Star Equity Holdings, Inc. (STRR) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Digirad Corporation First Quarter 2018 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rica Lindsey.

Thank you, Dana, 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 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, but are not limited to, 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, CEO and Interim CFO, Matt Molchan. Matt will discuss the 2018 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. Good morning, Matt.

Thank you, Rica. Good morning, everyone and thank you all for joining us today for our first quarter 2018 results conference call. In the earnings release today and in my comments, I'll make references to both GAAP results as well as adjusted results. The adjusted results are non-GAAP and do not include nonrecurring charges. I'll also make references to adjusted EBITDA, which is a non-GAAP measure that further excludes depreciation, amortization, interest, taxes and stock-based compensation. Finally, I'll make references to free cash flow, which is a non-GAAP measure, taking operating cash flow and subtracting cash paid for capital expenditures. We believe the presentation of these non-GAAP measures, along with our GAAP financials statements and reconciliations, provide a more thorough analysis of our ongoing financial performance. You can find a reconciliation of our results on a GAAP versus non-GAAP basis in the earnings release. As we mentioned in our press release today, our businesses performed within our expectations in the quarter. Despite some harsh weather conditions in the Midwest and the Northeast have negatively impacted our Mobile route businesses, Diagnostic Services and Mobile Healthcare continue to deliver convenient, effective and efficient Healthcare solutions on an as-needed, when-needed and where-needed basis across the country. Servicing a combined 64,000 patients during the quarter. Also, our Diagnostic Imaging business saw improvement, exceeding revenue for the quarter on a year-over-year basis. As we discussed on recent calls, Philips Healthcare informed us in September that they would be canceling their consolidated agreement with us with an effective date of December 31, 2017, ending our product sales relationship as well as certain components of our services activities, both under our MDSS reportable segment. As we discussed last quarter, we subsequently determined that the value for the company and the shareholders would be to sell the MDSS service contracts to Philips for $8 million. This transaction closed on February 1, 2018. As a result, our MDSS reportable segment has been reported as discontinued operations within our financial statements presented for this first quarter, which includes our go-forward core business units, Diagnostic Imaging, Diagnostic Services and Mobile Healthcare. These businesses are reported and discussed on this call as continuing operations. Now, here is a more detailed summary of this quarter's activities. Total revenue for the first quarter of 2018 was $25.5 million compared to $25.8 million for the same period last year. Our overall gross profit percentage in the first quarter of 2018 was 18.1% compared to 21.7% in last year's first quarter. In Diagnostic Services, revenue and gross profit percentage for the first quarter was $12 million and 18.7% compared to $12.2 million and 23.2% in last year's first quarter. Our Mobile Healthcare business produced revenue and gross margin in the first quarter of 2018 at $10.6 million with a gross profit percentage at 10.5% compared to $10.9 million and 15.1% for the same period in the prior year. Overall, the year-over-year revenue decrease in our Diagnostic Services business and our Mobile Healthcare business was primarily due to lower stand volume, mainly attributed to harsh weather conditions during the quarter as previously mentioned. In Mobile Healthcare, the overall revenue decrease was partially offset by an increase in interim sales compared to the prior year. As discussed in previous calls, we made several changes in leadership, operations and by adding additional resources to improve our Mobile Healthcare interim sales efforts. We believe these efforts have been successful as evidenced by the performance in this quarter and will continue throughout the year. In our Diagnostic Imaging business, revenue and gross profit percentage for the first quarter of 2018 was $2.8 million and 43.8% compared to $2.8 million and 40.5% in the prior year. Our revenue in this business was slightly higher compared to the previous year to the comparable volume of camera sales during the quarter and a slight improvement in our camera support revenue. Moving on to the bottom line result for the quarter. Adjusted net loss was $1.4 million or $0.07 adjusted net loss per share, compared to adjusted net loss of $1.3 million or $0.06 adjusted net loss per share in the first quarter of last year. Adjusted EBITDA was $0.9 million for the first quarter of 2018 compared to $1.1 million in the first quarter of last year. As of March 31, 2018, the outstanding balance on our credit facility was $13 million and our overall net debt provision including all cash and cash equivalent was $12 million. During the quarter, we're able to pay $6.5 million towards our debt, bringing our debt position down from $19.5 million to its present $13 million. Also, as of March 31, 2018, we were in compliance with all our bank covenants. As we move forward, we'll focus on our core businesses, which will continue to generate revenue, profit, cash flow and grow into the future. And like always, we'll continue to look for opportunities that will continue to buy - contribute to our bottom line and enhance shareholder value from our three-tier growth strategy for the company, which are number one, acquisitions, our goal 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. Number two, adding new services to our portfolio that we can provide to our current distribution channels. And number three, organic growth within our existing portfolio of services and channels. I'll now comment on guidance. As we have announced in the press release, revenue is estimated to be in the range of $100 million and $105 million. Non-GAAP adjusted EBITDA is estimated to be in the range of $8.5 million and $9.5 million and free cash flow is estimated to be in the range of $4 million and $5 million. As announced previously today, our regular and quarterly cash dividend of $0.055 per share will be paid on May 30, 2018 to shareholders of record on May 15, 2018. And finally, as previously announced, our CFO, Jeff Keyes [ph] that was part of the company on April 10 went to pursue other opportunities. We wish him success in his new endeavors and we are truly grateful for his contributions over the last 5.5 years. We have begun a comprehensive search for Jeff's replacement and we are confident we will soon appoint the new CFO with the necessary skills and attributes to drive the company forward continued growth of Digirad. Now I'd like to turn the call over to the operator.

