Star Equity Holdings, Inc. (STRR) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Digirad Corporation’s Second Quarter 2018 Results Conference Call. At this time, all participants are in a 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, Rica Lindsey.

Thank you, Darren, 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 will 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 second 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 Second Quarter 2018 Results Conference Call. In the earnings release today and in my comments, I make references to both GAAP results as well as adjusted results. The adjusted results are non-GAAP and do not include nonrecurring charges. I will 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 will 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 financial 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. Overall, our businesses performed well during the quarter. Major highlights for the quarter: Our adjusted EBITDA increased by $700,000 in the quarter, or 35%; and our year-over-year free cash flow increased by almost $750,000, or 52%. Plus, we were able to pay down an additional $500,000 towards our debt in the quarter. Year-to-date, we have reduced our debt position by $7 million. Diagnostic Services led the way in the quarter with year-over-year revenue and gross profit gains. On a year-over-year basis, Mobile Healthcare revenue gross profit are down, but we did see interim sales growth of 14% in the quarter. Diagnostic Imaging revenue was impacted by the timing of camera sales, but favorable product mix increased gross profit on a year-over-year basis. As we discussed on recent calls, we sold the MDSS service contract to Philips Healthcare earlier this year. The transaction closed on February 1, 2018. As a result, our MDSS reportable segment is being reported as discontinued operations within our financial statements presented for the second quarter and our year-to-date results. Continuing operations include our go-forward core business units Diagnostic Imaging, Diagnostic Services and Mobile Healthcare. Now here’s a more detailed summary of the quarter’s activity. Total revenue for the second quarter of 2018 was $27.1 million compared to $26.7 million for the same period last year. Our overall gross margin in the second quarter of 2018 was 20.6% compared to 21.3% in last year’s second quarter. In Diagnostic Services, revenue and gross margin percentage for the second quarter were $13.3 million and 22.4% compared to $12.6 million and 21.7% in last year’s second quarter. The year-over-year revenue and gross margin increases are primarily driven by increased steady volumes. Our Mobile Healthcare business produced revenue and gross margin percentage in the second quarter of $11.1 million and 12% compared to $11.2 million and 17.1% for the same period in the prior year. The revenue decrease was mostly due to scan volume, which was mostly offset by an increase in interim sales compared to the prior year. The year-over-year gross profit decrease in the Mobile Healthcare business was primarily due to lower scan volume and increased maintenance expenses. 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 that these efforts have been successful, as evidenced by the performance this quarter, and will continue throughout the year. In our Diagnostic Imaging business, revenue and gross margin for the second quarter 2018 was $2.8 million and 45.9% compared to $2.9 million and 35.7% in the prior year second quarter. Our revenue in this business was slightly lower compared to the previous year with lower camera sales during the quarter due to timing. But we had favorable mix and improvements in camera support revenue. Moving on to the bottom line results for the second quarter, adjusted net income was $0.4 million, or $0.02 adjusted net income per share, compared to adjusted net loss of $500,000 and $0.03 adjusted net loss per share in the second quarter last year. Adjusted EBITDA was $2.7 million for the second quarter of 2018 compared to $2 million in the second quarter of last year. Operating cash flow and free cash flow were both strong in the second quarter, with operating cash flow at $2.6 million, up 67% when compared to the same period last year, and free cash flow at $2.2 million, up 52% when compared to the same period last year. In the first half of 2018, we have delivered $3 million of operating cash flow and $2.4 million of free cash flow. As of June 30, 2018, the outstanding balance on our credit facility was $12.5 million, and our overall net debt position, including all cash and cash equivalents, was $11.1 million. As mentioned earlier, during the quarter, we were able to pay $500,000 towards our debt, bringing our debt position down from $13 million to its present $12.5 million. Also, as of June 30, 2018, we were in compliance with all of our bank covenants. As we move forward, we’ll focus on our core businesses, which will continue to generate revenue, EBITDA, cash flow and grow into the future. And like all of us, we’ll continue to look for opportunities that will contribute to our bottom line and enhance shareholder value from our 3-tier growth strategy for the company, which are: Number one, acquisitions. Our goal is 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. As we have announced in the press release, the company reaffirms our previously announced 2018 fiscal year guidance from continuing operations to generate revenue in the range of $100 million to $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. Also, as previously announced today, our regular quarterly cash dividend of $0.055 per share will be paid on August 30, 2018 to shareholders of record on August 16, 2018. Now I’d like to turn the call over to the operator for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Larry Haimovitch with HMTC. Please proceed with your question.

