Star Equity Holdings, Inc. (STRR) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to Digirad Corporation's Fourth Quarter 2016 Conference Call. At this time, all participants are in the listen-only-mode. A 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, Risa Lindsay. Thank you, you may begin.

Thank you, Rob, 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'll be happy to get you one. Also this call is being broadcast live over the Internet and maybe 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, 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, 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 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 2016 fourth 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 would like to turn the call over to Matt. Good morning, Matt.

Thank you, Risa. Good morning everyone and thank you all for joining us today for our fourth quarter and full year 2016 results conference call. Overall the fourth quarter was a great for Digirad with revenues of $31.1 million a year-over-year growth of 100% and adjusted EBITDA of $5.4 million, an increase of 155% year-over-year. We ended our full year of 2016 at $125.5 million of revenue and $16.8 million of EBITDA. We finished an outstanding year defined by transformation change and very strong performance. Our acquisition of DMS Health in January 1, 2016 is going well. We've now completed our planned operation integration activities. As we move into 2017, we're going to work more on cross-selling activities and leveraging our combined leverages. We consider this normal business operation as you work amount the value of our larger combined company. As a reminder, DMS Health is an integrated healthcare services company that is headquartered in Fargo, North Dakota and 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 devices sales and services or MDSS, which sells and services primarily Philips medical equipment through their exclusive relationship with Philips Healthcare. Now for a quick business-by-business update. I will start with our services businesses which include diagnostic services and mobile healthcare. Our diagnostic service business, which includes our in-office mobile diagnostic imaging activities, Digirad Imaging Solutions or DIS; and our cardiac monitoring business, Telerhythmics. They continue to perform well overall. In the quarter, diagnostic services as a combined business unit performed well year-over-year benefiting from higher volumes from existing customers as well as volume from new customers, increasing overall revenues around 1%. For the year diagnostic services has increased its revenue by 4%. Our mobile healthcare business which was a part of our DMS acquisition also performed well in the fourth quarter achieving revenue of 11.3 million in full year 2016 revenues of 47.2 million. As a reminder, mobile healthcare provides trailer based mobile healthcare solutions to small and regional sized hospitals throughout the United States and currently offers MRI, CT, PET/CT and other flexible and convenient mobile healthcare solutions. We are continuing to explore a variety of relevant mobile healthcare solutions and believe some might be able to be integrated within the business overtime, providing potential new revenue streams. Now, onto our product businesses, which include diagnostic imaging and medical devices sales and services or MDSS. Our diagnostic imaging business finished the year with the great quarter with year-over-year revenue for the quarter increasing 7%. For the year, diagnostic imaging finished slightly behind 2015 revenues by about $500,000, which is attributed to the timing of deal closings. Overall from the business operations perspective for diagnostic imaging, we are continuing the small hardware and software enhancements, we previously announced to allow our cameras to gain higher reach in the marketplace. We deployed our new software on most models in Q3, 2016 with the hardware enhancements will be completed by Q2 of this year. Once ready, these initiatives will take some time before they gain full traction, but we're excited on their potential. In the meantime, we'll continue to manufacture and sell our existing high-quality nuclear imaging cameras in our current markets. Our MDSS business also part of the DMS Health acquisition, had a great fourth quarter positing revenues of $4 million in full year 2016 revenues of 16.1 million. As a reminder, our MDSS business has an exclusive relationship with Philips Healthcare to provide product sales installation, warranty and product support within a specific geographic area in the upper Midwest region in the United States. We primarily sell imaging systems and patient monitoring systems and provide support to imaging systems within that same general region. We generate revenues and commissions from these product sales and also generate revenue by directly servicing Philips Imaging Equipment in the region. As stated each quarter, our overall corporate strategy at Digirad is to focus on three main areas for growth. Area number one, acquisition, our goal is to acquire companies that fit within our business model, providing healthcare solutions on an as needed when needed and where needed basis in a very financially disciplined manner. Area number two is 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. Jeff and I remain committed to sourcing the right opportunity for the Company and had a number of interesting conversations since we've last talk. Of course, as always, we cannot predict the timing of potential acquisitions or any particular outcome, but in the meantime we'll continue to run our cash generating businesses. Finally, we expect to issue our 2017 financial guidance in April with our Q1, 2017 earnings release. At high level, we expect to generate more cash than 2016, we remain committed to paying our dividend, and we will continue to evaluate other opportunities to enhance shareholder value including the potential acceleration of debt pay down, dividend increases and share repurchases. Now, I'd like to turn the call over to Jeff for his 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 on non-GAAP and do not include non-recurring charges such as those associated with acquisition integration cost and purchase intangible asset amortization. In addition, I will make references to both