Star Equity Holdings Inc (STRR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Digirad Corporation 2010 Third Quarter and Nine Months Results Conference Call. (Operator Instructions) 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.

Thanks Alisa, 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 one, please contact our office at (949) 370-8500 after the call and we'd be happy to send you one. Also, this call is being broadcast over the internet and may be accessed at Digirad's Web site at www.digirad.com. Shortly after the call, a replay will also be available on the company's Web site.

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 services hubs, product divisions, financial results, estimated market shares and other topics related to Digirad's business strategy and outlook. These forward-looking statements are based on current assumptions and expectations and involve risks and uncertainties that could cause actual events and financial performance to differ materially. Risks and uncertainties include, but are not limited to business and economic conditions, technological change, industry trends, changed in the company's markets and competition. More information about the risks and uncertainties is available in the company's filings with the U.S. 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 third quarter results, update us on the company's new strategies and comment on the company's outlook. The question-and-answer period will then follow. And with that, I'd like to turn the call over to Todd Clyde. Good morning, Todd.

Thank you, Matt and good morning, everyone. I'd like to thank all of you for joining us on today's call and for your interest in Digirad. We are pleased to be talking today about an improved environment for our medical imaging products and services businesses that than what we have experienced in recent quarters. It's great to be able to say for the first time in several quarters that we are beginning to see growth and expansion in our business segments, due in part to environmental improvements as well as the product development and service business decisions we made and executed on during the current downturn.

In particular, we are seeing a growing receptiveness for our new imaging products, particularly the Ergo camera, our new general purpose portable imaging system, which we are introducing to a variety of potential hospital customers all over the country. Both the X-ACT cardiac camera and the Ergo have helped us make important progress in our strategic entrance into the hospital market.

Our financial results for the third quarter were substantially improved compared to the second quarter. We cut our loss for the quarter by more than half to $1.3 million. We have an asset to liabilities ratio of 5 to 1 and we have almost $29 million of cash on hand. We believe we have managed our way through some strong headwinds, including the radioactive isotope shortage caused by main reactors being down through August of this year and a very serious economic downturn that is not yet over, but we think that we have weathered the worst of the storm.

The progress we are making actually started in August when the Canadian Chalk River reactor went back into service. This reactor supplies approximately 50% of the medical radiopharmaceuticals to North America, and is a critical link in a supply chain we need for our nuclear imaging products and nuclear services. That alleviated a significant supply disruption that had negatively impacted our Digirad Imaging Solutions business or DIS for the past 15 months. It shut down back in May of 2009. And the most serious of those impacts came in the four months leading up to early August. The reactor coming back online was very welcome news and boosted our DIS margins near the end of the quarter. It allowed our physician customers to begin getting back into a normal rhythm of service and we expect the uptick in our service business to remain at that higher level going forward, barring any additional supply disruptions.

The other positive news about our DIS business is that as concerns about isotope shortages and further changes in reimbursement have subsided, we began signing new DIS customers at a higher rate in the third quarter of this year than we experienced during the first half of 2010. Those new contracts represent both ultrasound and nuclear services. The economics today are different than they were in the past as we have had to account for reimbursement decreases and other pressures. Again, for the first time in many months, it looks like the physicians are getting back into a rhythm as concerns around isotope availability and reimbursement have dissipated.

Our ultrasound services continue to march forward. We have spent a lot of time and effort expanding the types of imaging we can perform beyond Echo. This has offered flexibility to our physician customers and allowed them to balance the service day, as Echo reimbursements have been cut over the past two years. We plan to continue this expansion of imaging services.

Let me say something about reimbursement, it appears that following the dramatic cuts of the past year, up to 36% for some imaging services, things have stabilized and physicians are learning to live with the current environment. The sustainable growth rate or SGR is still alive as an issue, and the deferment expires on December first. Clearly, if the SGR goes into effect, this could have a significant negative impact on our business. It's anyone's guess as to what Congress will do. One possible outcome would be yet another delay and continued uncertainty, but we really don't know.

