Star Equity Holdings, Inc. (STRR) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Digirad Corporation 2012 First Quarter Results Conference Call. [Operator Instructions] This conference is being recorded April 27 of 2012. And I would now like to turn the conference over to our host, Mr. Matt Clawson of Allen & Caron. Please go ahead.

Thank you, Kelly, 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) 474-4300 after the call, and we'll be happy to send you one. Also, this call is being broadcast live over the web and maybe 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, costs 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 the company's market and competition. More information about the risks and uncertainties is available in the company's filings with the U.S. 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. Hosting the call today from Digirad is Todd Clyde, President and CEO. Todd will discuss the first quarter 2012 results, update us on the company's strategies and comment on the company's outlook. 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 first quarter 2012 results conference call. I'd like to start by welcoming our newest member of our executive team, Sarah Hanssen. Sarah is our Senior Vice President of Strategic Marketing and Business Development. She started in January and has been very busy doing the work necessary to understand our markets, customers and opportunities to deliver larger returns from our existing channels and new investments we make. Based on her experience in commercializing products, marketing strategies and developing partnership relationships, Sarah is already delivering new and executable ideas that could drive real value. We look forward to her contributions as we move forward on a variety of new initiatives. Speaking of fresh ideas, let me talk for a moment about our Board of Directors. As most of you know, based on our recent press releases, we have taken a series of steps to improve the policies and charter of our Board, as well as enhance its composition. In equal parts, that has resulted from our continual efforts to provide high standards of governance for the company and also from listening to all of our shareholders and their concerns about our appropriate representation at the Board level. As we noted in the press release, as we reach out to our larger shareholders and asked them to nominate or recommend representatives who might be productive board members, I can tell you now that these shareholders reacted very positively and presented us with names of a number of high caliber, seasoned medical technology executives and investors to consider. That process culminated this week with an appointment of 3 new directors, each of whom was suggested by one of our larger shareholders. Having met with and vetted these 3 individuals, the other members of the Board and I are extremely confident that they will make a positive contribution to strategy and governance and will do an excellent job of protecting and forwarding the interest of all shareholders. Again, our primary goal has been, and will continue to be, increasing shareholder value. The 3 new board members are Chuck Gillman, Jeff Eberwein and Jim Hawkins. In connection with these appointments, we have increased the size of Board by 1 and 2 of Digirad's existing share directors, Ken Olson and Steve Mendel have stepped down effective immediately. Ken and Steve have both done a great job to guide the company through both times of growth and challenges and have been exemplary board members and shareholder representatives. I would like to thank them both for their service to the company. Now just a bit about the backgrounds of our new directors. Since their CVs are extensive, I could go through a long list of accomplishments, but I will summarize their relevant experience and urge you all to take a look at our recent filings to appreciate the impressive backgrounds of each of these gentlemen. First, Chuck Gillman has been a consultan, professional investor and a board member at a variety of organizations for the past 20 years. In mid-2009, large shareholders in MRV Communications approached Mr. Gillman about joining the board of MRV after MRV's stock had fallen significantly. Mr. Gillman joined the Board of Directors of MRV in the fall of 2009 and subsequently purchased more than $3 million of MRV's stock via a fund he managed. Mr. Gillman's presence in the boardroom acted as a catalyst for a number of performance improvements that dramatically increased value for MRV shareholders. Jeff Eberwein, who is currently a private investor, has 20 years of financial sector experience, including 16 years in investment management and 4 years in investment banking. He will bring the Board a wealth of contacts on Wall Street and an intense focus on creating shareholder value. He was a portfolio manager for more than a decade at Soros Fund Management, most recently and part of that at Viking Global Investors and Cumberland Associates. Jim Hawkins has more than 2 decades of experience as the Chief Executive Officer of successful medical device companies. Since April 2004, Mr. Hawkins has served as the President and CEO and Director of Natus Medical Incorporated, where he has guided the company to a substantial increase in value via both organic and strategic growth. Jim was also President and CEO and Director of Invivo Corporation and he is currently Director of IRIDEX Corporation. Needless to say, the combined business acumen, turn around experience and eye for strategy and value creation among these 3 individuals will be a great addition to the Board. And I look forward to their guidance as we move forward into an exciting period of the company. Now let's go through our first quarter results. I'm pleased to report that revenues on both sides of our business, that's our Digirad Imaging Services or DIS business and our solid-state camera or Product business trended up sequentially in the first quarter over last year's fourth quarter. Also, new