Hey, good morning, Matt. You provided lots of good information on the call. I wondered if you would highlight for us the things that you felt particularly good about during the quarter and anything that you feel needs some more work, perhaps a tad disappointing.

Certainly I feel good about the performance of Diagnostic Services, particularly on our DIS division. We’re seeing, as I mentioned, both revenue growth there and gross margin growth and just an overall positive momentum with our DIS business, so really excited about that business. I’m also excited about the turnaround that we’re seeing in Mobile Healthcare as it relates to our interim sales initiatives, which were lagging last year, so very much excited about those two sides of the business. And I’m also excited about the favorable camera mix that we had in Diagnostic Imaging. Yes, we were anticipating and looking at a pipeline that would bring in a larger number of camera sales, but we feel those camera sales are still active and it’s just a matter of timing. But the ones that did come in were at our higher margin cameras. And that’s always a great sign because we’d like to obviously continue to sell more of those. In terms of our areas of concern, I would say – as I highlighted in today’s call, we are – within our gross margin with our Mobile Healthcare business, we did experience a higher equipment maintenance associated with the maintaining of our fleet. This is mostly due to pieces of equipment that we service ourselves, and there can be some swings, ups and downs, in terms of when those maintenance costs actually come in. And we did see a greater proportion of that – those costs coming in, in the second quarter. But we feel very confident about the strategy that we have in terms of maintaining and servicing our Mobile Healthcare fleet, so we anticipate that, that anomaly or those changes that we saw here in the second quarter will be rectified as we finish out the year.

Matt, on the – sorry, on the Mobile business, I think you mentioned the number of scans were down. Did I catch that right?

On the Mobile Healthcare business on a year-over-year basis, correct. That is...

Okay. And so what’s happening there? Are you losing market share? Or are more providers just deciding they don’t want to lose – they don’t want to use the Mobile Service and they’re putting in fixed systems? What do you think is happening in the Mobile business?

Well, for the – specifically, for the reason why we had scans down in the quarter was specifically due to customers that took business in-house. So we were servicing them and providing our mobile services to their locations, and we did our job. We performed well. And we were able to build a big enough business where the financials made sense for them to bring that business in-house and purchase their own equipment. So in that case, that’s exactly what happened. Is that an anomaly or is that a trend? It does happen. A lot of our customers are so dependent upon us because there’s no way that they could ever bring the service in-house. But we do have customers that, due to a variety of different reasons, we help them grow their business and then, eventually, they will take it in-house. And that’s what occurred here on a year-over-year basis. So it’s...

Is that a trend now that…

Well, I classify that as a normal course of the business. We will always have business that will convert, and we will also always have new locations that will require our services. So I believe that is a normal course of providing this type of business.

And was that trend you saw in Q2 something we’ve seen going back other quarters, where other providers were taking things in-house and you lost? The mobile scan revenue was declining because of that? Or was this just a one-quarter event?

Well, this is something that we anticipated because it’s not something that happens overnight, obviously. When they make the decision to buy their own equipment and bring it in-house, we were anticipating it. And like I said, this – we have – we obviously experienced it here in this quarter, but we anticipated it. We had planned for it. And we were – for the actual, for the sites that we were providing, that we continue provide services to, our same-store growth in those – on those mobile routes, actually, was up year-over-year. But overall, because these accounts were brought in-house, our overall scan volume decreased. So I think that this is – like I said, this is something that we – is a normal course of the business. And it’s something that we don’t anticipate to lose. We don’t – we are projecting that we are going to lose a lot more of these mobile customers in the conversion on a go-forward basis. So – and that’s all factored into our guidance.

Okay. And then one more question, I’ll jump back in queue. On the camera sales, this variability we see quarter-to-quarter, that’s just part of the business because it’s capital equipment, right? There’s no way for you to kind of smooth that out a little bit? It just depends on the timing of these orders and when you ship them, correct?

That’s correct, yes. I wish there was a better way to handle that, but you are correct. It is based on the timing of the orders, the timing of funding and whatnot. And normally, our history shows that we sell more cameras in the third and fourth quarter than we do in the first and second quarter, and that’s just the normal course of business.

Yes. Okay, Matt. Thanks. I will jump back in the queue.

[Operator Instructions] There are no further questions. I’d like to turn the call back over to Mr. Matt Molchan for closing remarks.

Thank you, Darren. As always, we appreciate all our shareholders and your continued feedback and support. We’re looking forward to our next update call. Thank you and have a great afternoon.

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