Star Equity Holdings Inc (STRR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Digirad Corporation 2011 Second Quarter and Six-Month Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Wednesday, July 27, 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, sir.

Thank you, Christina, 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 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 results 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 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 this morning from Digirad is Todd Clyde, President and CEO; and Richard Slansky, Chief Financial Officer. Management will discuss the second quarter and six-month results, update us on the Company's new 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.

Thank you, Matt, and thank you all for your interest in Digirad and for being on the call this morning. We are pleased to announce that at the midpoint of the year, we have made progress toward our goals for 2011. Notably, we've returned to year-over-year growth in the quarter for the first time in over two years. The 8% growth over the 2010 second quarter indicates both the increase in demand for our products and services in the marketplace and the progress we are making as a Company.

Of course, there is still work to be done on all fronts, but in general, we are making good strides, particularly in our Digirad Imaging Solutions business, or DIS, which is continuing the turnaround and expansion we have seen throughout the first part of the year.

Our camera business, which we anticipate will develop into a real compelling growth engine, has been more challenging in the short term. In large part, this has been due to the continued soft capital equipment hospital market, the most important marketplace for our new cameras.

In an effort to make marked improvement despite the soft market, we have and are taking steps to improve our planning, sales strategy and key personnel in this area, which I will go into in a moment.

As a means of review, let's go through our goals for the year point by point and take a look at how we are doing.

Our first goal has been to generate free cash flow for the full year of 2011. We're very pleased to say we're doing very well in terms of free cash flow. We currently have more than $31 million of cash and investments on hand. For the second quarter in a row, we generated positive free cash flow.

In total, our cash and investments balance has increased nearly $900,000 during the first half of 2011. That's ahead of plan and very good news, reflecting well in our strong balance sheet. Richard will get into the financial data more in-depth later on, but we are pleased with our cash position, which is a key asset and is critical in opening a number of strategic doors as that -- we are assessing.

Expanding our margins in both of our businesses was another one of our goals. As I mentioned, we achieved that as well as gross margins increased from 18.7% in the first half of 2010 to 26.4% during the first half of 2011. I know we did take some larger than normal inventory write-offs in the second quarter of 2010, but margins expanded despite this by approximately 650 basis points for the second quarter comparison or 600 basis points year-to-date.

While we remain optimistic about the prospects for our new portable ergo camera and our Cardius products, sales have lagged because of the soft hospital market. We are currently focusing on turning this around. As most of you know, we announced earlier this month that we have hired a seasoned veteran in medical sales, Armando Jackson, as our Vice President of Product Sales. Armando has more than 25 years of experience and success in sales and sales management positions.

He has demonstrated an ability to bring a strategic perspective to selling, effectively building and motivating sales teams, setting and meeting goals and expectations, as well as increasing top line revenue. That is the kind of expertise we need right now.

Since he joined the team, and over the next 90 days, Armando will be out among our customers effectively putting his ear to the street and making an assessment of the marketplace and our strategies. We will take his new perspective of what's going on out there together -- and together we will come up with any needed improvements to our sales strategies aimed at accelerating camera sales in this environment, as well as positioning us for greater success as the markets improve.

We believe Armando can help us with our goal to increase ergo sales, further driving imaging to the point of care. That's an important initiative for us moving beyond the cardiology space and penetrating the hospital market. While sales of the ergo started out strong this year and the pipeline still looks healthy and growing, contracts and deliveries have lagged recently. Our Product sales were essentially flat from the first quarter of 2011 to the second quarter of 2011. We still believe, however, that the ergo, because of its flexibility, portability, ease of use, is a great example of our innovative capabilities.

We look forward to Armando's feedback on the camera side of our business and we will be working closely with him as we benefit from his expertise and talent.

I mentioned last quarter that we had launched a market study to evaluate an international appetite for our products focused initially in Europe. We are just wrapping up that study and the initial findings indicate there is a dedicated cardiac market that is beginning to grow, but less of an opportunity for our ergo type camera.

We believe this will be a good market for us at some point in the future when the healthcare market is stronger. What's more important right now is to get the US market more stable and have our new strategy in place with hospitals freeing up their spending. That's where we focus -- where we are focused and we remain optimistic.