physician groups are signing up for our DIS service days as reimbursements have stabilized and as positive clinical and economic drivers we believe are becoming clearer. In addition, from a margin standpoint, our DIS margins have grown from about 19% to almost 25% on a quarter-to-quarter basis. Now, some of that growth is due to lower rate of pharmaceutical cost and some of it is based on a one-time gain associated with a worker's compensation insurance credit. Even so, this is another significant trend that we are pleased about. Expanding our margins has always been an important goal for us, and we will continue to work to keep our operating cost low in order to keep our margins at these much better percentage levels. Despite lower product revenue, our gross margin in this business segment was slightly higher than last year, in part due to the mix of sales favorably weighted to our ergo cameras, which is yet another good sign. As most of you know, our ergo is an innovative, flexible, portable device that provides point-of-care imaging especially for the hospital market. This is a good indication of acceptance of our new camera product and our ability to respond to the needs of the marketplace. We are far from the ramp up level that we are ultimately looking for, but we believe this camera will continue to gain greater market acceptance over time. The fact that we continue to see genuine enthusiasm and increased interest around this ergo camera in the marketplace gives us confidence. We continue to make some cautious investigatory type of investments in the technology and product and development side of the business. Thus, we see our level of activity in research and development and commercial activities have picked up slightly as we explore ways to accelerate growth. We believe the macroeconomic market has improved from a year ago, and this is a prudent and worthwhile to begin to make some of these small investments. These kinds of activities combined with an enhanced board and new addition to the management team are creating a sense of excitement in our organization as we look to the coming year. Now let's talk about the financials in the current period. You have now, no doubt noticed the absence of our former Chief Financial Officer, Richard Slansky, whose last day was this past Friday. We wish Rich well in his new venture and we are very appreciative for his financial management over the past few years. While you will have to put up with me for my financial reporting on this call, we have already begun the process of seeking a new CFO in the caliber of candidates interested in the Digirad position and opportunity appear to be very strong. Consolidated revenue for the first quarter of 2012 was $13 million compared to $14.2 million for the same period in the prior year, but up from the $11.9 million in the fourth quarter of 2011. DIS-only revenue for the first quarter of 2012 was $9.3 million compared to $9.6 million in the same period of the prior year, but up from $9 million in the prior sequential quarter. Product revenue for the first quarter of 2012 was $3.7 million compared to $4.6 million for the same period of the prior year, and up from $2.9 million in the 2011 Q4 period. Gross profit for the first quarter of 2012 was $3.7 million or 28.3% of revenue, up from $3.5 million or 24.8% of the revenue in the same period of the prior year and $3.1 million or 26% of the revenue in the prior quarter. Net loss for the quarter of 2012 was $1.3 million or $0.07 per share, compared with net loss of $400,000 or $0.02 per share in the prior -- in the same period of the prior year and a net loss, $2.8 million or $0.15 per share in the prior quarter. We ended the first quarter with cash and cash equivalents and available-for-sale securities totaling just a little over $29 million or $1.54 per share. We did use some cash during the first quarter but the primary use of cash in the quarter was related to the typical first quarter slowdown of collections, associated with annual changes in payor coding in our DIS business. That impact is expected to reverse itself in the current quarter. In addition, we have transitioned our accounts receivable function in-house in recent months, a move we think will increase the efficiency of collections and lower overall cost in the months to come. Let me close with some final remarks. We believe we are entering a new chapter at Digirad and have identified some exciting opportunities that are before us, all with the intention of increasing shareholder value. That said, we have a newly enhanced Board of Directors as of this week, and we will all be working very hard to make sure that they are up to speed as quickly as possible and understand the opportunities and challenges that we face in the marketplace, and are in a position to be clearly heard as we determined that next steps of the company. I remind you as well that the board has established a new strategic advisory committee chaired by Jeff Eberwein. We'll be working closely to look at all possible ways to drive shareholder value. The current Digirad business is improving and offers an interesting value proposition. The overall marketplace for our products has improved recently, and we believe will continue to do so and we are exploring new ways to accelerate growth further. I look forward to exploring, with the Board, all of the options and communicating the actions that we will be taking. In 2012, we expect to generate positive cash flow from our DIS business and to increase sales in our cardiac and ergo cameras. We will also continue to explore where our solid-state camera technology's going to be applied with greater success in the marketplace. The initiatives in these areas that I touched on earlier will begin in the coming months as we roll out those strategies. Of course, we need to make sure that our Board of Directors are up to speed and they have an understanding before we roll out any specific plans. With that, I'll go ahead and open the call up for questions.