adjusted EBITDA, which is also a non-GAAP measure that further excludes depreciation, amortization, interest, taxes and stock-based compensation. We believe that presentation of these non-GAAP measures along with our GAAP financial statements in reconciliation provide a more thorough analysis of our ongoing financial performance. You can find the reconciliations of the results on a GAAP versus non-GAAP basis in their earnings release that we released this morning. As previously discussed, we closed on the DMS Health acquisition on January 1st, 2016. The results of DMS operations are included in our results for the entire quarter and for the year-to-date period since January 1st, 2016. Next, I’ll give a brief summary of the quarter's activity. Total revenues for the fourth quarter of 2016 was 31.1 million compared to 15.6 million for the same period last year with a largest impact being the inclusion of the DMS Health business unit’s mobile healthcare and MDSS within our results. Revenue from these new business units contributed a total of 11.3 million and 4.0 million respectively to our overall revenue for the quarter. Revenues for diagnostic services were 11.8 million compared to 11.7 million for the fourth quarter of last year and revenues for diagnostic imaging were 2 million compared to 3.9 million for the fourth quarter of last year. Our overall gross profit percentage in the fourth quarter of 2016 was 27.8% compared to 30.1% in last year’s fourth quarter. In diagnostic services, the gross profit percentage for the fourth quarter was 21.7% compared to 22.6% in last year’s fourth; quarter and in our diagnostic imaging business, the gross profit percentage was 56.9% compared to 52.8% in the prior year fourth quarter. Overall, the revenue increase in our diagnostic services business was positively impacted by a higher volume of service days ran in the fourth quarter of 2016 compared to the prior year, primarily from new business activity. This is partially offset with an unfavorable mix of cardiac monitoring service revenue for our Telerhythmics business unit as we continue to educate our customers on the benefits of telemetry monitoring services, which provide much more comprehensive data and information than event monitoring and also at a higher price point. In our diagnostic imaging business, our overall revenue and gross margin was positively impacted by the volume of mix cameras sold. As you recall, we had a lower volume in our third quarter for diagnostic imaging and as expected we booked higher sales in the fourth quarter based on this timing. Our mobile healthcare business produced revenues at 11.3 million with a gross profit percentage of 15.5% while MDSS had revenues of 4 million with a gross profit percentage up 50%. We do generally expect the gross profit percentage for mobile healthcare to be in the mid 20% range and MDSS in the mid 50% though MDSS can vary somewhat depending on the timing of product sales and commission revenues related to our exclusive Philips relationship. During the quarter, our mobile healthcare business gross profit percentage was lower than our expectations based on the timing and utilization of underlying asset. We engaged in more sublease activity to address shorter term provision work versus owned assets, which typically do not produce the same margin levels. We do experience some seasonality in our service businesses and notwithstanding other factors, the fourth and the first quarter are slower quarters for mobile healthcare and diagnostic services business, with the second and third quarters being our higher revenue quarters. Also for MDSS and diagnostic imaging businesses, we can experience some seasonality related to timing of equipment sales and capital budgeting timing of our customers. Notwithstanding acquisitions, we would expect these trends to continue as we move forward. During the fourth quarter, we incurred closing and integrated related cost for DMS Health of $173,000, which included our operational integration of DMS Health. We do not expect to incur any integration related charges in 2017. Moving onto the bottom line results for the fourth quarter, adjusted net income was 3 million or $0.15 per diluted share compared to 1.3 million or $0.07 per diluted share in the fourth quarter of last year. Adjusted EBITDA was 5.4 million for the fourth quarter of 2016 compared to 2.1 million for the fourth quarter of last year. During the quarter, we did perform a required caring value analysis or investment in Telerhythmics based on an estimated forecast of future cash flows from the business relative to our purchase price, we will require to recognize a 338,000 goodwill adjustment in the fourth quarter. Fundamentally, we believe our Telerhythmics business is sound and this adjustment just aligns our current estimate of forecasted cash flows to the fair value of the business. As a reminder, we do have a credit facility with Wells Fargo that was used to help fund the acquisition of DMS Health. This credit facility has three components, a revolver or line of credit, which has a borrowing base up to $12.5 million and bears interest at LIBOR plus 2%; a tranche A, that had an initial borrowing base of 20 million and bears interest at LIBOR plus 2.5% and amortizes over 7 years; and tranche B, with the total initial borrowing of $7.5 million and bears interest at LIBOR plus 5% and amortizes over three years. At December 31, our weighted average interest rate on our overall credit facility was 3.7% and the total principle balance outstanding was $22 million. Our net debt position less all cash, cash equivalents and securities available for sale and related restricted cash requirements was $15 million. Also at December 31, we had no outstanding balance on our line of credit, leaving availability of approximately $6.3 million. Going forward, we may make extra payments on our credit facility depending on their cash needs and our goal deploying our cash from the highest and best use relative to our capital allocation and value. And finally, we previously announced our regular quarterly cash dividend of $0.05 per share that will be paid on February 28 to shareholders of record of February 15. Now, I'd like to turn the call over to the operator for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Andrew D'Silva with B. Riley. Please proceed with your question.

