Star Equity Holdings, Inc. (STRR) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Digirad Corporation 2013 Fourth Quarter and Year-End Results Conference Call. [Operator Instructions] I would now like to turn the conference over to our host, Ms. Reesa Lindsey [ph]. Please go ahead.

Thank you, Jada, and thank you, all, very much for joining this morning. If you didn't receive a copy of today's 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 at www.digirad.com. Shortly after the call, a replay will also be available on the company's website. I'd like to remind everyone that certain statements made during this conference call, including the question-and-answer period, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements include statements about the company’s revenues, cost and expense, margin, 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 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, as well as 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 President and CEO, Matt Molchan. Joining Matt this morning is Jeff Keyes, Digirad's CFO. Matt and Jeff will discuss the 2013 fourth quarter 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, Reesa [ph]. Good morning, everyone, and thank you, all, for joining us today for our fourth quarter 2013 and year-end results conference call. I am pleased to report that we had another solid quarter and returned a profit for the second quarter in a row. Total revenue for the quarter was $12.5 million, with earnings of $787,000, or $0.04 per diluted share. While total revenues are down modestly year-to-year, primarily related to camera sales in our Diagnostic Imaging business, we, of course, are a different company today: better margins, more profitable and more focused on our Digirad Imaging Solutions or DIS business. Revenues from DIS grew by about $726,000 compared to the fourth quarter of 2012, which is a great indicator of our progress. Our CFO, Jeff Keyes, will go into the financial results more thoroughly in a few moments. But those of you who follow us closely know the growth in DIS fits squarely into the new operational and strategic framework we installed in early 2013. Now, with 3 full quarters working in this new strategy, we believe more strongly than ever that we made the correct strategic decision. We are proving each quarter the thesis of our strategy: that DIS is scalable and offers us the best opportunity for income, cash flow generation and growth, while at the same time, we can continue to sell our cameras with very relevant technology into the market at profitable levels. As we have reported previously, the implementation of this strategy will continue through the course of 2014. It is clear to us we are headed in the right direction. In a healthcare environment where our customers are looking for ways to be more cost effective and efficient, DIS is a welcome outsourcing model. DIS allows our customers to limit their upfront capital expense cost and focus their efforts on addressing their patients, while our clinical technologies complete all the logistics of running their diagnostic imaging operation. Another good indicator is that we continue to close new DIS business, both in the third and fourth quarters, which bodes well for our growth going forward. Our revenue, of course, experienced some pressure in the fourth quarter because of the timing of holidays this year, as well as the impact of difficult weather conditions, which has been ongoing into the first quarter of 2014. Obviously, weather can impact our business and cause operating days to be rescheduled or canceled. However, these kind of impacts are expected and they are only for the short term. Turning to our Diagnostic Imaging business, the overall unit sales were down compared to last year, but our ASPs and margins are up. And we believe the business is more sound today than ever before. Our ability to deliver our most disciplined pricing model for our equipment, as well as the restructuring of the underlying cost and manufacturing infrastructure, will help to keep that business contributing, and will pay off even greater dividends as our growth initiatives here and abroad progress over time. We remain optimistic about our Diagnostic Imaging business because the same cost-efficient health care dynamics that is driving our DIS business also impacts our cameras sales, particularly, our portable and versatile ergo camera. As we have said before, ergo is a unique camera product, offering convenience and the potential for diverse activity throughout the hospital setting. Before I turn the call over to Jeff, let me summarize briefly. Our results and expected future results are right on target with our expectations. We will continue to deploy our restructured business model, while at the same time, we will continue to look for ways to return value to our shareholders, including our continued plan to return value via our cash dividend. Now, I'd like to turn the call over to Jeff, who will provide the financial results for the quarter and year. Jeff?