Finally, we have taken steps to diversify our commercial base beyond the cardiology space. In June, we announced that we have entered into a commercial stage of technology development and an OEM licensing agreement with Dilon Diagnostics, a premier company in the breast imaging space. This is the kind of partnership that provides us product expansion opportunities and other avenues to generate revenue from our photodetector technology. This is in the very early stages of our partnership, but I can tell you that Dilon is selling their new Acella camera in that marketplace and we have delivered to them our first order detectors. It's an important initiative for us and we will continue to seek additional opportunities like Dilon with other technology leaders.

I'd now like to turn the call over to Richard Slansky, our Chief Financial Officer, who will go into the financial numbers in more detail before we turn the call over to the operator for questions. 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 results. As you know, we issued our financial press release this morning and filed our financials with the SEC on Form 10-Q, and those results are now available both on our website at www.digirad.com under the Investors tab or on the SEC website.

Our first highlight relates to our cash position, as Todd mentioned. We generated cash in the quarter and for the first six months of 2011. This is good for two reasons. First, we thought we'd burn some cash in the first half of the year, we did not. And second, the cash generation pushed our cash and investments balance to over $31.1 million as of June 30, 2011. This result illustrates our continued focus on maintaining a strong balance sheet and being balance sheet managers.

The second quarter of 2011 showed some improvement for both our DIS and our Product business segments. Although our camera sales fell short of our expectation, our Product revenue exceeded last year's revenue for the second quarter by over $900,000.

Last quarter, we talked about the length of the hospital sales cycle, which is definitely longer than the physician office sales cycle, and its impact on our Product sales.

As Todd mentioned, we recently made a change in our Product sales leadership. With Armando Jackson joining our Company, we expect him to help us understand and impact the sales cycles, and minimize the delays we are experiencing in hospital purchasing organizations and other critical points in our sales cycle.

By a way of another highlight, for the first time in a long time, our DIS quarterly revenue exceeded the previous year's quarter. With our continued management of our operating expenses, we lowered our quarterly loss closer to a breakeven level. With the return of radio isotope supply for our nuclear services business late last year and some light tailwinds this year related to regulatory and reimbursement issues, we are seeing the number of studies in our nuclear imaging services business begin to increase again.

Unfortunately physicians across the board have experienced a decline in the number of patients they are seeing, and correspondingly we are seeing a decline in the number of days our physicians run our services. However, we have also seen an increase in the number of studies we performed for our physician customers each day.

Now for some specific results. Consolidated revenue for our 2011 second quarter was $14.2 million, up from $13.2 million in the second quarter of 2010 compared to $14.2 million for the first quarter of 2011. The million dollar increase in last year was mainly due to an increase in the number of camera sales in our Product business segment.

In the second quarter, the sales growth was mainly due to Cardius camera sales as opposed to our expectation of ergo camera sales.

DIS revenue in the 2011 second quarter increased to $10 million compared to $9.8 million in the 2010 second quarter and $9.6 million in the first quarter of 2011. Product revenue in the 2011 second quarter increased to $4.3 million, up from $3.4 million in the second quarter of 2010, but down slightly from the $4.6 million we recorded in the first quarter of 2011.

Consolidated revenue for the first six months of 2011 was $28.4 million compared to $28.2 million for the prior year period. DIS revenue for the first six months of 2011 was $19.5 million compared to $20.5 million for the prior year. The Product revenue for the first six months of 2011 were $8.9 million compared to $7.7 million for the same period last year.

Consolidated gross profits for our 2011 second quarter increased to $4 million or 28% of revenue compared to $1.9 million or 14.5% of revenue in the second quarter of 2010, and $3.5 million or 24.8% of revenue in the first quarter of 2011. Consolidated gross profits for the first six months of 2011 was $7.5 million or 26.4% of revenue. This is compared to $5.3 million or 18.7% of revenue for the prior year period.

As you may know, our cost of DIS revenue consists primarily of labor, radiopharmaceuticals, equipment depreciation and other costs associated with providing services to our customers. The cost of our DIS revenue was $7.8 million for our 2011 second quarter, representing a decrease of $400,000 or 4.9% compared to the second quarter of 2010. The decrease in the cost of our DIS revenue is primarily result of decreased expenses from more efficient utilization of our labor and our equipment.

