Star Equity Holdings Inc (STRR) 2016 Q1 法說會逐字稿

Greetings and welcome to the Digirad Corporation first-quarter 2016 conference call. (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, Ms. Lindsay; you may begin.

Thank you, Chris; and thank you all for joining us this morning. If you didn't receive a copy of our press 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 Internet 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 would 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, margin, operations, financial results, restructuring efforts, acquisitions, 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 2016 first-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.

Good morning, Risa; thank you. Good morning, everyone, and thank you all for joining us today for our first-quarter 2016 results conference call. It is great to be talking with you all today at the close of another excellent quarter for Digirad.

This quarter is the first quarter reporting results that include our recent acquisition of DMS Health, which transacted on January 1. Our revenues for the first quarter were $31.2 million, a year-over-year increase of 125%; and our adjusted EBITDA for the first quarter was $3.7 million, a year-over-year increase of 345%. Obviously, the DMS Health acquisition has elevated Digirad to the next level in terms of revenues, size, scale, and geographical coverage.

As a reminder, DMS Health is an integrated healthcare services company that is headquartered in Fargo, North Dakota. It operates in two primary business segments: mobile healthcare, which includes mobile fixed site, and provisional diagnostic imaging and mobile healthcare solutions throughout the United States, with their biggest concentration of customers in the upper Midwest; and medical equipment sales and service, selling and servicing primarily Philips medical equipment through their exclusive relationship with Philips Healthcare. We remain very excited about the incorporation of DMS Health's operations and employees into Digirad, and we are progressing very well with our operational integration plan.

Now for a quick business-by-business update. Our Diagnostic Services business -- which includes our in-office mobile Diagnostic Imaging activities, Digirad Imaging Solutions, or DIS, and our cardiac monitoring business, Telerhythmics -- continue to perform very well. DMS performed well year-over-year, benefiting from high volume from existing customers as well as volume from new customers.

Overall, our diagnostics services revenue increased 14% year-over-year in the first quarter from the favorable volume I mentioned as well as the impact of a full quarter of revenue from the MD Office Solutions acquisition that was completed in March of 2015. Still, as we have mentioned in the past, we are seeing challenges with some competition and with the overall market in general at DIS; but we are continuing to deploy other value-added services and pricing structures into these markets that we believe over the long term will address these challenges and allow us to continue to grow organically as we move forward.

I can say we are seeing some near-term positive results from these initiatives.

Our Diagnostic Imaging business performed well during the quarter, increasing its year-over-year revenue by 9% and ending the quarter with a good pipeline of business and forward outlook. As we move forward, we'll continue to put effort in international markets, as well as aligning ourselves with larger purchasing opportunities by being part of high-quality buying organizations.

In addition, we are conducting small enhancements to certain cameras in our product line to allow them to gain higher reach in the marketplace. These initiatives are being deployed over several quarters and will take some time before they gain full traction. Therefore, in the meantime we'll continue to manufacture and sell our existing high-quality nuclear imaging cameras in our current markets.

Our mobile healthcare business performed very well for the first quarter under Digirad ownership, and I'm very excited with the management team that is running that business for Digirad. As a reminder, mobile healthcare provides mobile healthcare solutions to small and regional size hospitals throughout the United States. Mobile healthcare currently offers MRI, CT, head CT, and other mobile Diagnostic Solutions and has the ability to provide a variety of other mobile healthcare solutions over time to leverage its relationships, infrastructure, and logistical backbone.

As we move forward, we're going to be exploring some of these other mobile healthcare solutions and believe some might be able to be integrated within the business over time, providing potential new revenue streams.

Our medical sales and services business, also new to Digirad from the DMS Health acquisition, performed well in the first quarter. They have an exciting pipeline of future product sales.

Also, as a reminder, our medical sales and service business has an exclusive relationship with Philips Healthcare to provide products, sales, installation, warranty, and product support within a specific geographical area in the upper Midwest region of the United States. They primarily sell imaging systems, patient monitoring systems, and provide support to imaging systems within that same general region. We generate revenues from commissions from these product sales and also generate revenue by directly servicing Philips product in the region.

