Star Equity Holdings Inc (STRR) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Digirad Corporation 2011 first quarter results conference call. At this time, all participants are in listen-only mode. Following the presentation, instructions will be given for the question-and-answer session.

(Operator Instructions) And as a reminder, this conference is being recorded, today, May 6, 2011. I would now like to turn the conference over to Matt Clawson of Allen & Caron, the Company's Investor Relations firm. Please go ahead.

Thank you, Craig, and thank you, everyone, 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 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'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, cost 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 trend, changes in the Company's market 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 10-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 those 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 first quarter results, update us on the Company's strategies and comment on the Company's outlook. The question-and-answer period will then follow.

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

Thank you, Matt, and thank you, everyone, for your interest in Digirad and for joining us on this morning's call. We are very pleased with what we have accomplished in the first quarter. We continue to believe that in terms of growth and profitability, we are building towards a solid second half of 2011. In general, as the reimbursement environment has stabilized in our markets along with the economy recover and grow, so does our business at Digirad.

During the first quarter, we hit or surpassed our expectations in nearly every category. Our first quarter revenue of $14.2 million was a little bit higher than we had budgeted. One area where we did much better than expected was in generating cash. We closed out the quarter with $30.6 million in cash and investments.

We are also seeing our Digirad Imaging Solutions business, which we call DIS, starting to grow again. And our cameras, particularly our portable ergo cameras, are selling and generating enthusiasm among members of our sales team and in the marketplace. It is very rewarding to see growth and momentum begin to come back into our DIS business. This is the beginning of a turnaround story for us as we -- because of that, this part of our business was hit hard in late 2009 and 2010 by the slumping economy, physician reimbursement issues and isotope shortages.

The dramatic reduction in nuclear cardiac imaging reimbursement coupled with isotope shortages resulted in lower-volume customers walking away from subscribing to the services altogether and resulted in the remaining larger customers not scanning at their historical levels due to the isotope shortages and other negative economic pressures on their patients. This all set a new revenue baseline for our DIS business coming out of 2010.

Thankfully, 2011 nuclear cardiac imaging reimbursement rates actually increased by approximately 5% and our existing physicians seem to be getting back to a more predictable and positive rhythm of service. Our sales team is also having success once again at bringing on new customers, a return to growth is refreshing. It will take a while before we surpass the high tide mark in DIS customer base, but it is very encouraging to see new physician practices coming on board and growth in the overall base business again following the 18-month contraction period we experienced.

We are also adding new physician practices -- practice accreditation services, which are beginning to bring in new incremental revenue. This will continue to grow during the next couple of quarters. One of our consistent goals has been to build new DIS business by adding services in ultrasound and nuclear and lately accreditation services. These are all good revenue drivers and we like the progress we are seeing.

Revenues in our DIS side of our business were $7.76 million for the first quarter and actually could have been stronger. Our hubs in the Midwest and other parts of the country were hit by severe storms during January and February that completely shut us down for several days and in one case for over a week. Without those interruptions, our numbers would have further exceeded our expectations. While it is difficult to recapture those lost days, we believe this further demonstrates that we're on the right track with our DIS business and that things will keep getting better.

On the camera side of our business, the ergo continues to be a great story and is a good example of our innovative capabilities. We have talked a lot about ergo on recent conference calls because we see its potential. Since the day we launched our ergo, we have received strong interest and positive feedback. People tell us just what we had hoped for with the ergo. It's an easy camera to use in a nuclear imaging department. It's easy to move around the hospital, it's lightweight and it's portable, which undoubtedly is its most innovative aspect. With the ergo, a hospital no longer has to shift patients out of the operating room and downstairs to the imaging center in the basement. You can use ergo right in the operating room or in the ICU or in the trauma center or wherever you need to in the hospital.

We still are developing the market opportunity in the surgical suite, for example, but the cases that we have done are very promising. Additionally, ergo places us into one of the most significant trends in medicine today. The advent of lighter, portable hospital equipment that are taken to the point of care. This trend towards smaller, flexible, lower-cost imaging at the patient's bedside is important.

Also, as I have noted in the past, ergo moves us beyond the cardiology clinic and inside the hospital. Our focus on the hospital market is a new initiative for us. We believe the hospital segment will rebound from the recession quicker than the physician suites. Products like ergo work well for the hospital because of the camera's flexibility and also the financial benefit.

