Star Equity Holdings Inc (STRR) 2015 Q2 法說會逐字稿

Greetings and welcome to the Digirad Corporation's second-quarter 2015 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Risa Lindsay. Thank you. You may begin.

Thank you, Melissa. And thank you all very much for joining us this morning. If you didn't receive a copy of our release and would like one, please contact our office at 858-726-1600 after the call, and we'd be happy to get you one. Also, this call is being broadcast live over the web and may be accessed at Digirad's website via www.Digirad.com. Shortly after the call, a replay will also be available on the Company's website.

I'd like to remind everyone that certain statements made during this conference call, including the question-and-answer period, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements include statements about the Company's revenues, costs and expenses, margins, operations, financial results, restructuring efforts, and other topics related to Digirad's business strategy and outlook.

These forward-looking statements are based on current assumptions and expectations, and involve risks and uncertainties that could cause actual events and financial performance to differ materially. Risks and uncertainties include, but are not limited to, business and economic conditions, technological change, industry trends, changes in 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, as well as today'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.

Hosting the call today from Digirad is President and CEO, Matt Molchan. Joining Matt this morning is Jeff Keyes, Digirad's CFO. Matt and Jeff will discuss the 2015 second-quarter financial results, update us on the Company's strategy, 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 Matt Molchan. Good morning, Matt.

Thank you, Risa. Good morning, everyone, and thank you all for joining us today for our second-quarter 2015 results conference call.

The second quarter of 2015 was another good quarter for Digirad financially, with year-over-year revenue growth of 7%. In addition, the second quarter represents a quarter where we have spent a good amount of time and resources further investing in our businesses to help continue to build a very bright future for our Company. These investments are all across our businesses, and range from operational and fixed assets to reviewing a variety of acquisition targets.

Within our Diagnostic Services business, I'm pleased to announce that we have completed our integration efforts for MD Office Solutions, the mobile nuclear diagnostic imaging business in Northern California we acquired in March of 2015. This business is an excellent example of a tuck-in acquisition we can make in our core business. It also opened up for us a densely-populated new market that we are actively working to grow further.

Beyond MD Office Solutions, our remaining Diagnostic Services business is performing well, holding a steady and consistent revenue load year-over-year. Our Telerhythmics business, which is also part of Diagnostic Services, is continuing to grow from its first-quarter 2015 levels, with the month of June in particular being a very good month for us. We continue to be excited about the growth prospects for Digirad overall, but in particular within our Telerhythmics business.

Diagnostic imaging performed well this quarter with good and consistent results. We continue to work initiatives to augment and expand our camera sales opportunities -- in particular, in the international markets. During the period, we were able to sell one unit internationally, with a total of three units sold internationally so far this year.

Though it is too soon to predict a normal and consistent volume sales internationally, this is a promising area that we continue to push with our partners as we move forward. This could eventually grow into a regular revenue stream for us.

As I have stated in the last few quarters, and will continue to state as we move forward, our overall corporate strategy is to focus on three main areas for growth. Area number one, acquisitions. Our goal is to acquire companies that fit within our business model of providing diagnostic products and healthcare-related services on an as-needed, when-needed, and where-needed basis in a very financially-disciplined manner.

Area number two, adding new services to our portfolio that we can provide through our current distribution channels. And area number three, organic growth within our existing portfolio of service -- services, products, and channels. During the quarter, we did spend a good amount of effort and resources reviewing potential acquisitions, and there continue to be a number of interesting acquisition targets that are in various stages.

As we have stated before, the timing and size of these deals vary, but we believe there is a lot of opportunity as long as we can secure these deals at the right financial metrics. Finally, we are still very confident that we will achieve within our previously-announced 2015 financial guidance ranges.

Now, I'd like to turn the call over to Jeff to give a more detailed financial update for the quarter. Jeff?

Thanks, Matt, and good morning, everyone. In the earnings release today and in my comments, I make reference to both GAAP results as well as adjusted results. The adjusted results are non-GAAP, and do not include nonrecurring charges such as those associated with restructuring activities or purchased intangible asset amortization.

In addition, I will make references to adjusted EBITDA, which is also a non-GAAP measure that further excludes stock-based compensation. We believe the presentation of these non-GAAP measures, along with our GAAP financial statements and reconciliations, provide a more thorough analysis of our ongoing financial performance. You can find the reconciliation of our results on a GAAP versus non-GAAP basis in the earnings news release today.