The acquisition of DMS Health is certainly a transformational event for Digirad. As we remain grounded in our legacy and the new businesses we have today, we also set our sights on our future as we continually work to grow, add value, and transform our Company into an even more diverse healthcare solutions company.

This dovetails into our overall corporate strategy at Digirad, which 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 healthcare solutions 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 services and channels.

Though most of our current efforts are spent running our businesses and integrating DMS Health, Jeff and I continue to spend time looking at possible acquisitions. Right now we're primarily spending our time on potential deals where owners are motivated and they are looking for a potential transaction relatively soon.

However, as we've stated before, the timing and size of these deals vary. And we'll only get involved in deals that we believe we can secure at the right financial metrics that add overall value to our Company.

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

Good morning, everyone. In the earnings release today and in my comments I will make references to both GAAP results as well as adjusted results. The adjusted results are non-GAAP and do not include nonrecurring charges such as those that are associated with acquisition integration and purchased intangible asset amortization.

In addition, I will make references to adjusted EBITDA, which also is a non-GAAP measure that further excludes depreciation, amortization, interest, taxes, and 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 reconciliations of our results on a GAAP versus non-GAAP basis in the earnings release deck.

As we had previously discussed, we closed on DMS Health on January 1, 2016, and the results of DMS operations are included in our results for the entire quarter. Now for a brief financial summary of this quarter's activity.

Total revenues for the first quarter of 2016 was $31.2 million compared to $13.8 million for the same period last year, with the largest impact being the inclusion of the DMS Health business unit, mobile healthcare, and medical equipment sales and services in our result. Revenue for these new business segments contributed a total of $15.6 million to our overall revenue for the quarter.

Revenues for Diagnostic Services were $12 million compared to $10.6 million for the first quarter of last year. Revenues for Diagnostic Imaging were $3.6 million compared to $3.3 million in the first quarter of last year.

Our overall gross profit percentage in the first quarter of 2016 was 29.1% compared to 26.4% in last year's first quarter. In Diagnostic Services, the gross profit percentage for the first quarter was 21.2% compared to 19.5% on last year's first quarter. In our Diagnostic Imaging business, the gross profit percentage was 47.9% compared to 48.5% in prior year's first quarter.

Overall, the revenue increase and gross profit percentage increase in our Diagnostic Services business was positively impacted by a higher volume of service days ran in the first quarter of 2016 compared to the prior year, both from new business activity as well as less cancellations in 2016 versus the prior year. In Diagnostic Imaging, our overall revenue and gross margin was impacted by the timing and mix of cameras sold as well as higher releases of prior reserved inventory in Q1 of 2015 versus Q1 of 2016.

Now I'll make some comments on our new business segments, mobile healthcare and mobile sales -- medical equipment sales and services. For the first quarter of 2016, mobile healthcare produced revenue of $12 million and a gross profit percentage of 24.6%, while medical equipment sales and services had revenues of $3.6 million and a gross profit percentage of 51.8%. Moving forward, we generally expect the gross profit percentages for these business segments to be in line with these in the first quarter, though medical equipment sales and services can vary somewhat depending on the timing of product sales and related commission revenues related to our exclusive Philips relationship.

As a reminder, we do experience some seasonality in our businesses. Notwithstanding other factors, the fourth and the first quarters are our slower quarters in the year, with the second and third quarters being our higher revenue quarters.

Further, we also expect this seasonality trend to be consistent with the inclusion of DMS Health business units as we move forward. The mobile healthcare business experiences most of the same seasonality concepts as Diagnostic Services. Medical equipment sales and services business experiences the same timing concepts based on timing of equipment sold, similar to Diagnostic Imaging. Notwithstanding acquisitions, we expect this trend to continue as we move forward.

During the first quarter, we also incurred closing and integration costs related to DMS Health of $1.5 million. We expect to incur approximately another $500,000 of remaining integration costs over the remaining portion of 2016.

Moving on to the bottom-line results for the first quarter, adjusted net income was $1.3 million or $0.07 per diluted share, compared to $0.3 million or $0.02 per diluted share in the first quarter of last year. Adjusted EBITDA was $3.7 million in the first quarter of 2016, an increase from the $0.8 million in last year's first quarter.