The ergo can help reduce hospital costs and increase revenues along with the improvements in patient care. The flexibility that the ergo camera offers its mobility and portability, for example, is already being recognized in the marketplace. We sold seven ergos in the first six months after we launched it and six more in the first quarter of 2011. So far, the big challenges is speeding up the hospital buying cycle. This can result in not only lumpiness in terms of orders, but makes our ability to predict bookings and revenues in this business segment a challenge.

As for the rest of our camera business, we sold a total of eight cameras in the first quarter of 2011, again, six ergo cameras, one X-ACT camera and one cardiac camera. We were hoping to book a few more sales than we did in the first quarter, but I can tell you that our pipeline is growing and we believe the fruits of our sales labor will be forthcoming.

Also, thanks to the positive response to ergo and our other products in the United States, we are conducting a market study to evaluate expanding our sales footprint into international marketplace. We definitely believe there is a market outside the US for our products and we will validate that in the coming months. All in all, we believe we have generated momentum during the first quarter, which builds on the momentum we established at the end of 2010. Our outlook today is much more positive than it was a year ago.

In closing, let me repeat our goals for 2011. First, generate free cash flow for the full year in 2011. We are ahead of what we thought we would do in the first quarter of 2011, or in fact, we thought that we would actually burn some cash and on the other hand, we actually generated cash. Second, we expect to increase our ergo sales. We sold more than we had budgeted, but we need to increase our bookings. Third, expand our margins in both our product and DIS business. We are on track on this initiative. And fourth, achieve consolidated topline revenue growth in the second half of the year. Again, we are on pace to hit this objective as well.

I'll now turn the call over to our Chief Financial Officer, Richard Slansky, who will go over the numbers and results of operations. We'll then take some of your questions and then, I'll have a few closing remarks. 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 you know, we filed our financials with the Securities and Exchange Commission on Form 10-Q today and those results are now available on our website at www.digirad.com under the Investor tab or on the SEC website.

The first quarter of 2011 was a much better quarter for us and shows the beginnings of our turnaround that Todd has mentioned earlier. With the return of radioisotope supply for our Nuclear Services business late last year and the inclement weather we experienced this winter on the East Coast and Midwest, we are seeing the number of studies in our Nuclear Imaging Services business begin to increase again. March was by far the best month of our quarter and sets a great trend going into Q2 of 2011.

With respect to our Products business, although the hospital sales cycle is definitely longer than the physician office sales cycle and some expected sales tend to be delayed in hospital purchasing organization, with the introduction of our ergo camera to hospitals, we are beginning to see new ergo camera sales. We are cautiously optimistic about both business segments for this year. Moreover, we continue to manage our cash and cash flow closely, as evidenced by our cash and investment balance of $30.6 million as of March 31, 2011.

Now, for some specific results. Consolidated revenue for our 2011 first quarter was $14.2 million, down from $15.1 million in the first quarter of 2010 and slightly down from $14.7 million in the fourth quarter of 2010. The $900,000 decline from last year was mainly due to lower DIS revenues as a result of our decision in 2010 to reduce our DIS daily lease fee combined with a reduction in the number of days that we're able to scan for our physician customers.

DIS revenue in the 2010 first quarter declined (sic - see Press Release) $9.6 million, compared to $10.7 million in the 2010 first quarter and $9.4 million in the fourth quarter of 2010. However, as I mentioned, we are seeing DIS study volumes increase again. And as Todd indicated, we are seeing higher day rates from our physician customers.

Product revenues in the 2010 first quarter increased to $4.6 million compared to $4.3 million in the first quarter of 2010 and $5.2 million in the fourth quarter of 2010, mainly due to sales of our new ergo camera. Consolidated gross profit for our 2011 first quarter increased to $3.5 million or 24.8% of revenue compared to $3.4 million or 22.4% of revenue in the first quarter of 2010. The $100,000 increase in consolidated gross profit is primarily result of improving gross margins in both of our DIS and product segment.

Cost of DIS revenue consists primarily of labor, radiopharmaceuticals, equipment depreciation and other cost associated with providing services to our customers. Cost of DIS revenue was $7.8 million for our 2010 first quarter, representing a decrease of $1 million or 11.8% compared to our first quarter of 2010. The decrease in cost of DIS revenue is primarily result of a more efficient utilization of our labor and equipment along with decreased expenditures from fewer scans performed.