Just got a couple of quick questions here. First off just a couple of bookkeeping questions, since the case now here, what CapEx and cash flow from operation for the quarter and also this operating income breakout for each of divisions will be slow as well? And then I guess while you’re pulling that data maybe you can let me know why you decided to push out guidance to the first quarter versus reporting it now?

Good morning, Andy. So, the cash flow provided by operations was 10.8 million and our CapEx, and these are annual numbers obviously. And our CapEx was 6.2 million and we'll have the segment disclosures in our 10-K, and we plan on filing that here in the next couple of days.

Okay, sounds great. And then as far as the guidance being pushed out till April, what was the reason for that?

There is no particular reason beyond the fact that it’s going to be in our normal plan to release our full year guidance at the end of Q1 with our end our Q1 earnings release. Having said that, I mean from a high level, and as Matt mentioned a couple of minutes ago, we expect to generate more cash next year than we did this year and continue generating cash for business, paying down our debt and paying our sustainable dividend and moving forward. So, that’s just going to be our general plan as we move forward for the business.

Okay, the basic narrative as far as top and adjusted EBITDA growth, top line and adjusted EBITDA growth is haven’t changed much, which is still probably figure mid-single digit organic growth is reasonable or has anything changed with that narrative at this point?

Yes, I think you just -- we got to go through and then have the full financial guidance release that ended Q1, there is no fundamental change that we’re going to go and update today. I think the main story is that we’re going to generate more cash next year and that’s what we’re focusing on right now.

Okay, fantastic. And then has there been any shift that you’ve noticed that are maybe hindered or benefitting your business as it relates to a consolidation with various health systems at this point? A –Matt Molchan : Andy, it's Matt. I mean those consolidations have been going on for the past five years and we do not see any I mean there is nothing recent that has happened that has effected any parts of our businesses.

Just a couple of more quick questions here. Do you guys have any data points that you can share at this time related to be maybe capital budgeting within your client base or perhaps Philips at least, given you an analysis of their expectation at this point from a capital budgeting standpoint for North America? A – Matt Molchan: We certainly have not received any type of information from Philips, but I mean there is no --you’re talking about indications across the industry on what 2017 capital spending would be like. We have no indications that there would be a more or any less spending in 2017 over 2016 from what we are -- from our dealing with the markets that we are selling capital equipment into.

Okay, fantastic. And then just a last question here, as it relates to your deal pipeline, have there been any changes quarter-over-quarter, third quarter when you reported versus now as far as maybe how far along with the opportunities or discussions in the deal pipeline or new opportunities that have emerged? Is the pipeline essentially spilled up more or any more progress to report?

Yes, the pipeline is definitely dynamic in terms of it's a moving target. It's hard to really judge into target profit price too, right. Because we've been at the strategy for the past three years, I can tell you that deals that we thought we're going to close and not close and did not close and deals that we didn't think we're going to close ended up closing. So, it's hard to really judge that, I would say that we've had a normal amount of activity in the fourth quarter that we have been experiencing very similar to the quarters that we've added to the past 12 quarters. And deals continue to move forward, and deals continue to drop off and deals continue to show up and be added to our list, so nothing different in the fourth quarter from previous quarters that we've experienced.

