Star Equity Holdings Inc (STRR) 2011 Q4 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Digirad Corporation 2011 fourth-quarter and year-end results conference call.

At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Friday, February 17, at A.M. Eastern time.

I will now turn the conference over to Mr. Matt Clawson from Allen & Caron. Please go ahead sir.

Thank you Ron. 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'll 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 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 trend, changes in the Company's market and competition. More information about the risks and uncertainties is available in 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. 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 fourth-quarter and year-end 2011 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'd like to turn the call over to Todd.

Thanks Matt. Thank you all for your interest in Digirad and for joining us on this morning's fourth-quarter 2011 and year-end results conference call.

As many of you know, we have recently undertaken a comprehensive market-wide analysis to help prepare an aggressive new growth strategy for 2012 and beyond. The study included an analysis of current market opportunities, customer metrics, and feedback designed to allow us to better understand which growth investments will best flourish and best align us with the healthcare delivery system in the future. This is an important time for Digirad and we believe this is the right time to invest in this kind of study and to assess and execute on the right strategic opportunities. We, along with our Board, are now seriously weighing and further refining the best alternatives that come out of this study and we're finalizing our next steps from that assessment.

I can tell you that we have a number of promising opportunities in front of us, including large new market opportunities that are adjacent our core technologies. Our new -- our main goal in all of this is to create a solid growth platform for the assets currently in place at Digirad. Those include our quality brand and nuclear imaging services, our existing channels in cardiology and physician practices throughout the country, and our intellectual property based on solid-state technology. We will be rolling out more details and actual milestones in the near future.

Currently, 2012 stands to be a time for new initiatives, focused development, and product line expansion for Digirad. We look forward to sharing our new strategies with everyone shortly.

Now, let's look back at this year, at last year. We set our fourth-quarter goals in 2011. Before I turn the call over to Richard Slansky, let me walk through some of the details of each one of those goals.

First, we said we would generate free cash flow for the year from operations. We did that by managing our operating costs throughout the year. At the year end, our cash and investments position was $30.5 million.

Secondly, we said we would increase sales of our innovative ergo camera, a flexible, portable camera that provides point-of-care imaging. While our ergo sales were not where we wanted them to be, we continued to see genuine enthusiasm about these cameras in the marketplace, and we did actually increase our sales over 2010.

We're hearing wonderful things about our ergo from our customers. This positive feedback allows us to remain confident that, as our message about these cameras continues to permeate the market, ergo sales will increase and we will realize, as promised, that our nuclear camera in the marketplace will be a successful initiative for us.

Our third goal is to expand our margins on both sides of our business, the Digirad Imaging Services business, or DIS, and our solid-state camera business, or our Product business. Again, we were successful in this regard. We worked hard to keep our operating costs low and expand our gross margins by $2.7 million despite working in a very soft hospital market and healthcare market overall.

Our final goal was to see topline growth in the second half of the year. Unfortunately, a relatively soft fourth quarter, especially in the camera business, prevented us from doing that. As I said earlier, we are working on a comprehensive expansion strategy that is being designed to return Digirad to a solid growth platform.

Now let me say a few words about our two businesses. While our DIS business continues to generate cash as it has for the past two years, revenues were basically flat or slightly down year-over-year. This has prompted us to continue to streamline the operational process in DIS to facilitate or be nimble and reactive to the marketplace. To further our efforts to make the DIS business more efficient, I recently asked Matt Molchan to drive the day-to-day operation of DIS. DIS is a good business for Digirad, and we expect this business to generate cash in the foreseeable future.

Our camera business was disappointing in the fourth quarter, particularly considering the promise of new technology, such as our ergo. One of our major goals in 2012 will be to increase the number of camera sales both domestically and internationally.

I hope you saw our press release where we recently announced our CEMark approval for our Cardius X-ACT imaging system. A key part of that release was our new agreement with a Turkish distributor that will become part of our international selling network. It is our intention, as one of our several initiatives in 2012, to more aggressively build a distribution network to tap into the developing markets in a more meaningful way.

Now let me turn the time over to Richard for some financial details. 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. As you know, we filed our financials with the Securities and Exchange Commission this morning on Form 10-K, and those results are now available on our website at www.Digirad.com under the "Investor" tab, or on the SEC website.

Now, for some specific results. Consolidated revenue for our 2011 fourth quarter was $11.9 million, down from $14.7 million in the fourth quarter of 2010 and $13.4 million in the third quarter of 2011. The $2.8 million decline from last year was due mainly to lower camera sales in our Product business for the quarter.