Our DIS first quarter gross margin was $1.8 million or 19.1% of DIS sales versus $1.9 million or 17.9% in the first quarter of last year and $1.8 million or 18.8% of DIS sales in the fourth quarter of 2010. Cost of product revenue consists primarily of material, labor, overhead and associated costs with the manufacturing and warranting of our products. Cost of product revenue were $2.9 million for our 2011 first quarter, representing the same amount compared to the first quarter of 2010. The stability in cost of product revenue is primarily a result of higher margins on ergo camera sales due to the current quarter compared to the mix of new and used cameras in prior quarters.

Our first quarter product gross margin was $1.7 million or 36.8% of product sales, up from $1.5 million or 33.4% in the first quarter of last year, and from $1.8 million or 35.1% of product sales in the fourth quarter of 2010.

Our net loss for the first quarter of 2011 was approximately $400,000 or a loss of $0.02 per share. This is compared to a net loss of $1.2 million or $0.07 per share for the first quarter of last year and a net loss of $600,000 or $0.06 per share in the fourth quarter of 2010. Certainly, we are heading in the right direction. Although we recorded a net loss for the quarter, we've reduced our loss from last quarter by more than 67% and we continue to work extremely hard to modify our DIS business model to adjust and adapt to our changing regulatory and reimbursement environment.

Throughout the 2010 first quarter, we continued to focus on improving our cash position, improving our DIS and product gross margin, and increasing ergo sales. We made some good progress in all three areas. With the introduction of the ergo, we also introduced our customers to our diamond-level service. As a new product, we want our customers to realize the best possible experience. This service or a service level comes with a price, and we incurred and accrued some additional costs related to the ergo introduction, which is reflected in our product cost of sale. We were encouraged by the increase in DIS contracts in the first quarter and a substantial decrease in DIS lost business in the quarter, which we attribute to the efforts of our DIS sales force and the stabilization of the environmental trends that we faced last year.

Our goal this year is to expand our gross margins and generate positive cash flow. In that vein, as we mentioned before, we continue our efforts to manage a very strong balance sheet. Our focus on cash has allowed us to grow our cash and investments balances to $30.6 million or approximately $1.64 per share as of March 31, 2011. This can be compared to our cash and investments balance of $30.2 million or approximately $1.63 per share at December 31. For your reference, we sometimes refer to cash and investments as cash, cash equivalents and securities available for sale, but in short, it is effectively our cash balances.

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 first quarter of 2011. However, during 2009 and 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 by our Board of Directors.

As a special note, you will see a one-time restructuring gain on our consolidated statement of operations of $164,000 in the first quarter of 2011. This is the result of a promissory note that was paid in full during the quarter. Back in 2009, we sold some assets as part of our restructuring activities. We then reserved the promissory note and expensed it as part of our restructuring cost. Well, the promissory note was paid in full, which is a good thing, and we took the gain against the same line that we had previously took the expense.

So, in conclusion, our cash position remains strong as does our balance sheet. We are starting to see some tailwinds after last year's very strong headwind. We are heading in a more positive direction and are looking forward to improving our margins and generating cash in 2011. We are looking forward to begin growing the business again with an eye toward the income statement, while we maintain our focus on the balance sheet.

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

Thank you very much. (Operator Instructions) Adam Peck, Heartland Funds.

Good morning, gentlemen.

Good morning, Adam.

Well, great to see the rate of change in DIS improving. Could you help me understand what that would have looked like if you excluded the weather in the quarter? I mean, I understand that we're going to have a tough weather in the first quarter every year. But, this first quarter seemed a little more severe than the past quarters. So, what would it have looked like ex the weather? Can you put a number to that?

I would say, somewhere in the range of a little bit north of $100,000. Obviously, there is always some weather. So, I kind of try to balance out what you would normally expect. But, we lost an entire week of business in Atlanta. I don't think we would have ever budgeted to lose an entire week in Atlanta. We did make up some of that. So, that's why you're hearing a modest amount of hesitation in my voice. But I would say, it's probably little bit north of the $100,000 range, could be close to $200,000. But, probably closer to the $100,000.

In every year, Adam, we budget some amount of weather in the first quarter and we do have some seasonality to the DIS business. So, second quarter tends to be one of our stronger quarters. Summertime, we get a little bit of vacation time from physicians and the patients. And then, in the wintertime, we do have some weather. So, we try and factor those in. This is a little bit more extreme than we normally would expect as we've normally seen in the past.