Our next question comes from Larry Haimovitch with HMTC. Please proceed with your question.

Couple of high level questions for you Matt. Number one, you've had I guess it would be 13 months since you closed on with the acquisition. Just a couple of thoughts from you on sort of the good to bad to ugly and feel there is been some positive surprise but I'm sure you've had a couple of disappointments. So, I'm just curious how you look at it now that you've had more than a year to really work with this acquisition and try to put it fully into the Company?

Yes, I mean I think that it's -- from a high level, we did a lot of diligence into this business. So, our surprises have not been two meaning. What we've seen is that we bought a business very similar to our business, as we expected where you have a mobile imaging business, and you have a product sales business much like we do today. What we had before the acquisition with our diagnostic services and our diagnostic imaging divisions. So from that standpoint in terms of how those businesses run how they operate we have no any surprises. But we've realized that the business diagnostic of mobile healthcare the business of mobile services in the healthcare business is a difficult business, it's a business that requires a lot of work, lot of attention. Our DIS business we're very familiar with and we found that there was a lot of similarities in how you run and operate these businesses as we took it over. So, really no surprises there, but it’s a day-in and day-out business. In terms of you’re good as the last patient that you service. So we really had not we did not feel like 2016 brought up any major surprises I think on the negative end. On the positive end we're really excited about the opportunities that are flexible mobile healthcare solutions can create, really excited about the opportunities to create mobile solutions beyond just mobile imaging. One very specifically working with a number of different customers including the VA on creating women's healthcare clinics, mobile women's healthcare clinics has been very intriguing to us. We've definitely moved that project forward and we think that has a lot of potential but beyond just the women’s healthcare clinics, you know working with other customers on looking to develop other ways that we can create large mobile dialysis, mobile optometry. There is a whole gamut of opportunities that we see beyond imaging and providing healthcare on an as needed and when needed and where needed basis, so very excited about those opportunities in the upside that those opportunities could bring Digirad into the future.

Thanks. That’s a great answer. Do you foresee being able to make an acquisition of any magnitude of what you just did or was that kind of a one-off deal where are you essentially double the Company and made a huge magnitude change in the character of the Company in terms of size at least? Are there other deals that they are potentially of that size that we could possibly see you do?

Anything is possible. All the deals of that size are bigger, yes. We feel that our sweet spot is in adding on the mom-and-pop type of acquisitions. But certainly Larry, we are looking for opportunities that will have the maximum impact to our shareholder values. So, there are other deals out there and certainly we will continue to look for them. But obviously, we’re going to, as we have done with all of our other acquisitions, we’re going to make sure that we apply the financial discipline that we applied to those acquisitions and we’re not over paying for that growth.

Thanks. So, you’ve clearly driven, you're your very disciplined in your acquisition approach. If you look at successful companies who acquire that’s really one of the key reasons that it has tremendous financial discipline and not over step your balance and get carried away with your emotion, but it will be very hard about valuations.

Absolutely.

So, second question, Matt. Second broad question, you’ve excited my imagination with your concept, your thoughts about dividend increase share buyback, you’re going to have more cash flow this year and that presents some opportunities. Can you talk a little bit more about that that I realize you’re not going to probably come tell us what you’re going to do, but give us a little more color about your own thinking on and the Board’s thinking about some of those issues?

Yes, I mean I think those things are all on the table, right. We’ve got to look at, we have build the business you know over the past three years and that was a business that was in 2013, in 2012 it was a business that you know had with losing money, was very little to any EBITDA being generated and was less than a $50 million revenue business and over the past three years we have grown it to where we finish this year, $125.5 million in revenue, $16.8 million in EBITDA. You know I can tell you that our Board is definitely committed and we are committed to growing shareholder value. We think that these opportunities that we discuss that pay down dividends, buying back shares, finding financially disciplined acquisitions. All our opportunities that will increase value for our shareholders and that’s what we’re going to concentrate our efforts. So, all those things are on the table, we want to make sure that our shareholders are aware of them and but all of them are very positive for our shareholders and for our future shareholders.

[Operator Instructions] Our next question comes from Jon McCullough with Glacier Peak Capital. Please proceed with your question.