DIS revenue in the 2011 fourth quarter declined $9 million compared -- declined to $9 million compared to $9.4 million in 2010's fourth quarter and $9.3 million in the third quarter of 2011. Product revenue in the 2011 fourth quarter decreased to $2.9 million compared to $5.2 million in the fourth quarter of 2010 and $4.2 million in the third quarter of 2011.

The fourth quarter is probably the worst quarter for our camera sales that the business has seen in a while. We attribute most of the shortfall to the depressed nuclear gamma camera market and to a lesser extent to the transition of sales leadership, which is now complete and up to speed.

Consolidated revenue for 2011 was $53.7 million compared to $56.2 million in 2010. DIS revenue for 2011 was $37.8 million compared to $39.5 million for 2010. Product revenue for 2011 was $16 million compared to $16.6 million for 2010. Although these are not good results and we are certainly not happy with them, we are already seeing signs of increasing camera and DIS sales in early 2012, so we believe our new sales initiatives and management changes are working.

Consolidated gross profit for our 2011 fourth quarter decreased to $3.1 million, or 26% of revenue compared to $3.6 million or 24.6% of revenue in the fourth quarter of 2010. The $0.5 million increase in consolidated gross profit is driven by lower camera sales in our Products business and reductions in scan days in our DIS business. However, the improvement in gross profit percentage illustrates our continued effort to align our costs with our revenues even at these lower volume levels.

Consolidated gross profit for 2011 was $14.8 million, or 27.5% of revenue, compared to $12 million, or 21.4% of revenue, for 2010. Our gross margin improvement was mainly attributable to lower radiopharmaceutical costs in our DIS business and better inventory management in our Products business which resulted in lower reserves in 2012 -- in 2010 over 2000 -- or 2011 over 2010.

Cost of DIS revenue consisted primarily of labor, radiopharmaceuticals, equipment depreciation, and other costs associated with providing our services to our customers. Cost of DIS revenue was $7.1 million for our 2011 fourth quarter, representing a decrease of $600,000 or 7.3% compared to the fourth quarter of 2010. The decrease in the cost of DIS revenue is primarily a result of decreased radiopharmaceutical expenses, as I just mentioned, coupled with a change in the useful life of our DIS camera fleet from five years to ten years.

Our DIS fourth-quarter gross margin was $1.9 million, or 20.8% of DIS sales, versus $1.8 million, or 18.8%, in the fourth quarter of last year and $2.2 million or 24.2% of DIS sales in the third quarter of 2011.

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 $1.7 million for our 2011 fourth quarter, representing a decrease of $1.7 million, or 50%, compared to the fourth quarter of 2010. The decrease in cost of Product revenue is primarily a result of lower camera sales, despite some higher manufacturing variances from the transition of a key component from one of our suppliers to another.

Our fourth-quarter Product gross margin was $1.2 million, or 42% of product revenue, versus $1.9 million, or 35.1%, in the fourth quarter of last year and $1.9 million or 45.9% of Product revenue in the third quarter of 2011.

Our net loss for the fourth quarter of 2011 was $2.8 million or $0.15 per share, compared to a net loss of $600,000 or $0.03 per share for the fourth quarter of last year and a net income of $100,000, or $0.01 per share, in the third quarter of 2011. Net loss for 2011 was $3.3 million, or $0.18 per share, compared to a net loss of $6.2 million, or $0.33 per share, for 2010. Although we recorded a net loss for the quarter, it was primarily related to our strategic marketing study that Todd mentioned in his -- earlier in his remarks.

In 2011, we experienced a decrease of $1.3 million in our general and administrative expenses compared to 2010. This was attributable to a decrease in bad debt expense from better collection practices and lower legal fees from the favorable settlement of a dispute in 2010. Although 2011 and now into 2012 we continue to focus on the fundamentals, despite our relatively weak revenue performance in 2011, we continue our efforts to manage a very strong balance sheet. Our focus on cash has allowed us to preserve our cash and cash equivalents and securities available for sale balances of $30.5 million, or approximately $1.61 per share, as of December 31, 2011. This can be compared to our cash and cash equivalents and securities available for sale balances of $31.6 million as of September 30, 2011 and $30.2 million as of December 31, 2010.

Our consolidated DSOs, or our days sales outstanding, increased during the quarter from 56 days to 58 days. However, the bad debt expense for 2011 versus 2010 was $800,000 lower.

Collection efforts continued to be a focus of our accounting and our operational team.

Although we are proud of our balance sheet and cost reduction accomplishments, we are not at all satisfied with our operational results. We are working hard to develop new revenue opportunities and expand our existing DIS and Product businesses. We appreciate the loyalty and support of our stockholders. We know that you believe in Digirad and want to see us realize our potential.