Outside of the SGR, preliminary indications are that there won't be another big reimbursement decline for cardiac nuclear imaging and in fact, there even be a modest uptick in reimbursement for nuclear codes. We shall see, but again, we are cautiously optimistic.

On the camera side of our business, we are happy to report some positive trends as well. We instituted a road show program last quarter designed to get physicians and imaging technologists hands-on experience with our Ergo camera in the hospital setting. We felt that if we could see-- if they could see how maneuverable and flexible the camera was, they would be more likely to image-- imagine, excuse me, all of its potential uses and advantages. This has been true and beyond our expectation. Early indications from that road show activity are very positive. We have performed more than 30 on-site demonstrations and interest from those targets is high. As we have stated in the past, the hospital market, especially in this environment, necessitates a long sale cycle, but we are seeing encouraging signs and the sales pipeline is filling up and we expect a stream of Ergo camera sales to commence in 2011. This is a substantial product unlike anything else we have developed. It's an advanced imaging device that's light weight and portable and can be moved and used all over the hospital. You can take this flexibility and easy-to-use camera to the ICU, to the CCU or the Burn Unit. You can use it for imaging kidneys, gall bladders, lung studies and chest studies.

We talk about freedom. We continue to find new opportunities with this camera nearly every time we enter a hospital. This is possible because of its portability, quality and ease of use. As an example of Ergo's usefulness, we were told of one instant where during a road show visit, the Ergo was brought into the operating room to do a quick imaging study of a particularly large patient, I believe the person weighed more than 600 pounds, to make sure that there was no internal bleeding before the patient was taken off the operating table. Sometimes a patient can have internal bleeding after an operation and not only is it dangerous, but it can be costly if the patient is readmitted for a second operation and a second operation is required. Ergo can eliminate that problem in a number of instances, it is light enough and so easy to move that it can be easy to use virtually anywhere in the hospital. Our team is very proud of the Ergo's ability to improve the care of patients. For a hospital, that means reductions in cost and increases in revenues for many procedures as well as increases in productivity and flexibility, all very important considerations for any business, but particularly for hospitals in this health care environment.

As I mentioned, the initial response to our Ergo has been very promising. Of the 30 or so on-site demonstrations we conducted on our Ergo road show, the majority of customers have come back and indicated an interest to purchase. At this point, we can not say exactly what this will transfer to in terms of sales, but the early indications are good. We believe the financial return should begin to occur in 2011. We look forward to talking to you more about Ergo in the future.

Now, I'll turn the call over to Richard Slansky, who will go over the results of operations, 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 third quarter and nine months ended results. As was mentioned earlier, we have time allocated for questions at the conclusion of our opening comment, so if we don't cover everything or something that you're interested in, please keep track of your questions and we'll get to them shortly. If for some reason we can not get answer your questions this morning, we will take a note and post the answers to them on our Web site for your later review.

As Todd indicated, the third quarter of 2010 was a better quarter with the return of radioisotope supply in August for our Nuclear Services business, with the continued progress in our ultrasound business, with the introduction of our Ergo camera to hospitals in our camera business and with continued success and profitability in our customer services business. Also, our balance sheet remains strong with our cash position at nearly $29 million. By the way, we filed our financials with the SEC on form 10-Q yesterday, and those results are available on our Web site at www.digirad.com under the Investor tab or on the SEC Web site.

Now for some results, consolidated revenue for our 2010 third quarter was $13.3 million compared to $16.9 million in the third quarter of 2009. The $3.6 million decline was due to extremely limited isotope supplies in our DIS business for part of this quarter, combined with low camera sales in the quarter. DIS revenue in the 2010 third quarter declined to $9.6 million compared to $12.9 million in the 2009 third quarter. Product revenue in the 2010 third quarter decreased $3.7 million compared to $4 million in the same quarter of 2009. We do expect DIS revenue to continue to represent the larger percentage of our consolidated revenue in the future.