Just for more high level, there is a lot of stuff coming out of Washington DC and some of these congressmen talking about. They're going to appeal replace all kinds of things with HCA, so from the standpoint of uncertainty. Are your customer is the rural hospitals are they just, are they holding back on orders do they fully understand kind of what the feature is or they proceed, are you seeing any kind of hesitation there? And then I guess also on the standpoint of deals, is kind counterparties and even yourself are willing to kind of there is a bid at spread there that you know is why just because of the uncertainty of what the future is?

Yes, I would say that Yes we saw this happened in the fourth quarter. During the fourth quarter where there was a lot of uncertainty around the election. And words that we thought that were going to come in earlier in the quarter were basically put on hold until the end of the quarter and we certainly saw that. The big news about our business though Jon is that we got two size of it, right. So, hospitals have decisions to make, do they want to invest the capital, they look at from the standpoint. They need the services whether they buy or they lease it from us as a service they have options. We present these options to these customers. So whether they want to pay for at either their capital budget or use it as part of their operating expenses and just have us provide the service to them through either our mobile healthcare division or DIS segment. We can offer these customers this type of these selections. So, I think that's good news about Digirad that we're seeing that people are trying to figure out exactly where all this is going to end up. But they still have a hospital to run. They still have a business to run. And they're selecting Digirad whether it would be through our products that we provide to them with the services that we sale for them. So I think that Digirad is well positioned for climate such as this where there is some uncertainty and where there are hospital systems trying to figure out how to best service their patients.

Got it. I would assume whatever I mean this is more just more of a comment than anything. But I would assume the way the administration if kind of indicated as is now that outsourcing is all cost cutting is important and having no ways to I would assume there was centralized hospitals to do that even more. So, I guess it should be interesting to see what comes out in the coming months, but appreciated. Thanks so much.

Thank you, Jon.

Our next question comes from Mitra Ramgopal with Sidoti. Please proceed with your question.

Just a few questions. First, I was wondering, if you're starting to see any cross-selling opportunities now the DMS has been integrated?

Yes, we're starting to see some proofs to that level in terms of bringing the entire breadth of Digirad to our customers. We’re seeing some very minor wins along the way in terms of offering up different types of our services, event monitoring or some of our mobile healthcare solutions to some of our existing Digirad customer base customers. So, we’re seeing some of that, we’re nothing significant really to talk to but you know it takes times to get these efforts in place, we’ve done multiple strategic selling classes with our sales groups to really inform them and really create packages of offerings to our customers. So, we’re starting to see a little bit of it and we expect more of it as we continue on.

Thanks. And then, Matt, you talked in the past on the mobile side a lot of ancillary opportunities. Is the strategy going to make us target any specific area or pretty much across the board as it relates to say cardiac or cancer or diabetes et cetera?

Yes, I mean right now obviously, we’re still even after the purchase at DMS we're still very heavy on the cardiology side with the purchase of DMS. It allowed us to move into the cancer side, orthopedic side with our PET/CTs or MRIs. So, but you know we’re also looking, I think the future as I mentioned earlier is to create these combination of services that we can bring and provide to a whole classes, the segments you know a patient basis whether that be for women’s health, for diabetics, for people that would need our services maybe in a screening vein. So, we think that there is still definitely through the acquisition allowed us to increase the breadth of our services and ways increase the modalities that we offer in imaging, but we’ll really see the opportunity is to create these mobile healthcare clinics that can provide services directly to entire patient basis. So, that’s where we see the most opportunity.

Thanks. And then just a couple of questions on the sales side, I know you’ve been operating in terms of independent sales team. So, I was wondering now with DMS integrators if you go to centralize some as you look at some of the opportunities out there, do you need to expand your sales force?

Yes, just because the coverage maps that we have with DMS and with the Digirad's DIS teams. It doesn’t make sense to really combine services or sales grew to this time. So, we’re still operating with separate groups, but we’re looking more in an account management type grouping where we might have specific specialist that can really hone in on MRI or PET/CT versus into other travels versus in-office travel. So, as we look at the accounts that we’re dragging, we’re more of looking at putting together leads for those large accounts that we have and how best to service Mayo, Sanford Health, Amore. And that’s really what we’re creating more of a virtual account management team to attack our best and biggest customers.

There are no further questions. At this time, I’d like to turn the conference call back to Matt Molchan for closing comments.

Thanks, Rob. As always, we appreciate all our shareholders and your continued feedback and support. We are very excited about our business and our future. Jeff and I look forward to discussing our results and business update with you next question. Thank you.

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