We are heading in a more positive direction and are looking forward to improving our financial position in 2012. We've managed through a very difficult year in an uncertain economy, and a very difficult healthcare environment. We believe in our people and in our team's ability to begin producing positive results for you in the months and years ahead.

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

(Operator Instructions). [Bihab Seti], Somerset Capital.

Hi guys. You talk about seeing improvements in the capital equipment environment and the markets improving. Does this mean getting back to third-quarter levels or getting to above those levels?

Yes, That's a great question. We would expect that, as the year progresses, that we would get above even those third-quarter levels. What we are seeing is long sales cycles. 18 months is pretty much a standard in that hospital space, but we also see deals that we've worked for quite some time that have started to come through. Richard mentioned that even in the front part of this quarter, meaning Q1 of 2012, we've been able to close some deals and already ship some units, and we are kind of well on our way.

The customers that own the camera are tremendously positive about the camera. We also believe there is an opportunity in the cardiac space to do a little bit better than we did in 2011.

Then we also expect some modest growth in the international market. The international market is a little bit more open to dedicated devices than they would've been in the past, when you see cardiovascular disease increase in some key countries for example. But it's kind of an isolated surgical approach into some key markets through a distribution network. So we're excited about that, and we'll make sure that initiative kind of bears effective fruit. So those are some of the key reasons why we feel more bullish about 2012 than 2011.

Okay, great. So, do you expect to be net cash flow positive this year and to build on your cash balance?

We expect the DIS business to continue to generate cash. We generated almost over $2.7 million of cash in the DIS business in 2011. We expect those types of levels to continue as we go forward.

What we would say in terms of when you think about cash, it's always a question of are you investing? What are you doing from there? When we lay out what we would do strategically, we would obviously talk about that. So in the businesses themselves, as they are currently constituted, you should see cash generation. If we invest in something, obviously that would be a different issue, but we haven't talked about that specifically yet.

So then the camera business should also be cash flow positive?

I can't say that specifically, but if you look at 2011, you won't see that it's burned a ton of cash outside of kind of the strategic assessment that Richard had highlighted in his remarks. So, it isn't like that business is burning $3 million, $4 million, $5 million of cash. It would definitely be less than that.

Okay. So, on that, you seem to have spent a not inconsequential sum of shareholder cash to pursue the market research study. How much was that roughly?

It was about $1.5 million overall. The purpose of the assessment is to really create much more shareholder value going forward, and there is going to have to be some investment in order to do that.

Okay. So, why did you not, at the same time, retain investment bankers to explore the sale of all or part of the Company?

Probably the best time to really address all of the things that are part of the strategic potential of the business, including those things that you just mentioned, right, like divesting, selling, growing, expanding acquisition, whatever, all of those things have been under consideration by the Board of Directors and will continue to be part of that analysis.

Okay. I guess I'd just like to make one last comment. We at Somerset Capital [are] shareholders. We believe that it should be apparent to Digirad's management and Board what has become increasingly apparent to the equity markets, that the Company lacks the critical mass to compete as a public company. We therefore believe that management and the Board cannot perform its fiduciary duty without undertaking a complete exploration of strategic alternatives available to the Company and its shareholders. We would welcome the opportunity to meet with representatives of the Board and discuss this matter further. Thank you.

Appreciate the comment.

Adam Peck, Heartland Funds.

Good morning guys. Will the costs for the strategic review, will we see those again in the first quarter, or was $1.5 million, was that the total?

That was the total and it was all in the fourth quarter.

Okay, we won't see those costs again.

That's correct.

How many cameras were sold in the fourth quarter?

Richard?

We sold four cameras in the fourth quarter, two new cameras and two used cameras.

Okay. Were there any ergo sales?

The two new cameras were ergo sales.

[Elan Greshkin], Nanocap Growth Fund.

We've been a shareholder for a long period of time. I'm going to reiterate what the gentleman from Somerset said. We are extremely frustrated. The Company has now been shrinking for more than three years. I think strategic alternative, splitting the Company up, selling it, something needs to be done at this point in time.

Appreciate the comment.

There are no further questions at this time. Please continue.

Over the past three years, we have spent a good amount of time dealing with specific market changes in dynamics and managing our way through often difficult times. We feel good about what we have accomplished in terms of managing the balance sheet and conserving cash. It has taken a lot of hard work to manage the expense line and keep the operating costs low, as well as expanding the margins as a percent of revenue. That said, it's time to move forward. As I noted earlier, at the tail end of a market-wide assessment strategy and in the midst of creating a roadmap for our future, in the meantime, our immediate goal is to remain cash flow positive in the DIS business as we make final determinations in terms of what that roadmap should be. Please stay tuned for additional information as we work through that and share our progress on the next call. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your line.