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Edited Transcript of DRAD earnings conference call or presentation 1-Mar-19 4:00pm GMT

Q4 2018 Digirad Corp Earnings Call

Poway Mar 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Digirad Corp earnings conference call or presentation Friday, March 1, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey E. Eberwein

Digirad Corporation - Independent Chairman

* Matthew Gabel Molchan

Digirad Corporation - President, CEO & Director

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Conference Call Participants

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* Michael E. Santelli

Ancora Advisors, LLC - Portfolio Manager

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Presentation

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Operator [1]

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Greetings, and welcome to Digirad Corporation's Fourth Quarter 2018 Earnings Call. (Operator Instructions). And as a reminder, this conference is being recorded. I would now like to turn the conference over to Matt Molchan. Thank you, please go ahead.

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Matthew Gabel Molchan, Digirad Corporation - President, CEO & Director [2]

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Thank you, Brenda. Good morning, and thank you all for joining us today for our fourth quarter 2018 results conference call. My name is Matthew Molchan, and I am Digirad's President and CEO. Also on the call with me today is Digirad's Chairman of the Board, Jeffrey Eberwein; and our COO and Interim Chief Financial Officer, David Noble.

We will discuss the 2018 fourth quarter and full year financial results, provide an update on the company's strategy and comment on the company's outlook. A question-and-answer period will then follow.

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'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 security 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.

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'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 financial statements and reconciliations provide a more thorough analysis of our ongoing financial performance. You can find the reconciliation of our results on a GAAP versus non-GAAP basis in the earnings release.

We continue to work very diligently at positioning our company in anticipation of the formation and implementation of our previously announced HoldCo strategy.

We are excited as we move closer to our eventual transformation into HoldCo, which we believe will give our company its best opportunity to grow and maximize value per share over the long term.

As we push towards HoldCo, we are also firmly grounded in the business of our current operating units, and despite a myriad of challenges that we face due to business conditions and the disruption caused by selling 2 operating units during 2018, we were able to meet our expectations and guidance for revenues and for free cash flow. We were also able to pay down $10 million in debt during the year with $4 million of debt paydown in the fourth quarter alone.

Additionally, our Digirad Imaging Solutions or DIS unit within diagnostic services did perform above expectations and finished the year with revenue growth of 4%. Our interim rental revenue also performed well during the year, finishing 21% higher than last year.

As we discussed on previous calls, we sold the MDSS service contracts to Philips on February 1, 2018. As a result, our MDSS reportable segment is being reported as discontinued operations within our financial statements presented for the fourth quarter and year-to-date results. Continuing operations includes our go-forward core business units, Diagnostic Imaging, Diagnostic Services and Mobile Healthcare.

Now here is a more detailed summary of the quarter's activity. Total revenue for the fourth quarter of 2018 was $25.9 million compared to $26.3 million for the same period last year.

Our overall gross margin in fourth quarter of 2018 was 14.4% compared to 17.2% in last year's fourth quarter.

Total revenue for 2018 was $104.2 million compared to $104.6 million in 2017.

Our overall gross margin in 2018 was 17.5% compared to 20.3% in 2017.

In Diagnostic Services, revenue and gross margin percentage for the fourth quarter was $11.6 million and 15.8% compared to $12.1 million and 14.8% in last year's fourth quarter. Revenue and gross margin percentage for 2018 was $49.3 million and 19.2% compared to $49 million and 20.3% in 2017.

Diagnostic Services suffered weather-related issues, due to storms in the Southeast, but still managed to grow its gross profit percentage from the prior year's fourth quarter. Moreover, year-to-date service revenue is consistent with last year. The increase in Diagnostic Services revenue is primarily due to higher volume of imaging days ran and studies performed, and an increase in the average mobile imaging rates per day, partially offset by a loss of revenues due to the sale of our Telerhythmics business as of October 31, 2018.

Our Mobile Healthcare business produced revenues and gross margin percentage in the fourth quarter of $10.8 million and 4.0% compared to $10.8 million and 11.1% for the same period in the prior year. Revenue and gross margin percentage for 2018 was $42.9 million and 8.6% compared to $43.5 million and 14.3% in 2017. The revenues are consistent due to increases in interim sales. The year-over-year gross profit decrease in the Mobile Healthcare business was primarily due to lower scan volume and increased maintenance expenses. We have reorganized our Mobile Healthcare leadership to better focus our teams on organic growth and controlling expenses.