One noteworthy impact for the quarter was included in our financial results, but adjusted from our adjusted results, was the impact of the release of previously reserved deferred tax assets associated with our net operating loss carryforward. As we have discussed previously, we have over $90 million in federal NOLs as of December 31, 2015, that can be utilized to offset taxable income as we move forward.

However, based on our prior history of losses, these benefits were previously all reserved prior to the third quarter of 2015. In the third quarter of 2015, we conducted a detailed analysis of our deferred tax reserves and determined it was appropriate to release approximately 50% of these reserves, which resulted in recognition of approximately $18.2 million of deferred tax benefit during that quarter.

During the first quarter of 2016, we conducted a similar but updated analysis based on the closing of DMS Health and inclusion of their operations into ours, which resulted in further releases that generated $12.5 million of income tax benefit during the quarter. As of now, the vast majority of our previously reserved deferred tax benefits have been released.

We only have a remaining $5.6 million of gross reserve benefits of the original $95 million we had reported over the last couple years. As we expect to generate taxable income in 2016, we will see some more releases related to our taxable income in 2016, which will likely result in a very effective tax rate for 2016 of around 6%.

As we move into 2017, we expect our effective tax rate to be in the 38% to 40% range as we have released all of our expected tax benefits related to NOLs. One important thing to remember in context of our effective tax rate moving around between 2016 and 2017 is this: We expect our cash tax rate as we move forward in the foreseeable future to be around 6% no matter what our effective tax rate is.

Today we also reaffirmed our 2016 financial guidance, which is to produce revenues of between $125 million and $130 million and adjusted EBITDA of $17 million to $18 million. In addition, based on concluding our purchase accounting associated with DMS Health acquisition, we expect to have adjusted diluted earnings per share of between $0.30 and $0.35 per share.

As you know, we also closed on a credit facility with Wells Fargo on January 1, 2016, to help fund the acquisition of DMS Health. This credit facility has three components: a line of credit that has a borrowing base of up to $12.5 million and bears interest of LIBOR plus 2%; a tranche A that has a borrowing base of $20 million and bears interest at LIBOR plus 2.5% and amortizes over seven years; and a tranche B that has a borrowing base of $7.5 million and bears interest at LIBOR plus 5% and amortizes over three years.

At March 31, 2016, our weighted average interest rate on our credit facility was 3.41%, and the total principal balance outstanding was $32 million. Our net debt position less all cash, cash equivalents, available-for-sale securities, and restricted cash was $18.4 million. Moving forward, we expect to utilize most of our excess available cash to be applied against our credit facility to help reduce overall interest expense.

Finally, we announced today our regular quarterly cash dividend of $0.05 per share that will be paid on May 27 to shareholders of record on May 13. Now I'd like to turn the call over to the operator to take questions.

(Operator Instructions) Larry Haimovitch, HMTC.

Good morning, gentlemen, and congrats on another good quarter.

Thanks. Good morning, Larry.

Hey, Matt, once again this is the third or fourth quarter, I think, you mentioned the word competition and how you are dealing with it. I keep wondering about -- if you could provide a little more color on that, since you proactively bring up the competitive aspect of the business.

It really is just a fundamental aspect that we're running into in certain of our markets where we do have a small mom-and-pop competitors that are competing on price. As that occurs that does, obviously, as we have spoken about in previous quarters, that still has a downward effect on the DMS operating performance -- the DIS operating performance.

So we just want to point that out, as I also stated, we've been working on new initiatives that have been combating that type of price pressure. And we are seeing some small benefits from those, from these new programs.

I think as we see increases as we saw in DIS in the first quarter, we saw some organic growth, less the acquisition, over -- about 5%. So we're starting to see some benefit from those initiatives to combat that. But it's still in certain areas that we are running into some of these mom-and-pops and we're experiencing some price pressure.

Great. A follow-up question, Matt. It sounds like overall the acquisition has gone very, very well, and it's as expected. Were there any issues or disappointments as you started integrating the two Companies that you might want to share with us?

We have not experienced any disappointments at all. I'm very excited about the Company, very excited about the people and the relationships they have with their customers.

It has definitely been a lot of work, but integrating mainly the operational aspects of the back office, the HR, the IT, the finance departments. But in general, we have not had any surprises to this point, and it has gone very smoothly.