Consolidated revenue for the first nine months of 2010 was $41.5 million compared to $53.2 million for the prior year period. DIS revenue for the first nine months of 2010 was $30.1 million compared to $40.3 million for the prior year period, and product revenue for the first nine months of 2010 were $11.4 million compared to $12.9 million for the prior year period. Consolidated gross profits for our 2010 third quarter decreased to $3.1 million or 23.4% of revenue compared to $4.5 million or 26.7% of revenue in the same quarter of 2009. The $1.4 million decrease in consolidated gross profit is associated with the reduction in scan days in our DIS business due to the worldwide radioisotope shortage for the majority of the third quarter and greater manufacturing variances due to lower production volume.

Consolidated gross profit for the first nine months of 2010 was $8.4 million or 20.2% of revenue compared to $15.5 million or 29.2% of revenue for the prior year period. Cost of DIS revenue consists primarily of labor, radiopharmaceuticals, equipment depreciation and other costs associated with providing services to our customers. Cost of DIS revenue was $7.9 million for our 2010 third quarter, representing a decrease of $1.6 million or 17% compared to the prior year quarter. The decrease in the cost of DIS revenue is primarily a result of decreased radiopharmaceutical expenses from fewer scans. Cost of product revenue consists primarily of materials, labor, overhead costs associated with the manufacturing and warranting of our products. Cost of product revenues were $2.2 million for our 2010 third quarter, representing a decline of $600,000 or 21.3% compared to the prior year quarter. The decrease in cost of product revenue is primarily result of lower camera sales during the quarter and the mix of new and used cameras compared to the prior year period.

Our net loss for the third quarter of 2010 was $1.3 million or $0.07 per share compared to a net loss of $400,000 or $0.02 per share for the same quarter of last year. Net loss for the first nine months of 2010 was $5.7 million or $0.30 per share compared to a net income of $400,000 or $0.02 for the prior year period.

Although we recorded a net loss for the quarter, we dropped the loss from last quarter by more than 50% and we continue to work extremely hard to overcome the many environmental headwinds we faced this year. Throughout this 2010 third quarter, we continued to focus on fundaments including a strong focus on cost reduction, as evidenced by our June reduction in force, executive and board salary cuts and various other management actions to reduce costs and/or improve profitability. Our goal remains to regain profitability and positive cash flow. In that vein, our focus on cash has allowed us to preserve our cash, cash equivalent and securities available for sale balances at $28.6 million or approximately $1.52 per share at September 30, 2010. This can be compared to our cash and cash equivalent and securities available for sale balances of $31.8 million at December 31, 2009. So we did burn some cash this year, but we believe the cash burn was minimal due to our efforts to manage our balance sheet account.

Our DSOs remained consistent during the quarter. Going forward, we plan to increase collection efforts reduce our DSOs or days sales outstanding while we continue to focus on reducing inventory level. By way of an update, we announced in February, 2009 that our Board of Directors had authorized a stock buyback program to repurchase up to an aggregate of $2 million of our outstanding common stock under a 10B-18 plan. During 2009 and the first nine months of 2010, we purchased just under $600,000 shares of our common stock at a cost of just over $1 million. We did not repurchase any shares during the third quarter, but the program is active subject to the constraints imposed by the plan itself and our Board of Directors.

We have seen in increase in the number of studies we perform due to the resumption of isotope supply for our nuclear services business. We are certainly heading in a more positive direction than we were during first half of 2010. Although we no longer believe that we will achieve positive cash and earnings this year, our cash and cash equivalent balances remain at nearly $29 million, and we believe that we will begin generating cash again soon. We have managed through one of the most difficult periods in our collective business experiences and we believe in our team's ability to produce positive results in the months and year ahead.