Okay. Physician pre-certification requirements, was that material as well?

No. Well, so you said pre-certification, sorry, I kind of read the answer in my mind as accreditation. The pre-certification authorization requirements, I would say, has been steady. Some areas of the country, it's more acute in the type of work that the physician has to go through in order to get accredit to physicians or accredit patients. What I think is positive, as you've read in the news recently where some groups like with Blue Cross have started to back away from those accrediting pressures, that will be certainly a positive for our physicians. I can't tell you exactly how many patients they end up not processing through, but it certainly puts pressure on the physicians just in terms of how they think about imaging in general.

Okay. And when do --

[And I want to add], Adam, that in this quarter, we've seen not only some new business -- growth in new business in the DIS side, which is -- I mentioned that briefly in my comment, but we've also seen the number of studies come up from the physicians that were hesitant to actually perform those studies last year due to all the headwinds that they were facing, the uncertainty in the environment and reimbursement, whether they were going to get actually paid for those studies. So, the actual study volume, the attitude of the physicians is definitely improving. And we're seeing an increase in that regard as well.

Okay. And when did the 5% increase in CMS from reimbursements hit?

It was effective January 1, 2011.

Okay. And what percentage you capture?

Technically, we don't capture any of it, right, because that's the physician's bill forward to Medicare. We're talking about Medicare only. But what I would tell you is that it has relieved us of some of the downward pressure, certainly the downward pressure we had last year on pricing. So, we've been able to hold the price and in some circumstances, were able to bring it up a little bit. Where we're seeing the price increase right now is by providing accreditation services. So, we're going to back to physicians and increasing that so that we can help them through that process and accredit their locations specifically, and that's something that has to go into effect in 2012.

Okay. So, as you look over the course of the entire year, do you think pricing would be a net positive for you?

I think it will be a net positive, a modest net positive.

We're going out in our renewals and we are seeing an increase, a small increase. But we are going back every time we have a new contract. The contracts are normally one-year contracts with the physician and that's -- the physician is then committed to that period and the pricing and we tend to commit to the pricing for that period as well. So we're still living with contracts that were signed in the 2010 period as we negotiate new contracts that will affect our revenue stream going forward. The main issue there is that last year, we did reduce our pricing as the physicians were under pressure and now, there is not the same level of pressure going forward.

Okay. One more question on product and will [see] the floor. Of the seven ergos that were sold, was that predominantly to your Centers of Influence hospitals or it there no correlation to growth you're seeing there and that franchise?

There isn't necessarily a correlation to the COI relationships that we have in the DIS business. I would tell you that the ergo sales have gone into everywhere from premier hospital locations to just kind of standard large hospitals in key regions. A hospital that has like 200 beds or less is not normally a buying consumer of the ergo today.

Hopefully, in the future, as you open up different avenues, they'll start to recognize that. But those groups really don't usually have very big nuclear departments and so they're going to buy a multi-variable angle camera, if they only have one device. But the groups that are using it are using it to do a lot of ancillary procedures, they are doing a lot of bedside imaging, they're taking it into the ICU, the CCU, those types of locations and having a lot of success and the feedback we have on the existing customer level is very, very positive.

We're also doing a great job of getting into the hospitals and garnering a lot of positive interest. The frustration that we have is how do we get the ergos into the check-writing zone, so that it doesn't get bumped for some other piece of equipment on occasion or budget constraints, things like that that continue to exist in the hospital. So the sell cycle continues to be long and it creates some lumpiness in the bookings process.

Okay, great. Thank you very much.

Thanks a lot, Adam. Nice to chat with you.

Tyson Bauer, Wealth Monitors, Incorporated.

Good morning, gentlemen.

Hi, Tyson.

Good morning.

A couple of quick questions. You talked about the significant improvement in March as far as the progress that you've made that you haven't seen in a long time. Any initial data that came through in April to see if that trend has continued and do you expect that to continue as we go through the rest of the year?

Yes, we continue to see a good bookings in our DIS business. It would appear that based on the data that we're looking at that physicians are getting back into a little bit more normal rhythm of the patients that they're scanning. So that was a positive. I guess, a trend and these are things we normally don't talk about, but we did better than our budgeted number in the month of April, for example, in our DIS business.