Great. Thank you, Matt.

Juan Molta, B. Riley & Company.

Good morning, guys. First question is on the 2016 guidance. It seems like given this quarter's results and the strength you had this quarter -- it was above our estimate -- you could have potential increased that guidance some. I was wondering if you're just being conservative for the balance of the year, or is there something in particular that you're seeing that may marginally reduce results in the next nine months?

No, Juan, there's nothing in particular. But at the same time, we just acquired a company that essentially doubled the size of Digirad and we're coming out for the first quarter. So there is seasonality and activity within the businesses, as we mentioned. We don't have concerns or any thoughts on the full year that would cause us deep concern as we go forward.

But at the same time, we think the guidance range that we've provided is appropriate. Obviously each quarter we'll take a look at it, and we'll update everyone as needed. But right now we think the full-year guidance range is appropriate based on how we're seeing the year coming together.

Okay; very good. Regarding -- a couple of questions on product sales. The product sales was about 20% stronger than we had forecasted. Was that due mainly to DMS, or is that the core -- the nuclear imaging product sale? Where did you see (multiple speakers)?

Unfortunately I don't have in front of me your estimates on how you calculate that. But we have two separate divisions now that are selling product: our traditional Diagnostic Imaging business, which was up about 9% over last year quarter-over-quarter; and then our medical equipment sales and services business, which obviously, as I said, performed well in the first quarter.

But maybe -- and I apologize, I don't have your forecast right directly in front of me, so I'm not sure if -- which one -- where you forecasted those sales. But both divisions are performing very well. Both have very strong backlogs, and we're very excited about their performance in 2016.

Okay, very good. Then the next question is on product margins, which was almost 50%. You already mentioned you expect that level of margins for the balance of the year.

I was wondering about the previously marked-down inventory that you had going through the cost of goods sold line. Is that not going to be an issue here going forward that may reduce product margins?

Let me just clarify a little bit between the businesses. Obviously at Diagnostic Imaging for product sales we manufacture and sell those products, so the actual product cost is part of the margin.

Then for medical equipment sales and services, we generate revenues based on a commission off the product that is sold via Philips. We're not actually running the cost of the product through COGS and the ultimate margin.

Having said that, your other question was about inventory releases. There was a minor amount of inventory releases, within margin, in the first quarter of 2016 for Diagnostic Imaging, but we do not expect any more of that. It was definitely less than it was in the first quarter of 2015.

That actually took margin down year-over-year comparatively for that one concept, Juan. But we don't expect any more margin benefit going through for the course of -- inventory release. It's just normal inventory activity.

So, yes, we're aware of that, and we would expect margins to be in the same general level as the combined product and equipment sales business across the new DMS business unit and the prior Digirad Diagnostic Imaging business unit.

Okay; very good. Regarding pricing in the services side, have you seen any change now that we're working with the 2016 reimbursements off of Medicare? Have you seen benefits, or just has it been neutral?

Overall, I would say it's been neutral. Certain sections of our business did benefit actually from some increases, but a very small portion of our business. So for the most part in general it's been very neutral.

Okay. Then you mentioned in your -- I was going to ask about future acquisitions, but most of your efforts right now are going to be spent on integrating DMS, running the business as it is. So we shouldn't expect too much in terms of acquisitions in the next 12 months that are meaningful? Or maybe a little more color there.

Well, obviously, we're definitely going to be opportunistic in terms of deals that would come across our table that -- with the right financial metrics -- will make sense for Digirad. So we'll continue to have our eye open on that.

But you're correct: for the most part, we are concentrating on integrating this business. As those opportunities come up we will obviously address them, and apply the proper resources to execute them if we feel like they will be beneficial to Digirad.

Very good. That's all I had. Thank you very much, guys.

(Operator Instructions) There are no further questions at this time. I'd like to turn the call back over to management for any closing remarks.

Thanks, Chris. As always, we appreciate all our shareholders and your continued feedback and support. We are very excited about our business model and our future, and we believe that there are many, many more good things to come.

Jeff and I look forward to discussing our results and business update with you next quarter for our second-quarter results. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your time and participation. You may disconnect your lines at this time and have a wonderful rest of your day.