Star Equity Holdings Inc (STRR) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen, thank you for standing by. Welcome to the Digirad Corporation's 2010 fourth quarter and year-end results conference call.

(Operator Instructions). As a reminder this conference is being recorded today, Wednesday, March 9, 2011.

I would 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, Alicia, and thank you everyone for joining us this morning.

If you did not receive a copy of today's press release and would like to, please contact our office at 949-370-8500, and we will be happy to send you one. Also, this call is being broadcast live over the Internet. And may 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'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, changes in Company's markets and competition.

More information about the 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 from Digirad is Todd Clyde, President and CEO, and Richard Slansky, Chief Financial Officer. Management will discuss fourth quarter and year-end results, update us on the Company's strategies and comment on the Company's outlook. A question-and-answer period will then follow.

With that, I'd like to turn the call over to Todd Clyde. Good morning, Todd.

Thanks, Matt, and thank you all for your interest in Digirad and for joining us this mornings conference call.

What a difference a year makes. Last year this time, we were battling a variety of several headwinds, with little visibility into how to solve them. We were in the middle of a global recession, a difficult and month-long isotope shortage and we're facing significant physician reimbursement reductions. Today, thanks to a modest economic recovery and our focus on product innovation and cutting costs, and to the momentum we built in the second half of 2010, our mood and perspectives had shifted to the positive. The isotope shortage has been solved and physician reimbursement, following drastic cuts in the past two years, has actually increased a bit for some key procedures including nuclear cardiac imaging. Both sides of our business are generating good revenues and now growing again.

We achieved positive cash flow from operations of $1.9 million in the fourth quarter, and closed the year with more than $30 million in cash and securities. Today, we believe those headwinds we were facing in early 2010 are behind us. As a result, we expect to see revenue increases and top line growth in 2011, particularly in the second half of the year. In short, after struggling for many months, we believe Digirad is moving again. One of the main reasons for our optimism is Ergo, our new general purpose, portable imaging system. Since the day we launched Ergo with the national road show to our customers last fall, we have seen a very strong interest and positive feedback. We are hearing from customers that Ergo is the easiest camera to use in nuclear imaging. It's lightweight, and it's portable which is undoubtedly its most innovative aspect. With Ergo, you no longer have to take a patient downstairs to the basement or to the imaging center. You can use Ergo right in the operating room, or in the ICU, or in the trauma center, or wherever in the hospital you need it.

This feedback is important to note because this camera does some fundamental thing's for Digirad that we have never done before. First,, it puts us in the middle of one of the most significant trends in medicine today; the move to lighter, portable hospital equipment, toward the patient or to the point of care. Particularly with diagnostic imaging, you are now seeing devices being brought to the patient rather than vice versa. Why? To provide the physician with immediate information on which to act. Delayed information is always less valuable than real-time information. The potential impact on patient care and costs are tremendous. Physicians are under a lot of pressure all the time, with increasing patient loads. They are being asked to do more with less. Giving them tools that will allow them to dramatically improve, not only the diagnosis of disease, but the treatment of disease, is becoming important. In fact, it will be absolutely critical in the coming years.

The trend is toward smaller, flexible, lower cost imaging at the patient side. The flexibility that Ergo offers, its mobility and portability, is one of the main reasons it is welcome wherever our sales team introduces it. We booked eight Ergo cameras in the first six months after its launch, two in the third quarter of 2010 and six in the fourth quarter, including one internationally. This has us all very excited and optimistic about the future.

Secondly, Ergo moves us beyond the cardiology clinic and inside the hospital, a key strategic initiative of ours. The hospital is the new marketplace for Digirad and one, we believe, that will rebound from the recession quicker than the physician suites where we have traditionally been focusing.

From the hospital's perspective, products like Ergo mean improved patient care, reductions in cost and increases in revenues, as well as improvements in productivity and flexibility, all important considerations and selling points. For Ergo, our X-ACT camera, and the entire camera set of our business, the back part of 2010 was encouraging, and we expect this enthusiasm to continue in 2011. We have a similar optimism about the other side of our business, the Digirad Imaging Solutions side, which we call DIS. We believe we've finally weathered the storm that plagued the DIS business during much of 2009 and the bulk of 2010. Starting last August when the isotope shortage ended, business began to come back online and many of our physician customers began returning to a more normal rhythm of service. We saw DIS margin expansion in both the third and fourth quarters of 2010. And, we will keep driving further improvements in 2011.

