Star Equity Holdings Inc (STRR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Digirad Corporation 2011 Third Quarter and Nine-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, Friday, November 4, 2011.

I would now like to turn the conference over to Matt Clawson of Allen & Caron. Please go ahead, sir.

Thank you, Val, 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 share and other topics related to Digirad's business strategy and outlook.

These forward-looking statements are based on current assumptions and expectations and involve risks and uncertainties that could cause actual events and financial performance to differ materially. Risks and uncertainties include, but are not limited to, business and economic conditions, technological change, industry trend, changes in Company's market and competition. More information about 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 the third quarter and nine-month results, update us on the Company's new strategies and comment on the Company's general 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.

Thanks, Matt, and thank you all for your interest in Digirad and for joining us on this morning's third quarter 2011 results conference call. I am pleased to report that we generated free cash flow in the third quarter of 2011 for the fourth consecutive quarter, increased margins on both sides of our business, and continued to grow our revenue modestly in the period.

We ended the third quarter with more than $31.6 million in cash and investments on hand. Our cash position continues to be one of our major strengths and generating cash flow has been one of our main goals for 2011.

That said, we understand that there is no way to save your way to prosperity, and our effectiveness in managing the business through tough times is only one piece of the equation. During the remainder of the year and into 2012 we will focus on finding and executing on new ways to expand our business. To that, and we have made a decision to invest in an independent comprehensive market-wide analysis to prepare us for 2012 and beyond.

In a marketplace that has changed dramatically during the past two years, we believe now is the right time to assess and execute on strategic opportunities that are intended to expand the business. We have several important assets in place at Digirad, including a quality brand in both our product business and imaging services business, critical IP surrounding solid state nuclear imaging technology, existing channels in the cardiology and general medicine practices across the nation, and as I indicated more than $31 million of cash and investments.

What we are lacking is an engine for more rapid growth. This independent study will include a thorough analysis of strategic market opportunities, as well as customer metrics and feedback that will allow us to better understand where the business growth investments exist.

The majority of the dollars associated with the assessments phase of this initiative will hit in the fourth quarter of this year. We think it is a solid investment and a prudent use of our resources as we look for new ways to grow. We will talk more about this once the plan is fully developed.

For now, back to the results. Another one of our major goals for the year was expanding our margins. Through our financial discipline we have managed to increase our margins in both our Digirad Imaging Solutions business, which we call DIS, and our products business. Generating cash and profit will continue to be our near-term focus in our DIS business.

DIS slowed during the quarter due in part to the seasonality of that business and the continued reimbursement pressures and uncertainty in the overall healthcare market. In our DIS business we have made it a priority to work closely with our current physician customers to help them maximize their imaging operations. Our focus in DIS is to continue to generate cash, and be nimble enough to alter our business model to align with the variability caused by the uncertainty in the healthcare environment. Healthcare reform will be ongoing and will most likely to require changes in our business model in order to compete successfully.

For most of this year our DIS business has been a highlight as we built revenue back up from the tail-end of 2010. DIS-only revenue for the quarter was $9.3 million compared to $9.6 million in the third quarter of last year and just under $10 million in our previous quarter.

As we just experienced, and as expected, DIS does tent to be affected by some summer seasonality due to patient and physician vacations. On the other hand the second quarter of each year tends to be the strongest quarter. As we study our DIS results we are seeing our cardiology customers continue to use our services at a steady rate, whereas the contributions from our primary care doctors are falling off slightly as they struggle to garner the volume necessary to keep their service requirements steady.

All in all we are pleased with the cash that we have been able to generate in our DIS business through the first nine months of 2011. We will keep making modifications and improvements to make our DIS business even a more consistent performer and build momentum.

I am pleased to report that our camera revenue grew year-over-year. For the camera sales during the quarter, or for our new flexible portable ergo cameras which continue to generate enthusiasm and acceptance into the marketplace. We see particular interest in ergo as an ideal placement device for order portable cameras and for hospitals moving to point-of-care imaging.

Point-of-care imaging, which is what ergo provides, continues to be an important initiative for us. It has the potential to move Digirad beyond the cardiology space and to further penetrate the hospital market which we see as potentially a significant opportunity for our products in the near future. Currently, there is a general softness in the hospital market which has affected our overall camera sales. But the feedback we are getting, particularly about our ergo, allows us to believe that the ergo and the hospital market can develop into a compelling growth opportunity for Digirad. It is just going to take more work and time to open up opportunities than we had originally anticipated or hoped due in part to the overall market softness. We plan to continue to take steps in this area going forward.

As we noted on our last call, we have already moved toward changing our strategy to improve our product sales. Our new Vice President of Sales, Armando Jackson, who has built his career around bringing a strategic perspective to selling and effectively building and motivating sales teams has now been with us a quarter and is implementing initial steps to strengthen our commercial execution. He has been out in the field talking to our customers and we believe Armando's enthusiasm and energy in this role will be vital as we close out the year and enter 2012.

