Star Equity Holdings, Inc. (STRR) Q1 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Digirad Corporation First 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 Risa Lindsay. Thank you. Please go ahead.

Thank you, Brenda 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 would 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 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, 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 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 first 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 would 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 first quarter 2015 results conference call. I am pleased to be talking to you today as we've wrapped up another solid quarter at Digirad, a quarter that marks a milestone as we report our eighth consecutive profitable quarter on an adjusted basis. Further, we've made solid progress on all of our internal initiatives including significant progress on the integration of MD Office Solutions, the mobile nuclear diagnostic imaging business we acquired in Northern California that we announced in early March. This business is an excellent example of a tuck-in acquisition we can make in our core business and also opens up for us a densely populated new market. We expect MD Office Solutions to contribute approximately $3 million of revenue on an annual basis. This acquisition strengthens our position as the market leader in delivering convenient, effective, and efficient healthcare solutions on an as-needed, when needed, and where needed basis. During the quarter, we did experience some headwinds; however, primarily in our diagnostic services businesses from poor winter weather that led to some slowness in a few customers. However, we look at these items as short term in nature and believe this is behind us. We also announced earlier today that we have officially completed our integration efforts with Telerhythmics, our cardiac event monitoring business, and we believe that it is poised for growth now that these efforts are behind us. We believe that all of our businesses at Digirad will continue to grow over time, but in particular we're excited about the growing potential of Telerhythmics now that the integration efforts are completed. Now moving on to our results. Overall, revenues for the 2015 first quarter were $13.8 million, an increase of 6% over last year's first quarter, again despite the headwinds of weather and related activity we were able to post a small amount of organic growth after adjusting out for the year-over-year increase related to the timing of purchasing Telerhythmics in March of 2014. I continue to expect to see modest growth in our tradition businesses of diagnostic imaging and diagnostic services along with as I mentioned earlier higher growth potential from our Telerhythmics business. Based on this and other positive signs we're seeing as we move forward in 2015, we continue to hold the 2015 financial guidance we announced last quarter. As I stated in our 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 to our current distribution channels; and area number three, organic growth within our existing portfolio of services and channels. Even as I remind our current shareholders and prospective shareholders of our corporate strategy, I will say that we continue to look at a number of interesting acquisition targets that are in various stages. The timing and size of these deals vary, but let me just say there is a lot of opportunity out there that we remain interested in as long as we can gain these businesses at the right financial metrics. Now, I would 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 will make reference to both GAAP results as well as adjusted results. The adjusted results are non-GAAP and do not include non-recurring charges such as those associated with restructuring activities or purchased intangible asset amortization. In addition, I will make reference 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 the GAAP financial statements and reconciliations provide a more thorough analysis of our ongoing financial performance. You can find these reconciliations of our results on a GAAP versus non-GAAP basis in the earnings release today. I'll start with a brief summary of the quarter's activity. As Matt stated, total revenue for the first quarter of 2015 were $13.8 million compared to $13 million for the same period last year. Revenues for diagnostic services, which includes the acquisition of Telerhythmics in March of 2014 and most recently MD Office Solutions in March of 2015 were $10.6 million compared to $9.6 million for the first quarter of the last year. Diagnostic imaging revenue was $3.3 million for the first quarter of 2015 compared to $3.4 million in the first quarter last year. Our overall gross profit percentage in the first quarter of 2015 was 26.4%, essentially flat to the 26.5% in last year's first quarter. In diagnostic services, the gross profit percentage for the first quarter of 2015 was 19.5% compared to 21.2% in the last year's first quarter. In the diagnostic imaging business, the gross margin percentage in the first quarter of 2015 was 48.5% compared to 41.3% in the prior year first quarter. Overall, the gross profit percentage in the diagnostic services businesses was impacted by the planned integration efforts in our Telerhythmics business which completed during the first quarter as Matt mentioned as well as the impacts of winter weather. In diagnostic imaging, we enjoyed year-over-year margin expansion based on reduced manufacturing costs, the benefit of some previously reserved inventory releases, and the impacts of product mix sold. As a reminder, we do experience some seasonality in our business and notwithstanding other factors, the fourth and first quarters are our slower quarters with the second and third quarters being our higher revenue quarters. Of course, we also experienced some volatility in revenues and earnings based on the timing of sales of our nuclear imaging cameras. At the end of March, cash, cash equivalents, and available for sale securities totaled $20.9 million, which was a decrease from our December 31 balance. Based on business operations, the first quarter is typically our slowest quarter related to cash flow generation. During the quarter, the business did produce some cash; however, our overall cash balance decreased about $1 million as we paid out our regular quarterly dividend, which was known and planned for. We continue to have plenty of cash to deploy our strategic plan and make strategic acquisitions in a financially disciplined manner as well as fund our regular quarterly dividend. Moving on to the bottom line results for the first quarter, adjusted net income was $0.3 million or $0.01 per diluted share compared to $0.4 million or $0.02 per diluted share for the same period in the prior year. Beyond our integration efforts and winter weather, our year-over-year results reflect our recent investment in additional sales and marketing efforts in both businesses as we continue to drive efforts for growth in the future. Adjusted EBITDA was $0.8 million for the first quarter of 2015, which was unchanged compared to the same period last year. Finally, we announced today that our regular quarterly cash dividend of $0.05 per share will be paid on May 27 to shareholders of record on May 13. Now, I would like to turn the call back over to you Matt.

Thanks, Jeff. I would like to close by saying we continue to believe we’re on the right track for growth in all of our core businesses, and we have the right overall model for the healthcare industry today and where we see it moving in the future. Further, we're excited about our recent acquisition of MD Office Solutions and the potential of other deals we're seeing in the market. These are exciting times for Digirad, and we're taking every step to capitalize on these opportunities. Now, I would like to turn the call over to the operator for questions.

Okay. Thank you, Brenda. Thank you to 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. Thank you and have a good afternoon.

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