Speaking of weathering the storm, we were impacted in the first quarter of 2011 by unusually bad weather in some of our hub cities. I must admit, we didn't exactly plan on being shut down for a week in Atlanta, when a 100-year storm hit in January and a massive storm in the Midwest in February, for example. Looking forward, the outlook for physician reimbursement is also good. In fact, the 2011 Medicare physician fee schedule for nuclear cardiac imaging resulted in approximately a 5% to 6% increase, which will be a nice boost for our physician customers, for DIS, and for Digirad in general. One of our goals for 2011 and beyond, is to sign up new DIS business both in ultrasound and in nuclear, and to continue to expand the ultrasound services to key locations.

Also, based on the regulatory changes underway in the healthcare marketplace, we are looking into providing accreditation consulting and facilitation services for our DIS nuclear customers. This is a natural extension to the nuclear services we provide, and will be a welcomed value for most of our physician customers. These are all good signs for growth for Digirad and among the reasons for our enthusiasm. All in all, our outlook today is much more positive than a year ago. The headwinds and much of the uncertainty of early 2010 are gone. In their place for the first time in recent months, are avenues for margin improvement and revenue growth.

Also, thanks to the positive response to Ergo, and our other products, we are evaluating expanding into the international market place. We definitely believe there is a market there for our products. Specifically, we are looking for a number of positive accomplishments in 2011, including; number one, generating consolidated free cash flow for the full year. Number two, further increasing the adoption rates and revenues from the Ergo program. Number three, expanding product and DIS margins, and fourth, growth in consolidated top line in the second half of 2011 versus the second half of 2010.

With that, now I will turn the call over to Richard Slansky, our CFO, who will go over the numbers and results of operations. Then, we'll open the call for some questions and then I'll have some closing remarks thereafter.

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 fourth quarter and year end results. In the fourth quarter of 2010, it was a much better quarter for us, with the return of radio isotope supply 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 the continued success and profitability in our customer services business. As Todd mentioned, we also generated $1.9 million in cash during the fourth quarter. As you know, we filed our financials with the SEC on Form 10-K, and those results are now available on our website at www.digirad.com and under the investor tab, or under the SEC's website.

Now, for some specific results. Consolidated revenue for our 2010 fourth quarter was $14.7 million, down from $16.4 million in the fourth quarter of 2009, but up from $13.3 million in the third quarter of 2010. The $1.7 million decline from last year was due mainly to our lower nuclear study volume in our DIS business for the quarter. DIS revenue in the 2010 fourth quarter declined to $9.4 million, compared with $12 million in the same quarter of 2009, a $9.6 million in the third quarter 2010.

Product revenue in the 2010 fourth quarter increased to $5.2 million compared to $4.4 million in the fourth quarter of 2009, and $3.7 million in the third quarter of 2010. Consolidated revenue for 2010 was $56.2 million compared to $69.6 million for 2009. DIS revenue for 2010 was $39.5 million, compared to $52.3 million in 2009, and product revenue for 2010 was $16.6 million, compared to $17.3 million for 2009. Consolidated gross profits for our 2010 fourth quarter decreased to $3.6 million, or 24.6% of revenue, compared to $4.7 million or 28.8% of revenue for the fourth quarter 2009.

The $1.1 million decrease in consolidated gross profit is associated with the reduction in scan days in our DIS business and greater manufacturing variances due to lower production volumes in our product business. Consolidated gross profit for 2010 was $12 million or 21.4% of revenue, compared to $20.2 million or 29.1% of revenue for 2009. 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 $7.6 million for our 2010 fourth quarter representing a decrease of $1.5 million, or 16.8%, compared to the fourth quarter of 2009. The decrease in the cost of DIS revenue is primarily a result of the decreased radiopharmaceuticals expenses from fewer scans. Our DIS fourth quarter gross margin was $1.8 million, or 18.7% of DIS sales, versus $2.8 million or 23.4% in the fourth quarter of last year, and $1.7 million, or 17.4% of DIS sales in the third quarter of 2010.

Cost of product revenue consists primarily of material, labor, overhead costs associated with the manufacturing and warranting of our product. Cost of product revenues were $3.4 million for our 2010 fourth quarter, representing an increase of $900,000, or 36.4%, compared to the fourth quarter of 2009. The increase in cost of product revenue is primarily the result of higher manufacturing variances from our lower production volume, as well as an increase in excess and obsolete reserves.