I'll start with a brief summary of the quarter's activity. Total revenue for the second quarter of 2015 was $15.5 million compared to $14.6 million for the same period last year. Revenues for Diagnostic Services, which includes the acquisition of MD Office Solutions in March of this year, were $12.2 million compared to $11.3 million for the same quarter last year. Diagnostic Imaging revenue was $3.4 million for the second quarter of 2015 compared to $3.3 million in the second quarter last year.

Our overall gross profit percentage in the second quarter of 2015 was 30.7%, which was down slightly compared to the 30.9% in last year's second quarter. In Diagnostic Services, the gross profit percentage for the second quarter of 2015 was 24.4% compared to 27.7% in last year's second quarter. In the Diagnostic Imaging business, the gross margin percentage in the second quarter of 2015 was 53.5% compared to 42.2% in the prior-year second quarter.

Overall, the gross profit percentage in the Diagnostic Services business was impacted by some pricing pressure we have experienced in some markets, along with the investment in our business that Matt mentioned. In Diagnostic Imaging, we enjoyed year-over-year margin expansion, based on reduced manufacturing costs, primarily from the benefit of some previously-reserved inventory releases, as well as the mix of cameras sold.

As a reminder, we do experience some seasonality in our business. And notwithstanding other factors, the fourth and the first quarters are our slowest quarters, with the second and third quarters being our higher revenue quarters. Of course, we always experience some volatility in revenues and earnings based in the timing of sales of our nuclear imaging cameras.

At the end of June, cash and cash equivalents and available-for-sale securities totaled $21.7 million, which was an increase from our March 31 balance of $20.9 million. During the quarter, our businesses produced good cash flow, for which we utilized some of our cash to pay our regular quarterly dividend.

Moving on to the bottom line results for the second quarter, adjusted net income was $1.1 million or $0.06 per diluted share, which was essentially flat compared to the second quarter last year. Again, as Matt had mentioned earlier, we did make some investment in our businesses, along with efforts in reviewing potential acquisitions during the quarter, of which there was some bottom-line impact. We do expect these investments to help grow the business in the future with a positive impact to our bottom-line.

Adjusted EBITDA was $1.7 million for the second quarter of 2015, an increase from the $1.5 million in the second quarter of last year. As Matt mentioned earlier as well, we do expect to achieve within our financial guidance range we announced earlier this year, which was to produce revenues between $61 million and $63 million, adjusted earnings-per-share of $0.19 to $0.21 per share, and adjusted EBITDA of $6.5 million to $6.9 million.

Finally, as we announced today, our regular -- finally, as we also announced today, our regular quarterly cash dividend $0.05 per share was declared, and will be paid on August 31 to shareholders of record on August 21, 2015.

Now I'd like to turn the call back over to Matt.

Thanks, Jeff. I'd like to close by saying we continue to believe we are on the right track for growth in all of our core businesses. We have the right overall model for the healthcare industry today and where we see it moving in the future. Further, we are excited about our recent acquisitions and the potential of other deals we are seeing in the market. These are exciting times for Digirad, and we are taking every step to capitalize on these opportunities.

Now I'd like to turn the call over to the operator for questions. Melissa?

Larry Haimovitch, HMTC.

A couple of questions for Matt and a question for you, Jeff. Matt, there were a couple of 8-K filings that I wanted to discuss with you. One -- and I did discuss it with Jeff maybe a week or two ago -- the investment you made in a foreign company to secure seems to be to secure some better supply for technetium. I wondered if you could kind of discuss your thinking and philosophy on that deal?

Yes. Perma-Fix Medical, actually the parent company to Perma-Fix Medical is Perma-Fix Environmental, which is a local, Atlanta-based business -- yes, this was an opportunity that we came across. And they have kind of developed an interesting process that could dramatically decrease the pricing on radiopharmaceuticals that we use in our DIS Mobile Nuclear Service business.

And we thought that there was some opportunity for us to make an investment, to also get -- partner with Perma-Fix Medical to help them on a few things through the process, to bring their process to commercialization. And we are very excited about the potential opportunities with our partner in Perma-Fix Medical.

Matt, what was the main driver for that deal? Was it to secure supply? Was it to secure cheaper supply? Was it the investment potentially that Perma-Fix some day could be worth a lot more money and you might make some money on the investment? But can you characterize what was most important to you about that deal?

Yes, you hit on all three. All three areas were important to us. I think the most important piece that we thought was the most interesting piece is that there was opportunity for additional supply through this new process, and that we could potentially get that at a -- or we would get that at a cheaper price.

As we look at our cost in our DIS business, our second-largest cost is the purchase of radiopharmaceuticals. And so that we felt this was a smart move to help secure our future gross margins.