So, that's kind of probably the most important [one] when I think about what we plan, what we expect, those things are positive and we continue to try to accelerate our camera bookings, right, which I would say is kind of one of our challenges right now. We've got to continue to accelerate that and so far, we've actually booked as many cameras as we booked last quarter, which isn't necessarily a great statement. But we are hoping to be more -- to increase that number and get these things kicked out of the hospital buying process.

And can you give us an idea of your net contract wins? How that is working through with the wins versus some of the losses you've had in the quarter?

On the camera side, we haven't had many losses at all. It's more a question of when the hospital is going to be in a position to actually purchase and a few times, we've had decisions that have been made in the hospital where some other capital equipment purchase became more urgent and they went in that direction. Our viewpoint in the discussions with those groups is it's a delay, but you could also perhaps call it a loss. But, it's actually more of a delay. So, encouragingly, you're not seeing things fall out the back. You're just seeing them get delayed.

Okay. You talked about the new sales cycles with the hospital. Is it typically one unit per hospital and are you having to treat the hospitals individually or can you get approval from a hospital chain and then, wish that decision goes down to the individual hospital?

Yes, the latter we've done a little bit less with to date, kind of probably somewhat based on our limited resources, but we have also talked to certain hospital chains and what has happened is they'll purchase one camera and then, we've opened up doors with the other individual hospitals and we're in process of working through second and third units in those locations, but it doesn't -- at least in our experience so far, it hasn't normally come under like this umbrella of five units. It's usually individual purchasing orders and processes. So, it helps us in getting into the discussion and opening that door. So, our goal right now is to give any customer that owns a camera just a tremendous experience so that you have real positive reference points.

Okay. And about how many units do you have existing in the marketplace today that's kind of in a demonstration mode?

Well, we've had -- this quarter, we had a couple of units that we were taking around into different hospital locations that are in demonstration mode. One of those were putting inside of a location that will be doing some specific testing protocols and then, the other one will remain on the road that is specifically moving around from region to region. So, there aren't like fixed site locations where we drop cameras in and we have like five locations set up under that umbrella because it's portable, we just move it around to the different locations. So that's worked out really well for us.

(inaudible) basically sales.

Okay. A final question from me, and you may not be able to give specifics, but give us an idea to the shareholders and then the investment community kind of some benchmark unit targets or sales that you are going toward for the second quarter and the second half in the year and where you ultimately believe you can be on that basis?

Yes. It's a great question, it's based on the amount of guidance or lack thereof that we've been giving. I can't answer the question directly. What I can tell you is that our goal and objective is for us to see continued progress and growth on the number of ergo units and cameras in total that we're selling, okay. So, it is an equipment business. There will be choppiness and we expect the second half to be stronger than the first half.

We were pleased with what we saw in the fourth quarter. We actually delivered one more unit than we had budgeted in the first quarter. But the element that was a little bit challenging was the bookings number. So we've got to get back to be able to close the deals and drive. I just got a text message a couple of minutes ago where we've booked a unit. So those are always great text messages to have, right. They are usually pretty much my favorite text message I can get. So that's the best I can do in terms of giving you direction there.

That sounds great. And is there a breakeven kind of revenue metric that you are looking to achieve to get GAAP earnings?

I think, if you look at the first quarter results and you take that -- the $164,000 kind of one timer that Richard had mentioned, that's in the kind of restructuring gain, we call them, you have a pretty good sense for roughly what our financial profile is right now. So, I think you can take that and just extrapolate forward and get pretty close to about where a breakeven would be.

That sounds great. Thanks a lot, gentlemen.

You bet. Thanks.

And at this time, there are no further questions in the queue. I'd like to turn the call back over to Todd Clyde for any closing comments.

Great. Thanks a lot, Craig, and I appreciate the questions today. There is much more stability in the market, and the economy appears to be getting a bit stronger and improving. The pricing pressure that we saw last year and all those challenges I think are behind us, and we're starting to see growth once again. Our DIS business is signing on new contracts and adding services. Our ergo is obviously a large initiative, we've talked quite a bit about that today during the Q&A period as well.

Overall, our business is in a much more positive position than it was last year. We certainly appreciate the patience and support as we work through kind of the real challenge in 2010, and we look forward to providing you with improved results in 2011 and beyond. Thank you, all, very much for your time today and we look forward to updating you on our next call in July. Goodbye for now.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. We do thank you for your participation. You may now disconnect your lines at this time.