Now I will turn the call over to Richard Slansky, our Chief Financial Officer, for a closer look at financials. 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 third quarter results. As you know, we issued our financial press release this morning and filed our financials with the Securities and Exchange Commission on Form 10-Q, and those results are now available both on our website at www.digirad.com under the Investor tab, and on the SEC website.

Our first highlight relates to our continued ability to generate cash as Todd mentioned. We generated cash in the quarter and for the first nine months of 2011. This is good for two reasons; the cash generation pushed our cash and investments balance over $31.6 million as of September 30. This result illustrates our continued focus on maintaining a strong balance sheet and being balance sheet managers through the past couple of years in what has been a choppy market.

The third quarter of 2011 was relatively stable from a commercial standpoint and showed marginally mixed results for our DIS and our product business segment. Our camera sales were stronger than last year, however, our DIS revenue was down slightly from last year's third quarter. We continue to manage our operating expenses to match revenues so that we move closer to a breakeven level.

We are seeing more of the same factors in the marketplace as many healthcare services and device firms are. Fortunately some of the regulatory and reimbursement issues we saw last year has subsided. But macro economic conditions are impacting the number of studies in our nuclear imaging services business as physicians across the board have experienced a decline in the number of patients they are seeing.

Now for some specific results. Consolidated revenue for our 2011 third quarter was $13.4 million, up from $13.3 million in the third quarter of 2010, and compared to $14.2 million in the second quarter of 2011. As I mentioned, the marginal increase from last year was mainly due to a change in the mix of our camera sales and our products business segment toward our ergo imaging system.

DIS revenue in the 2011 third quarter decreased to $9.3 million compared to $9.6 million in the 2010 third quarter and $10 million in the second quarter of 2011. There has historically been some seasonality in the DIS business during the summer months. But we see the larger economic factors playing a role as well.

Product revenue in the 2011 third quarter decreased to $4.1 million from $3.7 million in the third quarter of 2010 but down slightly from $4.3 million that we recorded in the second quarter of 2011.

Consolidated revenue for the first nine months of 2011 was $41.9 million compared to $41.5 million in the prior year period. DIS revenue for the first nine months of 2011 was $28.8 million compared to $30.1 million for the prior year. The product revenue for the first nine months of 2011 were $13.1, $13 million compared to $11.3 million for the same period last year.

Consolidated gross profits for our 2011 third quarter increased to $4.1 million or 30.9% of revenue compared to $3.1 million or 23.4% of revenue for the third quarter of 2010, and $4 million or 28% of revenue in the second quarter of 2011.

Consolidated gross profit for the first nine months of 2011 was $11.7 million, or 27.9% of revenue. This is compared to $8.4 million or 20.2% of revenue for the prior year period. As you may know, our costs of DIS revenue consist primarily of labor, radio pharmaceuticals, equipment depreciation and other costs associated with providing services to our customers. The cost of our DIS revenue was $7 million for our 2011 third quarter, representing a decrease of almost $900,000 or 11.2% compared to the third quarter of 2010.

The decrease in cost of our DIS revenue is primarily a result of the decreased expenses from more efficient utilization of our labor, lower pharmaceutical costs, and the change in useful lives of our DIS camera fleet.

Our DIS third quarter gross profit was $2.2 million or 24.2% of DIS revenue. This was compared to $1.7 million or 17.4% in the third quarter of last year, and $2.2 million or 21.9% of DIS revenue in the second quarter of 2011. So, our DIS team continues to work hard to increase our gross profit and the results are now being realized.

Our cost of product revenue consists primarily of material labor overhead costs that are associated with the manufacturing and warranting of our products. Cost of product revenue was $2.2 million for our 2011 third quarter, compared to $2.2 million in the third quarter of 2010, so flat. The very slight decrease in costs of product revenue is primarily the result of higher product volumes, a change in the camera mix toward our ergo systems, and better cost management which is partially offset by certain costs related to our new key components supplier.

We also had lower costs due to lower excess and obsolete reserves this year over last year.

Our third quarter product gross profit was $1.9 million or 45.9% of product revenue, up from $1.4 million or 39.1% in the third quarter of last year and $1.8 million or 42.2% of product revenue in the second quarter of 2011.

Our net income for the third quarter of 2011 was approximately $99,000 or a gain of about $0.01 per share. This is compared to a net loss of $1.3 million or a loss of $0.07 per share for the third quarter of 2010. And it is also compared to a net loss of $228,000 or about $0.01 per share for the second quarter of 2011.

We believe that we are heading in the right direction. Although we recorded a net loss for the nine-months ended September 30, we dramatically reduced our net loss from last year and moved from a net loss of $1.3 million this quarter last year to a small profit of about $100,000 for the three-months ended September 30, 2011.

As Todd 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 continued progress this quarter but we are not at all satisfied with our current levels of ergo sales. Two of our goals this year are to expand our gross margins and generate positive cash. Our focus on cash has allowed us to grow our cash investment balance to $31.6 million or approximately $1.68 per share as of September 30, 2011. This can be compared to our cash and investments balance of $30.2 million or approximately $1.63 per share as of December 30, 2010, just nine months ago.