[Operator Instructions]. Our first question comes from the line of Larry Haimovitch form HMTC.

So a couple of questions from me. One, as $100 million to $105 million guidance you provide. Can you compare that to what last year would've been when you back out the Philips business that you've sold? I'm trying to get sort of a same store apples-to-apples comparison here.

Yes. We approximately did about what $13 million, $13.4 million from the MDSS revenue last year, approximately, $14 million, approximately.

I didn't realize you sold that much revenue to Philips. I thought it was a smaller amount.

No. Well you got to remember the number I just give you is a combination of our sales activities, which was part of the manufacturers rep, which they canceled as of December 31 and then what we had sold them was the portion of that $14 million that was attributed to our service contract work.

Yes. So what when you back out, what you sold to them, it wasn't $14 million in total, was it?

No. We did not sell them the sales portion, they canceled that as part of the agreement. Yes, so the revenue...

If I can recall, it was about $8 million, was roughly.

Exactly.

So last year's revenue, if we back out $8 million. What's the comparison? It's $100 million to $105 million this year...

You've only got to back out the $14 million. So last year's total revenue was $118 million. Backing out the $14 million.

Okay. So basically, the revenue guidance was roughly flattish a year ago?

That's correct.

And then second on the dividend. I wonder what you could share with us regarding the board's deliberations on it. As you talked about - I think you talked about just on this call roughly $4 million in free cash flow?

$4 million to $5 million.

Yes. $4 million to $5 million. If I, again, I'm not expert in my numbers here but that surprised me as roughly what the dividend is annually? Something in the $4 million to $5 million range?

You're correct.

Not that I'm going to argue for a dividend cut here because obviously that would have effect on the stock but did the board - can you talk to us about what the board thought about with regard to the dividend and a stock buyback? And how to - what was best for the shareholders?

No. I mean we certainly - number one, what is best for the shareholders, we deliberate every quarter capital allocation and we went through all of those items. This quarter was no different. And we determined as a board - that the - at this point, the best use of our capital is to pay out - continue to pay out that dividend and that's what we're doing.

Our next question comes from the line of Walter Schenker from MAZ Partners.

Just trying to following up on the last question. If one looks at the company, you lack somewhat scale, which is why strategically you're looking for both acquisitions and other avenues for growth. However, you have fairly limited financial resources to make an acquisition of any consequence, since the free cash flow is largely used at least at this point for the dividend, which I applaud as a shareholder. And so I guess the question is two parts, a, how realistic is an acquisition that would be accretive and material? And secondly, is there - what can you do to further cut overhead costs to further enhance profitability in a business that isn't growing at this point with $100 million plus in revenues?

So to your first - the acquisition - obviously, we're opportunistic when it comes to acquisition. Clearly, we - as we look at - as we continue to look for those opportunities, I don't think in this market that getting the type of capital that would be necessary to make those acquisitions would not be - would be possible. However, it is very important, given the factors of the business to really constant as we mention, but really, our immediate focus is to concentrate on operating our three divisions. And that's where we will concentrate on looking for ways to grow those businesses on the top line and looking for ways to manage the bottom line. So certainly, that is our immediate focus right now. Yes, it'd be great if we came across some opportunities and we had the opportunity to go out and try to find ways to raise capital or what not to acquire businesses. But our immediate focus Walter is on continuing to look for ways that we can run this business more profitably and that does include looking at overhead. It does include at looking at everything that supports and run this business. And I can assure you that that is a major focus of our management team at this juncture.

And just a follow-up - and again, I understand that the board, who's on the board and I understand the commitment to enhancing shareholder value. If we go through the year and you meet or slightly exceed your targets, which is relatively flat and find you can't do anything material over the next 12 months in an acquisition, at what point does everyone turned around and realized that both decision and say maybe we're just not big enough to be a public company and the alternative is to sell it?

Yes. I mean speculating at this point on these types of things. But obviously, we look at all items but we feel very good and very confident about our operating divisions and their ability to generate cash and we'll continue to run those businesses and work with the hundreds of customers that we have and continue to look for ways to continue to grow the business. But yes we - but as I mentioned earlier with Larry's question, board every quarter, all the time, we get together and we look at ways - what is the best use of the funds that we have? And how can we generate shareholder value for our shareholders and that's obviously one of our main goals.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to Matt Molchan for closing remarks.

Well, thank you, Dana. As always, we appreciate all our shareholders and your continued feedback and support. We're looking forward to our next update call.

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