Our DIS second quarter gross profit was $2.2 million or 21.9% of DIS revenue compared to $1.6 million or 16.5% in the second quarter of last year, and $1.8 million or 19.1% of DIS revenue in the first quarter of 2011. So our DIS team continues to work hard to increase our gross profit and the results are being realized.

Our cost of Product revenue consists primarily of material, labor, overhead costs that are associated with the manufacturing and warranting of our product. Cost of Product revenues were $2.5 million for our 2011 second quarter, representing a decrease of $600,000 or 19.4% compared to the second quarter of 2010. The decrease in cost of Product revenue is primarily result of slightly higher production volumes, a change in the camera mix toward ergo systems and better cost management, partially offset by certain costs related to our new key component supplier.

Some of our investors noted and we have commented -- noted that we had commented in our 10-Q and 10-K risk factor related to this key component. While we have made a successful transition to our new key component supplier, so the risk of supply has diminished and our attention has shifted to the financial impact of the transition.

In that regard, we are working with our new supplier to increase the yield and reduce the cost of the key component, an effort that we believe will take a few more quarters. We believe the short-term impact on our financials will be not material.

Our second quarter Product gross margin was $1.8 million or 42.2% of Product revenue, up from $300,000 or 8.7% in the second quarter of last year, and from $1.7 million or 36.8% of Product revenue in the first quarter of 2011.

Our net loss for the second quarter of 2011 was approximately $200,000 or a loss of $0.01 per share. This is compared to a net loss of $3.1 million or a loss of $0.16 per share for the second quarter of 2010 and a net loss of $400,000 or $0.02 per share in the first quarter of 2011.

Certainly, we are heading in the right direction. Although we recorded a net loss for the quarter, we reduced our loss from last quarter by more than 41%, and we reduced our net loss from last year at this time by almost $2.9 million. As I mentioned earlier, we continue to focus on improving our cash position, improving our DIS and Product gross margins, and increasing our ergo sales. We made some good progress, but we are not satisfied with the current levels of ergo sales.

Two of our goals this year are to expand our gross margins and generate positive cash flow. Our focus on cash has allowed us to grow our cash and cash investment balances to $31.1 million or approximately $1.67 per share as of June 30, 2011. This can be compared to our cash and investment balances of $30.2 million or approximately $1.63 per share as of December 31, 2010. For your reference, we sometimes refer to cash and investments as cash, cash equivalents and securities available for sale. In short, it is our cash balances.

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 headwinds. We are heading in a more positive direction and are looking forward to improving our margins and generating cash in 2011.

With that, I'll turn it over to Christina, the operator, for questions. Christina?

(Operator Instructions) Ben Haynor, Feltl and Company.

Hi, Todd. Hi, Richard.

Hey, Ben. Good morning.

Looks like you guys are making some solid progress here.

Thank you.

Now, you said that you're targeting an expansion on the top line. Do you have any type of guidance as far as what you think you can achieve there?

You're talking about consolidated top line growth.

Yes, for the second half you mentioned in the press release.

Yes, we haven't -- we're not giving specific guidance in terms of absolute dollars. What we've said is that we expected to have growth in 2011 versus 2010, and that we would expect that to be mainly in the back half. Now we've done better in the first half than we had originally anticipated. So we're pleased overall and we discontinue to highlight the view that we expect to have growth when you look year-over-year.

Okay. And then expense levels, do you think those will look similar in the second half as to how they looked in the first half? It looks like you've made some pretty good progress there as far as operating expenses?

Yes, I think that that's probably fair. We always look at our operating expenses, and I think you know that we've managed that over the last several years fairly tightly, and we're always looking for ways to do things more efficiently. So to the extent that we can continue to improve the efficiency of our DIS operation or as we generate more volume in our production capability and can maximize our margins there, that's always something that we continue to strive to work on.

I wouldn't envision a dramatic change in the second half of the year, but we're going to continue to work on those expenses.