[Operator Instructions] Our first question comes from the line of Alex Andrade with Bulle Rock.

You alluded to a little bit -- can you talk about images or attempts to use ergo outside of cardiac imaging within the hospital? What are your early thoughts there?

Yes, so the ergo camera is a noncardiac device that's used for a lot of general-purpose imaging. The hospitals that have the device love the device. They use it in a lot of different ways but I'll give you a couple of examples. For example, if you look at some hospitals in the Texas region, they take that device and go into the NICU and in the ICU every single night in one specific location. That way, they don't have to move the patient. The nurses aren't having to spend their time out of the ICU and it makes it incredibly efficient for the organization. Others are using it in the pediatric setting where they can do the same thing and go right into the ICU or to the bedside and image the child. One hospital purchased the device to do that, but what they found over time is that it was such an incredibly easy device, so even when they were bringing patients down to the nuclear medicine department, that became a little bit of the camera of choice for some of the key ancillary type scans that are being done. When you think about kind of bone spot, lung studies, things like that, it's a very, very easy camera to use. On the adult side, gastric emptying studies and other studies that take a little bit longer, this is a great device. They're just placed over a patient like a gastro emptying study takes a couple of hours so you can easily set the patient up and use the device in an effective manner. Those are some very key areas. There's also use of the device in the women's health area. So if you think about when a woman has that, maybe an indeterminate mammogram, there's -- what are the next steps that a physician would take, they might use ultrasound, they might use MRI, but they can also look to molecular breast imaging, which is essentially a nuclear image to determine if there is cancer or any abnormality, especially if a woman has dense breast tissues. So this is a device that could be used in the woman's health department. So we have some hospitals that will take it down to women's health and utilize it, let's say 1 day a week in the women's health department. That seems to work very, very well. Great device for that type of imaging. We've also had a number of locations take the device and look to use it in the surgical suite to provide real-time imaging feedback for the surgeon. If you think about kind of some of the surgical staging that happens, a lot of times, an image will happen in the nuclear department either with specs, which is a nuclear scan, planar imaging with PET, and then they'll take those images and they go up and go into the operating room. But the patient gets repositioned and sometimes identification of where either the tumor is or certain nodes or whatever they're trying to go after, move in position. So how do you provide real-time information once that patient is there to really help the physician get what they want to get, confirm that they actually got it, and facilitate the process? So there's a potential for time savings and accuracy improvement element, and then ultimately, confirmation that they were able to take out, whatever they wanted to take out. So we have some groups that are using the device in that type of setting. There are other elements as well in surgery. The group that purchased the unit in the U.K. for example, has used it for some organ transplant purposes and renal studies, things like that.

Okay. That's very helpful. And then, can you talk about how your sales and marketing efforts are aligned with that? I mean, you may have to be selling or convincing a lot of different departments. How do you go about making that sale to a hospital?

Yes. So if we stay on the product side, I think your comment is true. You kind of highlight an area where we're still kind of finding our way just still a bit. If you're selling into -- I guess, the one thing I should highlight is the call point element that is consistent regardless is that nuclear medicine is involved in those processes. And so we understand that call point very, very well. The challenge that you have in a hospital setting, as they prepare for more reimbursement cuts and modifications, kind of coming online through the Affordable Care Act in 2016, hospitals are looking at all ways to drive efficiency. So sometimes, in like a capital budget, the department really, really wants an ergo, but they also need that new spec CT camera, maybe a PET device or something like that. So sometimes, that ergo camera might get clipped out. So if you think about where Digirad needs to continue to improve itself, process and cycle is really having influence, kind of up and down the entire purchasing channel. If you then go to, let's say some of the areas around women's health, surgery, right, understanding those call points effectively is important. So we're trying to do some work right now. We don't have a large sales force in the Product business. And so, our footprint is limited, and we go after the deals that we know are active. But I think, certainly that's an area that we continue to work on and need to improve operationally.

Okay. That's great. And then my last question is still on the product side, you mentioned U.K. What other international markets are you having success in? And where are you optimistic about?