Thanks, Matt, and good morning, everyone. In the release today and in my prepared comments, I will make reference to both GAAP results, as well as adjusted results, for which the adjusted results do not include nonrecurring charges associated with restructuring activities and the gain on sale of assets and license agreement associated with our surgical imaging sales, as well as references to adjusted EBITDA, which is a non-GAAP measure. 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 earnings on a GAAP versus non-GAAP basis in today's earnings press release. As Matt noted, we announced our restructuring of the company in February, 2013. Through those restructuring efforts and -- though those restructuring efforts are essentially complete, we will continue to have some minor cost related to that effort in the first and second quarters of 2014. Also, we announced in January, that we entered into a termination agreement for our former headquarters in Poway, California. This termination agreement will allow us to exit our existing lease early and move into a smaller and more economical space for our Diagnostic Imaging operations, but we will have cost related to that effort, as we've previously announced. However, subsequent to the move, we expect that we will save an additional $400,000 to $500,000 on an annual basis. Now for a brief summary of the quarter's activity. As Matt said, total revenue for the fourth quarter of 2013 was $12.5 million, compared to $13 million for the same period last year. DIS revenue for the fourth quarter of 2013 was $9.3 million, compared to $8.5 million in the same period last year. Diagnostic Imaging revenue, which includes our camera sales and related camera support business for the fourth quarter of 2013, was $3.3 million, compared to $4.5 million for the same period last year. Consolidated gross profit for the fourth quarter of 2013 was $3.7 million or 29.4% of revenue, compared to $2.6 million or 20.1% of revenue in the same period of the prior year. As Matt noted earlier, net income for the fourth quarter of 2013 was $787,000 or $0.04 per diluted share, compared to a net loss of $1.9 million or $0.10 loss per diluted share in the same period of the prior year. So moving onto 2013 full year revenue, which was $49.4 million compared to $50.5 million for 2012. DIS revenues for the full year 2013 were $37.2 million, compared to $36.1 million for the prior year. Diagnostic Imaging revenue for 2013 was $12.2 million, compared to $14.4 million for the same period of the prior year. Gross profit for the full year 2013 was $14.1 million, or 28.6% of revenue, compared to $13.1 million, or 25.9% of revenue for the prior year. Of course, the full year 2013 was impacted by our restructuring efforts earlier in the year. Despite this, we still managed to increase DIS revenue by $1.1 million, or around 3% growth year-over-year, increased our consolidated margin by 270 basis points. Our net income for 2013 full year was $264,000, or $0.01 per diluted share, compared to a net loss of $4.9 million, or $0.26 loss per diluted share for the prior year. As we look at the business and manage results, we really look more toward our adjusted results; both adjusted for restructuring cost and gain on sale of our uncommercialized technology, as well as adjusted EBITDA results, which includes these items, as well as impacts of interest, taxes, depreciation, amortization and stock-based compensation. As we presented in our financial schedules to the earnings release, we have shown our progress on a sequential quarter-by-quarter basis over the course of 2013. Going from an adjusted net loss of $1.4 million in Q1 2013 to breakeven in Q2, to adjusted net income of $1 million in Q3, and are finally arriving at adjusted net income of around $0.8 million in Q4. Of course, our business does experience seasonality, with Q1 being one of our lower quarters, especially this year with significant weather in the East. However, these 2013 results are within our expectations and we have every expectation that our recent trend will continue into the future. Now, I'll turn the call back over to Matt.

All right. Thanks, Jeff. I'd like to close by saying all of us at Digirad are very excited about our new strategic direction, the traction we are creating in the marketplace and the potential we are seeing to build scale into our business and growth. Now I would like to turn the call over to the operator for questions.

[Operator Instructions] And our first question comes from the line of Ross Taylor with Somerset.

Could you give us a quick overview on looking out over the year, what kind of free cash flow do you expect to generate? You've done a good job, so far, in the last 12 months, generating free cash flow, keeping the cash balances strong, even in spite of the dividend and the share buyback. But moving forward, what should we expect?

We continue, as we have stated previously, to have an operation that generates $3 million to $4 million of free cash flow on a go-forward basis from our core business. That is our -- continues to be our direction underneath our new strategic initiatives.

Okay. And when you look at the opportunity, back a year ago or so, the thought process was looking to try to do fold-in acquisitions in the mobile business. Could you talk about that market opportunity at this point in time, and where you see -- and with a rather substantial cash obviously, you should be able to continue to pay this dividend for an extended period of time, particularly given that you're generating free cash flow? So where do we see the balance of the cash being used for?

Yes, a part of our strategic initiatives are to continue to pursue acquisitions within the financial discipline that we've applied into this area. And yes, we are still -- we're talking, as we mentioned, our last meeting, we continue to talk to a number of imaging and other types of health care services-type businesses that we could fold into our current DIS operation that continues to progress. Unfortunately, we don't have anything to announce in terms of any deals or anything, but we continue to look aggressively for those deals and are hopeful to find some that will fit into the financial metrics that we have put in place.

[Operator Instructions] And I'm showing no further questions. Please continue.

Okay. I just -- let me just close by saying Digirad is in a growing health care market that sees the need and sees the value of our offerings. Our mission is to create value by being the market leader and delivering convenient, effective and efficient diagnostic solutions on an as-needed, when-needed and where-needed basis. Our overall results reflect a significant turnaround in profitability and cash flow generation. DIS is growing. Our Diagnostic Imaging business is now profitable and generating cash. Our results are in-line with our new strategic direction, which as stated previously, is to make our core business a $3 million to $4 million-a-year cash-generating operation. We'll continue to execute our strategies and continue to return value to our shareholders through a dividend. I'm looking forward to discussing our continued progress and successes next quarter with all of you. Thank you for your time, your interest and your investment in Digirad. Take care.

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.