Okay. Second question. There was another 8-K filing maybe about a week ago relating to a change in the need for shareholder approval -- or I can't remember exact details; I'm sure you know what I'm talking about -- that I thought was interesting. Can you discuss that?

Yes. So, a couple of years ago, when Digirad was going through a transition, moving from -- really moving models to a more -- to a model that was really more based on providing healthcare solutions rather than simply products, as we were going through that transition, we were in discussion with a number of our shareholders. And one of the things that -- as we talked about our -- one of our growth strategies being acquisitions, and we self-imposed a limit on the size of the acquisitions that we would contemplate.

This was all self-imposed by Digirad and our Board. And we -- since the past two years, as we continue to look at opportunities, we felt like we no longer -- and as we had success with our acquisitions and our ability to stick with our -- the discipline that we're providing -- that we are using in these acquisitions, we felt like that safeguard was no longer necessary. So we did recently eliminate that from that restriction, and which would allow us to look at potentially larger acquisitions. Obviously, though, we would still continue to use the same discipline that we have been using in our previous acquisitions.

Great, thanks. And Jeff, quick question for you. In your prepared remarks, you mentioned something about a little bit of price pressure. Could you discuss that a little bit more, please?

Sure. In certain of our markets, we compete with local competitors, and it's going to vary market by market. But we have been -- and over the last few quarters, been experiencing some price pressure in some of these markets, which has impacted our operations to a certain extent.

We are working through other strategies in those markets to provide our products and services in alternative ways to differentiate ourselves, even more than what we believe we are differentiated right now in our service and commitment to our customers ,to combat that price pressure. But it is in certain markets. We did see some of it in the second quarter. We have seen some of the past quarters. But we are working through a process to successfully compete on those levels. And I wouldn't say that it's a high concern, but we have been seeing it.

So, is it that you are losing business because they are cutting price? Or because you are having to cut price to meet their lower prices, is what the impact is?

We are having to lower some prices in some markets to be competitive and keep our customers, but we are actually seeing some higher volumes all -- higher volume across all our businesses. So there is a mix of price and volume concepts going on. But we have been working on some different business model changes in certain markets to be able to differentiate and just do -- provide services more on just volume of pricing for radiopharmaceuticals in days of services. And we're still deploying that. But it is -- really, Larry, it's a market-by-market concept.

Okay, great. Thank you very much.

Thank you, Larry.

Juan Molta, B. Riley & Co.

A few questions for you. From a high level, you mentioned Q2 and Q3 are your seasonally strong quarters. Do you have any visibility that you can provide into Q3 at this time?

You know, we normally look at it on an annual basis. So we don't really put a forecast forward for our third quarter. But we continue to see a lot of positive -- like we mentioned, a lot of positive trends. We're seeing good things happening within our Telerhythmics business that's very promising. And we are also feeling pretty good about all the efforts that we have been putting forth over the past couple of years. And we are starting to see some payoffs in the product side and on our services side.

So, very excited. But as far as particulars, we have not -- we don't really give Q-by-Q guidance there.

Okay. Fair enough. And regarding Telerhythmics, you mentioned some things in your remarks. Is it possible to maybe get a little bit more color? You mentioned, in the last quarter, that the integration efforts were finished in Q1. If possible, give a little more color if you have revenues on-hand at this time, if that's possible to share.

Yes, we don't have that detail of something that we do share, because it does make up -- even though we are excited about Telerhythmics, it's still a small -- smaller portion of the business compared to our overall Mobile Nuclear business and our Products business.

But I will say this, that, in this year, we have seen growth -- 25% growth in our enrollments since the beginning of the year. A lot of that is due to our ability to be able to push our -- the Telerhythmics services through our existing distribution channels, and our existing relationships that we have built over the years in providing our services.

So we feel very good about the growth potential of Telerhythmics, and our ability to be able to offer this service and execute on this service to our existing clientele. So that's where we are seeing a lot of our growth in that business.

Okay, perfect. That's good to hear. And then regarding MD Office, I was going to ask you -- can you at least say if there's growth from that business there, relative to the quarter when it was an independent company year-over-year?

You know -- hey, Jeff, do you -- I don't know if you have those details, but can you --?

Yes. I mean, Juan, I think what we can answer on MD Office is, it is holding steady/slight increase to where it was traditionally on a quarter-by-quarter basis. Our main objective for MD Office really in the first couple of quarters of ownership are, A, getting it integrated, which Matt mentioned that we had completed; and B, getting it stabilized to make sure that we don't lose any of the existing customers.

As we go forward, we're certainly going to be attacking those growth efforts. And they have had slight growth compared to traditional amounts, but it wasn't the near-term focus to immediately grow them. But it will be the mid and longer-term initiative for the business.