Our fourth quarter product gross margin was $1.8 million, or 35.1% of DIS sales, versus $1.9 million, or 43.3% in the fourth quarter of last year, and $1.4 million, or 39.1% of DIS sales in the third quarter of 2010. Our net loss for the fourth quarter of 2010 was $600,000, or $0.03 per share, compared to a net income of $200,000, or $0.01 a share for the third quarter of 2010. Net loss for 2010 was $6.2 million, or $0.33 per share, compared to a net income of $600,000, or $0.03 per share for 2009.

Although we recorded a net loss for the quarter, we dropped a loss from last quarter by more than 58% and we continue to work extremely hard to overcome the many environmental headwinds we faced this past year. Throughout the 2010 fourth quarter and into 2011, we continue to focus on fundamentals. However, we are also focusing on developing new physician customer relationships and contracts for our DIS business, as well as promoting our new Ergo imaging system.

Our goal this year is to expand our gross margin and generate positive cash flow. In that vein, as I mentioned before, we continued our efforts to manage a strong balance sheet. Our focus on cash has allowed us to preserve our cash and cash equivalents and securities available for sale balances at $30.2 million, or approximately $1.63 per share, as of December 31, 2010. This can be compared to our cash and cash equivalents and securities available for sale balances at $28.6 million as of September 30, 2010, and $31.8 million as of December 31, 2009. Though we did burn some cash this year we believe the cash burn was minimal compared to the operating loss, and allows us to enter into 2011 with strength despite the very tough year in 2010.

Our consolidated DSOs, or days sales outstanding, declined during the quarter from 61 days to 57 days, due to the sale and immediate payment of some camera sales combined with our ongoing focus on DIS collections. Going forward, we plan to continue our collection efforts and implement new methods to reduce our DSOs such as contract changes in our DIS business. By way of an update, we announced in February of 2009 that our Board of Directors had authorized a buyback program to repurchase up to an aggregate of $2 million of our outstanding common stock. We did not purchase any stock in the fourth quarter of 2010. However, during 2009 and the first part of 2010, we purchased just under 600,000 shares of our common stock at a cost of just over $1 million. Although the program is active, it is subject to the constraints imposed by the plan itself, and to our Board of Directors.

We are starting to see some tailwind after a year of very strong headwinds. We are certainly glad that 2010 is over. We are now heading in a more positive direction, and are looking forward to improving our margins and generating cash in 2011. We have managed through one of the most difficult periods in our collective business experience, and we strongly believe in our team's ability to produce positive results in the months and years ahead.

With that, we'll turn it back to the operator for questions. Alicia?

Thank you. Ladies and gentlemen will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from the line of [Alex Andrade] with [Bullrock Capital]. Please go ahead.

Hi, thank you. Can you talk about, if business is improving, why you're not expecting revenue growth in the first half of 2011?

Sure. Primarily because when we entered into 2010 and then we saw these dramatic cuts in reimbursement and isotope shortages and so on and so forth, we had to do a lot of managing with our existing base of customers. Some of the smaller groups actually fell off the back end so those groups would not be recaptured even as the isotope shortage was abated and came back online, and, then on top of that, their volumes are just a little bit lower than where we were, right? So we established a new baseline in the middle of the year and now we are building off of that. So you will see the majority of the growth when you compare second half of the year 2010 and second half of 2011. But, there will be growth.

I might just add to that on the product side of the business. We did introduce our Ergo, as Todd mentioned earlier, in the second half of 2010. And, we're continuing to move that out, but the hospital sales cycles tend to be a little bit longer, so the predominance of our Ergo sales we're projecting further into the year.

Okay. That makes sense. And, do you break out the percent of product sales that is maintenance contracts or new equipment sales?

We don't. It's included in the number.

Can you give me just a rough, I mean are we talking 10%, 50%? Just some rough--?

Yes, it is a fairly large number. It's between $9 million and $10 million annualized.

Annually. Okay, thanks. And, can you explain the metric you gave on DIS asset utilization, 61% of 133? I just didn't understand that metric.

I don't think we gave an asset utilization metric. I think we just talked about the DSOs of the business.

Well, you said in the press release--?

Oh, in the press release.

--asset utilization was 61% on 133 systems?

Yes, okay, sorry.

I'm just trying to understand what that meant.

Yes, what we're talking about is on a five day workweek, how many days are those assets fully utilized, or they're being used for a day of service, so out of the total available days in any given quarter adjusted for holidays and things like that that would happen in the fourth quarter for example, how many days did they serve us, so, 61% was the utilization rate on a five day workweek. You'll see that if we can drive that utilization rate into the 70s, you would expect a lot more margin expansion that we currently have. So that's why--.

That would happen because you downsized that business a little bit to reflect kind of a lower base number of accounts?

