additional equipment that was no longer being utilized, as a result of having fewer teams working out in the field servicing those physicians, servicing those physicians for the time being.

So the cameras were also written off as part of that and then there were some ancillary charges as well that went into the $352,000 of onetime charges, but the vast majority of what we had reduced in the $3.0 million were people-related costs.

And did any of that show up in the second quarter or are we going to see that in future quarters?

Virtually none of that showed up in the second quarter and you will see that in future quarters as we move forward. The actions were taken at the end of May and beginning of June, so with the severance provisions there was probably no impact, no positive impact, in the second quarter, but certainly in the third quarter and the fourth quarter you'll see that.

Okay. Do you have or can you provide a projected cash position at year-end, even it's a range?

As we said, we don't expect to be having positive cash this year, but we are minimizing the cash outlay or drain that we're seeing. It's not going to be significant, but also not putting out a specific number. I think you can seen that, even with the loss that we posted with the amortization and depreciation charges etc, we're not burning as much cash as we're showing in the loss column. So we expect to be fairly close to where we are not, but we're not providing any specific guidance on the cash number.

All right. Thanks, guys.

Thanks, Dennis.

Thank you, sir. (Operator Instructions) Adam Peck, Hartland Advisors

Hi, good morning, guys.

Good morning, Adam.

Hi, how are you doing? How many days were lost and is there an opportunity to get those back in the third quarter, any of those days?

Yes, when we think about lost days in the quarter, primarily what we saw were days that got flat out cancelled because we were not able to run based on the isotope shortage. Two scenarios, one other we could not source isotope at all and service the account. Sometimes we'd get a very notice that they could only provide, for example, isotopes for four patients versus a standard eight and the physician wasn't willing to run on the four so the day got cancelled.

Yes, there are some patients that those physicians are going to have to move into a hospital setting if it's a little bit more emergent requirement. Otherwise they try to come back and reschedule them. So I would guess that we would pick up some of those days.

The challenge for us, Adam, is that we saw significant shortages in April. May was very, very acute. June was somewhat tough and then there's been significant shortages in July when one of the real small reactors went offline yet again. So we're hoping that, when we kind of get into August and forward, that things become a lot more positive. It's still a little dicey.

The Canadian reactor has been approved to come back online and they're going through the process of refueling and so on and so forth and I read something yesterday that had indicated a possible ten-to-fifteen, day delay. They originally thought they'd be back online July 30th. So they haven't given us an absolute specific date beyond that, but it's said there could be a ten-to-fifteen day delay. So that's kind of the experience there.

And then while I'm on the top of radiopharmaceutical, as we had to move to a thalium/thalium protocol, some docs wouldn't do that and therefore we would lose ultimate opportunity. And then secondly, it makes the day much, much longer so the number of procedures that could actually be performed was probably lessened in some settings, so fairly significant on the results for the second quarter.

And do the hospitals then have higher inventories of the isotopes so that they would still be able to --?

Not necessarily. I mean, hospitals -- good question. The hospitals also experienced shortages. Some were able to source some isotopes. We went from our preferred vendor at times to a secondary source and tried to get it just about anywhere that we possibility could and therefore, under some settings, we paid a higher margin. But yes, some hospitals sourced and some did not.

I guess I should highlight one other thing. A hospital, if they have a PET system, they could also move the patient into doing or performing a cardiac PET and we also had some physicians that may have moved back into like a stress ACT or an ultrasound scenario and that's why you end up not just kind of recouping all of those potential scans in the future.

And Adam, we did some movement in June, as Todd said. May was probably the worst month for isotope shortages. When that supply came up in June, we did see the number of studies go up. So, as we obtained more availability, we do envision that that would increase.

Okay and could you walk us through the sales cycle for ergo? So is it shorter than your other cameras?

The length of the sales cycle has to do with either selling primarily, in kind of broad brush strokes view here, is either in the cardiology space or in the hospital space. What we're seeing specifically, and I'll kind of go through those two markets, is there's a lot of real positive interest from the hospitals.

We've done a great job of getting support and desire to buy the camera from the technology group, meaning the nuclear technologists. And the department heads, they've even done site visits in a large number of instance - and I'm talking both X-ACT and ergo - and then they then submit into the budgetary cycle and either funds are approved or they're not. Budgets sometimes come back and get cut. Then they have to make allocations between different products that they're purchasing.

So a lot of our deals are kind of in that phase right now where we're trying to get that action to happen. We see some delays that go on. It's not unusual for a hospital sell cycle to be in the 12-month to 18-month cycle. So we've been trying to accelerate that as much as we've possibility can. Maybe we've been a little bit optimistic in the past on how short or how long that cycle would be. But I can tell you the reception has been very positive on the X-ACT camera and on the ergo.

Sometimes they'll have emergency funds that are available where they can pull the trigger a little bit faster. That was certainly the case with a couple of deals that were able to close at the end of the quarter and we actually delivered our very first ergo at the end of June. We just delivered another one in the mid part of July and we have others that are coming down the pipe, so we're seeing interest there.

In the cardiology market you have a lot less decision-making elements so the physician can make the decision. The problem is they're not making buying decisions right now and what we saw over the last almost 12 months is that many of them that were buying were shifting into used equipment, refurb equipment. And then I think, with the whole SGR impact and lack of isotope availability, nobody really wanted to step up and make a purchasing decision.

Now we're hoping that if some of that gets remedied and delayed, that they'll come back and we've seen a little bit of that in the month of July.

Okay. So of the five cameras sold in the quarter, one was an ergo?

Yes. That's right. One was an ergo and I think three or four of them were in the hospital.

Okay and those carry higher ASPs and higher margins?

Yes, the X-ACT and the ergo carry higher ASPs and margins.

Okay. Well, good luck. Thank you.

Thanks a lot, Adam.

(Operator Instructions) One moment, please. And there are no further questions at this time. Management, please continue.

Thank you very much. We appreciate the interest and for the good questions today. We appreciate that the environment's been very, very tough. We are optimistic and hopeful that we're nearing a trough here if not at the trough and that things will start to improve as we move forward and we look forward to updating you on future calls. Thank you all for participating today.

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