The international market, if you look at Western Europe, more kind of the developed countries, there's an increase in cardiovascular disease, so there seems to be some interest kind of from a market study that we had done a little while back. And then some of our own work there would indicate that you're seeing more demand for dedicated devices. The slight offset to that are some of the kind of economic challenges that those countries have and since a lot of their health care is national in platform, the pressure on their health care system has some equivalent economic challenges just like ours does. But we see demand in kind of those Western Europe countries for dedicated devices, a little less for ergo camera. They don't perform kind of the same number procedures that we would perform with that device. In developing countries, they're mainly buying kind of larger multipurpose devices. That's kind of what our analysis has indicated. So I would say the short-term potential is in Western Europe, but I would look at it as a fairly modest opportunity.

[Operator Instructions] Our next question comes from the line of Adam Peck with Heartland Fund.

You said that the ergo camera's sales doubled this quarter versus last?

Yes.

That was 4 versus 2?

We actually sold 5 in the first quarter. And we've already booked another one in the month of April, at a pretty prestigious hospital. So we continue to see that pipeline move forward. As I indicated with the questions kind of from the other caller, sometimes the device is getting processed and then it kind of gets bumped at periods. So you can somehow, sometimes have a delay even like a year on a device. But the encouraging sign is that everyone who owns the camera just absolutely loves it. I have not gone into a single site that says you know this really doesn't meet our needs. It really wasn't what we are expecting. It's generally the image quality is phenomenal. It's very easy to use, we really like it. So we got to keep finding a way to open up those hospitals that didn't use portable, that kind of think maybe a bit more constrained in terms of just keeping cameras in the basement. So that's a positive trend, I think.

Were any of those 5 repeat sales?

No. We've had -- where we've had kind of some repeat sales that has been like maybe the hospital purchased an ergo and then they purchased an X.ACT or kind of vice-versa. We are working some deals like that right now. Factors, so like there's a deal where they have an ergo camera, and they also own one of our older devices, and we're looking to kind of drop in a second ergo. Most of the sites -- they have quite a bit of volume, right, to justify that. But anyway, go ahead.

Is there any way to characterize the backlog or the sales pipeline on a quantitative basis?

I mean, the short answer is there is a way to do that. We haven't done that in the past. I need to think about that a little bit, Adam. I'm most interested in really the ultimate result, can we sell the units? Can we collect the cash? If we collect the cash, that's never an issue. But I've been more focused really on just kind of driving the revenue. And we're still strengthening our team, right? We've got some really good production, but we've added -- we just added a person. We're hiring one other person, so we still got some people kind of coming up to speed on that side of the house. DIS, we actually saw very favorable bookings. I know you didn't ask that question, but even, kind of more than we've seen like over the last couple of years in the first quarter. So that was a very strong bookings quarter for us. I think what we're seeing is some of the change as people's kind of gotten back to business as usual, and they also appreciate that they've got to find ways to drive value for their patients, as well as manage their revenue streams. So we've seen, we're seeing some improvement there in that business.

And were any of the sales on the ergo side to IDNs? Or were they typically to just one-off hospitals?

They're, so some of them, yes were through IDNs, but to the, just to an individual hospital, right, not through like the IDN purchasing -- at the IDN purchasing level.

But you would want to move up to that?

Yes, exactly that's right. That's what I was going to say, we actually come back and then move, try to move back up that channel, right?

And have there been any initiatives where you've actually sold to an IDN to move up the channel?

Well, I guess I was thinking in my head, if I have an example of the success where we've done that. I would say not yet. I think that's still an opportunity for us. Armando's focus has been really on helping drive, at the local kind of tactical level like, because we had such a bad fourth quarter. We've got to, we got to go to get back up on top of where we were, so some of those, a little bit higher, more macro initiatives -- we weren't able to focus on over the last kind of 4 to 5 months.

Okay. And on a quarterly basis, I know it probably depends on the camera, but where do we need to -- how many do we need to sell to get to at least a breakeven level?

I think if you're in that 12 to 15 mark, you're there for sure. We might be able to get to that level even at a lower camera number. But I can say with confidence in that range -- excuse me, I think that the cost that we've stripped out of the organization over the last couple of years on that product side, as the volumes have come down dramatically, puts us in a stronger position as volumes go back up. And then, secondly, if your mix is oriented towards ergos and X.ACT cameras where your margins are better because you have differentiation more than just like a traditional dual head, or used cameras like refurbs, you don't make money out of the refrub units. Then that could sway that number just up or down, plus or minus a little bit.

Okay, and I realize that we've had a change in leadership at the board level. But last quarter, you did say that we'd have more information on the strategic review. Do you think we're going to have to wait another 3 months to hear with the results are or we'll we hear intra-quarter?