Okay, great. And now on the MedTech recommendation for imaging fee cuts, doesn't really look like it's going to happen. I think there are 61 Congress people that signed on to stop it. But what do you think the result would be to Digirad if it did happen?

Yes, it seems like a number of the recommendations and initiatives are about reducing, certainly when scans, multiple scans are done in a single day, which doesn't necessarily happen with the scan that we're performing on a nuclear side. There's some talk about bundling something like the isotope or the stress test component into the codes. So I think I would look at it just kind of at the macro level, are there potentials for some compression in the reimbursement that the physician is receiving? And if you just kind of thought about that like on a global build basis, I would say, yeah, there probably is some potential for that to happen. I wouldn't expect it to be overly meaningful. Certainly, nuclear imaging was -- took it in the barrel last year. On the ultrasound side, we tend to see a broader fluctuation of reimbursement where some code seem to go up and other seem to come down a little bit. The larger looming issue is the SGR, which I think everyone believes will get remedied somehow, someway and you just hope that the offset is not a cut in imaging codes, but that's kind of our general viewpoint.

Okay. Great. And then last one for me. How much room do you think you guys have to expand the gross margin? I mean, if you're looking a year or two years out, is there another 600 basis points in there, or is it something that you can bump up against it or even go beyond it down the road?

We think about it in terms of the two different business units. If I talk about the Product business unit, we believe that that business with higher volumes than where we are today. You should be able to generate easy in the 40% level on the camera side and collectively with our customer service, you'd still have a blended 40% plus margin for sure.

In terms of the DIS business, we do believe that there is still some expansion. Is this 600 basis points? I don't know. But I certainly would tell you that our goals and objectives are to see if you can really drive that to a collective, call it mid-20s. I mean, we have areas today that run even higher than the mid-20s, and that we have some other ones that are lower than that. There are different dynamics in different areas of the country that you have to deal with. So my comment is also probably assuming that there isn't a more sizable cut in the reimbursement dollar, right, that would kind of change those dynamics dramatically.

Right. Okay. Well, that's it for me. Thanks a lot, guys.

Great. Thanks. [Great questions].

Thank you.

(Operator Instructions) And I'm showing no additional audio questions at this time. I'll now turn the call back over to management. Please go ahead.

Thank you. We appreciate the participation today. I think overall we're very pleased with the progress that we've been able to make as a Company. I think everyone wishes across the globe that the economy was much stronger and much better. We certainly appreciate that a lot more camera sales would probably be going out the door, if a lot of those uncertainties in economics were much more stable than they have been. But I'm very pleased with what our team has been able to accomplish despite some of those challenges. And I think overall, over the last couple of years, we've increased the cash and investment level of the Company between $4 million and $5 million, and I think that during difficult and challenging times, that's a great thing to look at.

In terms of all the key initiatives that we're trying to drive, we're still very excited about those. The ergo has tremendous value and we're seeing that all the time in various areas where it is being used for unique purposes. Certainly, it's a natural replacement for [old] portable cameras, but it also have some very unique elements that drive value in a hospital. We're having great success with the study that we're performing at Ohio state. I know we didn't go into that in a lot of detail. We're still multiple months away from being able to articulate all those specifics and then develop a much more strategic thrust in how to really open up a surgical opportunity. There continues to be purchases of the camera to be used in women's health for example, and then we talked about our relationship with Dilon. So those things are positive.

In the DIS side of our business, we see continued improvement in expansion. We see physicians signing up for the services, certainly much more this year than we saw last year. And we believe that when you look out at a macro level, that there will be many institutions that will be looking for service offerings to help buoy up the procedures that they're able to provide and services they will able to provide within their own facilities rather than necessarily wanting to jump in and purchase all the equipment activities, and that can be across multiple modalities, not just nuclear or ultrasound. But we believe that you will see a stronger push for services in the future. How does that all play out and when does it all play out, that's all a question of really kind of how healthcare reform gets balanced out. But we believe that at the macro level, it's very positive. There are still a lot of aging population folks that need healthcare, need to be taken care of. So we see all of that as a real positive.

With that, I thank you all for being on the call today for sharing in our progress and we look forward to talking to you in the coming quarters. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference call for today. We'd like to thank all of you for your participation and you may now disconnect.