I wouldn't think of it as downsizing at this point, I think of it more as expansion and therefore you're utilizing your fixed cost better.

Okay. Fair enough. And then, the Ergo, is that more then, is that the majority of your equipment sales now?

It's certainly the majority of our focus. We'll continue to push our X-ACT camera, that's a great camera and it's great for the hospital outpatient setting, and large practice setting. We'll continue to sell our dual-headed camera, our mobile dual-headed camera into the marketplace, but we certainly appreciate that the cardiology market is depressed. If you look at domestically, the cardiac specific market sold just a little over 100 cameras in all of 2010. We believe that that's a low watermark level and hopefully you'll see some rebound, but our current focus is to really drive that Ergo camera into the hospital because it does some special things for bedside imaging in terms of really reducing the cost, taking imaging where the patient is, and expanding the capability to provide real-time information to the treating physician.

Okay. That's great. Thank you.

Thank you.

Thanks for the call.

Thank you. Your next question comes from the line of David Wright with Henry Investment Trust. Please go ahead.

Good morning, gentlemen.

Morning, David.

Good job on keeping the cash up, you said that was a priority and you delivered, so, good job.

Thank you.

A question on Ergo. How many hospitals constitute the potential market in the United States in your estimation?

Yes, that's a great question. I would tell you that you can bifurcate that thought into two segments. One, our large hospitals that have multiple systems that would be either looking to replace an older, single headed camera, an old portable camera, there were some old clunker portables that were put in the market years ago or, groups that really want to get into the portability for the first time, and move it into the ward, to the ICU activity, trauma, things like that. But if you can also -- and that's probably in the 750 to 1000 hospital market range. If you then look at opening up elements or areas where you don't do imaging today, and if I use surgery as an example, that's something that we're trying to look into, if you could actually use an Ergo right in the surgical suite, and provide real-time information to a physician, then you would be dramatically expanding the number of potential hospitals because really, anyone that had a formidable operating room program either cancer or other activity. Usually that camera would be ideal for any time when you are looking at either lesions, cancerous lesions or some type of an activity where there is perfusion, like when you bring down skin flaps after a pretty significant surgery, things like that. So, we've done some initial testing, we'll be doing testing throughout the year. So, that won't be many sales at all this year because it's kind of a work in progress, trying to validate that there's a real opportunity there, but I think it has incredible potential for the future.

And are you selling Ergo direct or through distributors, both?

Domestically it's almost all direct and then, internationally we are really doing an assessment of what that potential is. Where we sold our first unit internationally that was through distributor.

So, theoretically you could be selling 10 or 20 of these a quarter?

I think if you look down the road and you consider, certainly the international landscape, I would believe that that is a true statement. It's going to take some time to ramp up to those levels but I believe that is true, especially when you talk around the 20 mark per quarter. But I think this camera has a 100 plus unit per year potential when you look at the total, global market, probably even closer to the 120, 150 mark. And that's without including something like it having a tremendous surgical application.

That's helpful. I have one additional question. Some months ago you announced a joint venture, a partnership, with an undisclosed party. I'm wondering how that's developing, if it's producing any revenues?

It's advancing very well and we would expect some time in the middle to back end of this year that that product will start to be moved out commercially. We actually did recognize some revenue on a couple of heads that were prototype heads that were delivered part of the R&D project in the fourth quarter. Okay. Todd, Rich, thanks very much. Thank you.

Thank you.

(Operator Instructions).

And I show no further questions in the queue at this time. I'd like to turn the conference back to Mr. Clyde for closing remarks.

Great. Thank you Alicia.

We appreciate the questions and the engagement today. In closing, I'd like to reiterate why we are optimistic. Both sides of our business are generating good revenues and growing. There is more stability in the marketplace today, the isotope shortage has been solved, and the physicians are actually experiencing a modest increase in rates for nuclear cardiac imaging. This should help drive new business as well as enhance revenue utilization rates.

In our DIS business we are generating cash flow and expanding our service offerings. Our new camera, Ergo, demonstrates our ability to innovate and to move where the market is headed; towards mobility, flexibility and to the point of care. As I said earlier, we sold eight cameras since we launched the camera during the last six months, and the market is expressing a lot of enthusiasm for this camera. We also continue to look for potential products and technologies to add to what we are doing, and to diversify and grow our Company. This remains a key part of our overall strategy.

Thank you all for joining us today. Goodbye.

Ladies and gentlemen, this concludes the Digirad Corporation 2010 fourth-quarter and year-end results conference call. Thank you for you for your participation.