This is a slow but consistent growth from period to period. For your reference, we sometimes refer to cash and investments as cash, cash equivalents, and securities available for sale. But in short, it is our cash balance.

So in conclusion, our cash position remains strong as does our balance sheet. We are experiencing some tailwinds after last year's very strong headwinds, but the waters remain a bit choppy. We are heading in a positive direction and are looking forward to the results as our strategic market analysis for 2012 and beyond is completed.

With that, I will turn it over to the operator for the question-and-answer session. Val?

Thank you, sir. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions). And our first question comes from the line of Alex Andrade with Bulle Rock Capital. Please go ahead.

Hi, good morning guys. Nice job on expense control.

Good morning. Thanks Alex.

I was curious, could you talk about some specifics as far as what Armando is finding that you can do better to sell into the hospital? The ergo is a great product and I was just curious what your findings are so far.

Yes, it is a great question. Let me maybe try to provide a little bit of color there. First of all, what we recognize is that the hospital market continues to be soft on capital spend. And we were hoping that that wouldn't have quite as dramatic of an impact on our products and the way that we sell into the hospital as it is having, but they continue to be under a lot of cost pressure. There are still a lot of changes happening and we find that hospitals are still faced with a lot of different competing priorities and pressures.

So, we are trying to really expand the way that we kind of sell up the value chain and make sure that we really don't have to walk the deals through that entire process and that entire channel. If you think about when markets are really strong, it is just always easier to sell, right, versus how you have to go through the process when things are a little bit more challenging and make sure that all the stakeholders understand the value proposition that is there.

Some hospitals absolutely get it. If we are in there and we are replacing and old portable, we win every single time if they really are looking for portability. If the hospital makes a decision to not have portability and then they start to compare the system against like a single-headed system, then it is a little bit harder to win in that scenario because regular single-head is less expensive because it doesn't bring all the features and value that an ergo actually brings, right?

We are also petty pleased with the progress that we are making in helping people understand the opportunity of value of an ergo. When you think about areas such as the surgical suite, it is going to continue to take time to garner the right feedback, meaning protocol feedback and publications into the marketplace because you will be changing a little bit of how people have done imaging in those locations in the past.

But I think we are finding positive results there as well. We are trying to kind of attack it from a couple of different angles, make sure that we really understand the market and that we are stable there. And that we can make sure our sales folks have the skills necessary to kind of sell the value chain and work their way through the process more effectively than we have in the past.

Okay. And do you think you will be expanding the sales force or is it just having them work more efficiently?

Yes, I think we have to get our head around exactly the most important elements of expansion there in terms of making it more effective. And that will naturally drive a decision around if you expand and broaden the sales footprint or not. We have to make sure that they are efficient in their output.

Thank you.

You got it, thanks.

Thank you. And our next question comes from the line of Ross Taylor with Somerset Capital Advisers. Please go ahead.

Thank you. Once again, excellent quarter on the cost control side. Curious on whether you feel ergo would benefit from an expanded distribution arrangement with one of the bigger players in the space. And if so, is that something that you guys are working on?

Let's see, so, if I would say based on the number of reps that we have and our footprint and our ability to really penetrate the market, I think it is natural to say that you would benefit from having distribution of a much larger player who has that established footprint and name recognition, all of those things.

Kind of how it fits into their product portfolio is always the question. There are no active discussions with any of those groups at this point.

Okay. Thank you very much.

You bet. Thanks for the question.

Thank you. (Operator Instructions). And I'm showing there are no further questions in the queue. I will turn the call back over to management for any closing comments.

Great, thanks Val. We appreciate everyone's participation today. And we are glad that we have been able to start out really strong this year. We had cash generation early in the year. We actually thought that we would burn cash during the first part of the year, but we actually generated cash.

I'm very pleased with our ability to, during tough economic times and still challenging healthcare headwind times, that we have been able to stabilize the cash generation element of the business. And that our DIS business specifically, that will continue to be a key focus, making sure that business is stable, that you can be nimble enough while there are certain healthcare changes that are happening to make sure that your physician customers have an effective imaging experience, and we can help maximize their businesses with the services that we render and offer. I think we have been able to do that and that will continue to be a strong focus for us.

Obviously we wish that the growth was accelerating even more so in the back part of the year. We will continue to work on ways to penetrate the market in a stronger way with our camera. We are excited about the assessment that we are doing kind of on the strategic side of the house. And we expect to be able to bring more of a growth opportunity to play in the future.

And as those things materialize and we are in a position to communicate, we will do so with you. Thank you again for your interest in Digirad. We look forward to updating you at the end of a successful year. And goodbye for now.

Thank you. Ladies and gentlemen, that does conclude today's Digirad Corporation 2011 Third Quarter and Nine-Month Results Conference Call. Thank you for your participation. You may now disconnect.