I'd love to go to give you that answer straight out, but it would be unfair because we have really tried to be responsive to our shareholders, listening to them, stepping back. We've gone out. We've talked to, obviously, all of our larger shareholders, including you guys and gotten nominees and brought those forward. And now, to be respectful to that process, we've got to allow Chuck and Jeff and Jim to really come up to speed and understand all of those types of initiatives and strategies before we would lay them out, so that we're fully united and we understand that that's really the best way to add to value. I mean, it doesn't, our view is simply is, it doesn't do any good to bring on new members and not take advantage of their fresh ideas and their perspective to make sure what you're doing is absolutely the best move, right? So yes, that forces some patience to be required, but I believe that that's right approach.

And we have a follow-up question from the line of Alex Andrade with Bulle Rock.

Just a couple of follow on questions on the cameras. You said you sold 5 ergos, how many X.ACTs did you sell?

No X.ACT in the C2M, which is the mobile triple headed camera in the quarter. And then we, I guess we placed one other C2 that is kind of on a financing arrangement. So we shipped and delivered 7 units.

Okay. And the 12 to 15-ish that's break-even, that's all the cameras together? That wasn't ergo only?

Correct. I'll go up and confirm that math offline, but that's kind of where I think it lands.

And do you, do you guys track sales of used cameras to see of that market's gotten a little better? I assume there are a lot of used cameras kind of dumped on the market the last couple of years as people close their practices. And is that getting better now? Or is there less of a supply of used cameras out there?

We have more of an anecdotal understanding of the used market. Like on the new camera market, there's NEMA data that gets reported by Siemens, GE, Phillips, Digirad, Spectrum Dynamics, 1 or 2 others. So that data's pretty firm. In that data, there are refurb units. But if you think about the larger -- well, a lot of refurb shops are kind of more mom-and-pop. There's a couple of that are more nationally footprinted. They don't report into the NEMA data, right? So it's more anecdotal in terms of the true refurb market. I would tell you over the last 1.5 year to 2 years, the refurb market has been very strong, because as you see, it takes an example of the dynamic where a 20 plus man plus practice gets bought out by a hospital group. Usually, 2 or 3 of the doctors will splinter out the back and say, "I don't really want to go with the transaction. " So they pop up. They're used to doing imaging, but with all the dynamics, they'll just, a lot of times they'll just think, "I'm just going to go off and buy a used camera. I can get into a used camera for $125,000, $150,000. My investment's a lot less." And on they go. So there's certainly been some of that market and that even pushed the dual headed kind of new market, ASPs down to a degree. We are seeing a little bit of improvement in that space, but it's hard to say. If you look at the NEMA data over the last 2 years, which would cover those other companies that I talked about in their dedicated cardiac device line, it's only about 100 units that were sold the last few years, each year, domestically, right? So that part of the market's been very, very small. I don't know if the refurb market would be another $100,000 or so, somewhere in that range maybe, but it could be a little less than that too..

Okay. And just the last thing on the mobile imaging unit. Are you having success going into accounts that maybe have a competing device, and they're looking to scale back and just do 1 or 2 days a week, and then becoming customers of yours? So basically converting a GE or Phillips customer to a Digirad customer on the mobile side?

The answer is yes, right? And even some guys who or practices that would have purchased like a Digirad camera the last 3 or 4 years, when their volumes were stronger, and it seemed like it was an easier deal and we all expect that the market has kind of continued forward. As they lost volumes, and they got more pressure, they kind of just said, "I think it's not worth kind of having a camera and managing that." So that could be a little bit of the dynamic as why you see some increase in our DIS bookings and starts in the first quarter. And so, that's certainly a trend as it shifts down more to the service line.

This concludes our question and answer session. I'd now like to turn the conference back over to management for closing remarks.

Thank you, everyone, for being on the call. We appreciate the questions. We appreciate again all the feedback that we received from our larger shareholders in this entire process of going out and looking for ways to enhance our Board and make modifications. I believe that the Board has acutely listened to our shareholder base. We'll continue to do so, and really is laser-focused on trying to increase shareholder value. So thank you for your patience as we bring those new Board members up to speed, and we really analyze kind of all of the strategic options for the business. And we will communicate at the most appropriate time going forward. Have a great day.

Ladies and gentlemen, this concludes the Digirad Corporation 2012 First Quarter Results Conference Call. We thank you for your participation. You may now disconnect.