Okay, very good. If I can -- I can go back into York and ask a couple more about your costs, whatever you think is best.

I'm sorry. I didn't understand your question there, Juan. Can you --?

Yes, I have a couple more about the cost, about your operating expenses, but I don't know if I can ask them right now or let somebody else ask a question and come back?

No, that's fine. Go ahead.

Yes. So you mentioned -- regarding the DIS cost of sales, you mentioned the pricing pressure and some local markets and investments you are making into the business that brought your gross margin down. In -- is the gross margin level there at 24%? Is that something that we should model forward more or less at that level? Or do you expect some recovery there as those investments bear fruits maybe later this year?

Yes, I would say that our goal, our targets for DIS in terms of gross margins is 25%, 26% business. That's where we see that business in the long-term in its current state. So, yes, I would say that you would see some recovery to those levels, Juan, based on what we are working on

Okay, perfect. And then, depreciation and amortization. Relative to prior quarters, that increased a little bit. Can you attribute that to something in particular?

Yes. It's mostly through the growth that we are having within the Telerhythmics business. As we grow that business, it does require us to purchase additional equipment for monitoring.

Okay, perfect. All right. Back to the question that the first gentleman asked about the Perma-Fix collaboration. Do you, at this time, have any milestones that you can share with us in terms of when those developments you expect to start bearing fruit, and you will see some cost benefits?

Yes, I mean, as far as specific milestones, obviously, we are -- I don't know if I can go into those details, but I will say that we are looking at -- this is an investment that has a -- we are talking two-year type or more type -- two to three-year type operationalization.

Now we are hoping and working towards -- to speed that up. But we would say that that's the ballpark for that business. There is still a variety of things that they need to do. They've got a great -- they've had some very good success. I think if you've read some of their press releases, they've had good success in certain tests that they have made with their process.

And we are seeing continued success there, but we're still looking at a two-year horizon for that -- is my best understanding for that, in terms of operational. Now, that could depend on a lot of -- that could change, based on a lot of different factors. But that's -- at this point, that's my answer to that.

Okay, perfect. And one last one, which is an industry question. And it may be a little early to answer, but the consolidation, and with the health insurance companies like the CIGNA, Anthem's, Aetna -- what type of impact do you expect for your business? And I know it can be a little early, but have you considered that?

Yes, I mean, obviously we -- that there is -- there would be certain impacts that are still unknown. But we would say, at this point, a lot of -- we don't see any positives or any negatives -- immediate positives or any immediate negatives. Most of those health insurance companies, those providers, they really do operate very similar in their treatment of imaging services and monitoring services. So, we see -- we don't really see a tremendous difference whether it's three or four or one or two.

Got it. All right. Thanks, guys. I have a couple more but I'll go back into queue, and if there's time, I can ask a couple more.

Okay.

Thank you.

(Operator Instructions) Our next question comes from the line of Juan Molta with B. Riley. Please proceed with your question.

Guys, I'll just keep them brief. Regarding the Diagnostic Imaging business, I wanted to ask, do you -- how has pricing remained there? And have you seen any general changes in the marketplace there? You mentioned you are making sales into international and it's still unknown, but you are seeing progress; but what about the domestic market?

Yes. As far as the domestic market, we have seen pickup. Last year, we saw pickup over the previous year. This year, we are projecting that we were going to sell more cameras this year than we did last year.

I think there is -- from our ability, just like on the services side, we more and more healthcare systems taking advantage of the opportunity that our unique cameras provide, in terms of not only the quality of imaging, but the mobility of imaging, and our ability for our technology to be used in a variety of different ways, we are seeing continued market acceptance of the Digirad cameras. And we foresee that to continue to happen into the future.

So, we are -- so, definitely excited about the business. I think that we will continue to see our prices hold steady. We're not seeing the same sort of price pressures that we've seen in our services businesses, as Jeff had mentioned earlier, because in a lot of cases, with our cameras, it's because of the uniqueness we are definitely able to get the prices that the value demand.

Okay, perfect. Yes, very good. That's all for me. I appreciate it, guys. Thank you very much.

Thank you, Juan. Appreciate you.

Thank you. Ladies and gentlemen, we've come to the end of our time for questions. I'd like to turn the floor back to Mr. Molchan for any further comments.

Okay, thank you, operator. Thank you, Melissa. Thank you all of our stockholders and other interested parties who joined us this morning. We appreciate your interest in Digirad. And Jeff and I look forward to discussing our results and business update with you next quarter. Have a great afternoon.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.