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

Thanks, Richard. We are beginning to see signs of progress and growth. Candidly, those signs are still small, green shoes, if you will, but nonetheless they are positive and we believe that the organization is very energized because of that. We have an optimism today that we believe is a direct result of the work our management team did in adapting to the changing healthcare world and re-stabilizing our company over the past quarters. We have overcome and managed a very damaging shortage in radiopharmaceutical supply and put this issue behind us. We cut our loss in half and have seen some significant financial improvement.

The outlook for Ergo and the response by our physician community has been very positive. In our DIS business, we are signing up new business and expanding our work in our regular customer base, and we are making significant strides in moving beyond the cardiac suite into the national hospital market. In brief, financially, operationally and commercially, we are moving in the right direction.

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

Thank you, sir. (Operator Instructions) And our first question comes from the line of [Jared Sinter] with G2 Systems. Please go ahead.

Hi, guys. Can you talk about the diversification initiative that you guys started earlier in the year and give more details around that and possibly other strategies that can enhance your hold value? Thanks.

Sure, thanks Jared, good morning to you. I guess you know, a couple of items we continue to look at a lot of different opportunities in terms of either broadening the product lines, look at new technologies or products that would fit into essentially the customer channel that we're servicing today, and the same thing on the services side. We have spent quite a bit of work in broadening the potential for what we do with ultrasound within the physicians' space as we've been shoring up that base business, and that we've expanded a little bit into some of the vascular lab activities by doing an ankle-brachial index type studies and things like that. But most of those of those little initiatives are kind of tied into the base business and linking in. Other things beyond that, we continue to look at ways to broaden the platform in a more meaningful way that we believe would enhance shareholder value. We have not, obviously communicated anything specific, but we continue our search and will do so. We also had entered into recently, into a development agreement with our technology. So looking at ways to expand that technology and have it be used, really, by others. We've always had a vision of helping convert the entire industry into solid state technologies. We believe that we have a technology that has tremendous opportunity to do that and really at a favorable price point. So we'll continue those initiatives and those efforts. Obviously in the first part of this year, we've had to spend a lot of time with the base business, so we're very pleased with some of those environmental improvements in terms of isotope challenges and things like that that we've had to fight through so that we can get that moving in the right direction again, which we're doing, and then continue our diversification initiatives.

You know, as Todd spoke about in his opening remarks, we've spent quite a bit of time recently working on this Ergo camera, which is really our first foray to stay within nuclear imaging, but to move away from cardiac imaging or at least diversity away from cardiac imaging. And this road show that we've done has been extremely positive. There's been a great reception to it. We're really excited about the Ergo camera and that alone is a diversification strategy for us to get into areas that are ancillary to cardiac imaging and not consider Digirad as just a cardiac imaging company. So in addition to that, we have the solid state technology, but moving in that direction, we're going to be putting even more time and effort into the Ergo camera and getting its distribution out with our sales force and others.

Will there be any effort to diversify away from the United States, perhaps into emerging markets?

I think that is a consideration. We don't have a firm initiative right now, Jared, but we certainly understand that there is possible potential and we need to look a little bit closer at what that opportunity is. We have had some discussions, kind of ancillary type discussions, with folks on that front and we need to determine if that's going to be a real firm initiative on a go-forward basis. We do believe that there is tremendous opportunity with that camera, for example, within the U.S. and we need to really capitalize on that first and foremost.

(Operator Instructions) And I show no further questions at this time. I'd like to turn it back to management, please go ahead.

Thank you, Alisa, appreciate it. Appreciate the questions from Jared this morning. Although we are very optimistic about the future, there remain uncertainties in healthcare and our business. What I can tell you is that my management ream and I are doing everything possible to create a great profitable and more diversified healthcare company. We appreciate the support of our loyal shareholders. Since our next conference call will not be until 2011, I'd like to take the opportunity to wish all of you a very happy and healthy holiday season, and we look forward to our next report in the new year. Take care for now.

And ladies and gentlemen, this concludes the Digirad Corporation 2010 Third Quarter and Nine Months Conference Call. Thank you for your participation. You may now disconnect.