In our Diagnostic Imaging business, revenue and gross margin for the fourth quarter of 2018 was $3.6 million and 41.2% compared to $3.4 million and 45.5% in the prior year fourth quarter. Our revenue in this business was slightly lower compared to the previous year with slightly lower camera sales and camera support revenue during the quarter. Revenue and gross margin for 2018 was $12 million and 42.9% compared to $12.1 million and 41.7% in the prior year. The decrease in Diagnostic Imaging revenue was due to a decrease in camera revenue sales resulting from lower volume of cameras sold partially offset by an increase in camera support time and time-and-material activities, which were variable in nature and based on customer needs.

Moving on to the bottom line results for the fourth quarter, we had an adjusted net loss of $1.2 million or $0.06 adjusted net loss per share compared to adjusted net loss of $1.4 million or 7% adjusted net loss per share in the fourth quarter last year. Adjusted EBITDA was $800,000 for the fourth quarter of 2018 compared to $800,000 in the fourth quarter of last year. Adjusted net loss for 2018 was $2.8 million or $0.14 adjusted net loss per share compared to adjusted net loss of $3.1 million or $0.15 adjusted net loss per share in 2017. Adjusted EBITDA was $6 million for 2018 compared to $6.3 million in 2017.

For the fourth quarter, operating cash flow was $2.8 million and free cash flow was $2.9 million compared to operating cash flow of $2 million and free cash flow of $1 million in the fourth quarter of last year.

Through the fourth quarter of 2018, we have delivered $5.1 million of operating cash flow and $5 million of free cash flow compared to $6.1 million of operating cash flow and $3.7 million of free cash flow through the end of 2017.

As of December 31, 2018, the outstanding balance of our credit facility was $9.5 million, and our overall net debt position, including all cash and cash equivalents, was $8 million.

As announced in today's press release, we met our previously announced 2018 fiscal year guidance from continuing operations to generate revenue in the range of $100 million and $105 million and our free cash flow in the range of $4 million to $5 million. The company's non-GAAP adjusted EBITDA came in lower -- slightly lower than expected at $6 million compared to the previously announced target of $7 million.

Finally, as discussed previously and announced on September 10, 2018, we intend to merge with ATRM Holdings, Inc. to form HoldCo.

We anticipate this to close during the second half of 2019. HoldCo, once it is formed, expects to make high-return internal investments as well as look for attractive acquisition opportunities in addition to repurchasing shares.

Our HoldCo mission will be to grow and maximize value per share over the long term. As part of this strategy, share repurchases will be evaluated against organic-growth investments and acquisitions, and the company expects to continually allocate capital to its highest and best use.

Now I'd like to turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Michael Santelli with Ancora.

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Michael E. Santelli, Ancora Advisors, LLC - Portfolio Manager [2]

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A couple of questions. One is there any details on the ATRM acquisition, any update there?

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Jeffrey E. Eberwein, Digirad Corporation - Independent Chairman [3]

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This is Jeff Eberwein, Chairman of the Board. So ATRM is very focused on getting its financials done and its SEC filings caught up, and I think we'll see a lot of progress on that in Q2, so there'll be more information coming there.

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Michael E. Santelli, Ancora Advisors, LLC - Portfolio Manager [4]

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Okay. And then with respect to capital allocation, last quarter, I think you guys eliminated the dividend and said something to the effect that you were going to use that capital to repurchase stock opportunistically. And I don't believe we've seen any activity to date, correct me if I'm wrong there, and why not?

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Jeffrey E. Eberwein, Digirad Corporation - Independent Chairman [5]

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Yes, that's -- this is Jeff again, that's a good question. We think our stock is at very, very attractive levels, but for us to be able to repurchase stock, the window has to be open and the window has not been open.

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Michael E. Santelli, Ancora Advisors, LLC - Portfolio Manager [6]

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From when you announced Q3 or when?

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Jeffrey E. Eberwein, Digirad Corporation - Independent Chairman [7]

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Well, the window hasn't been opened for us to buy back stock.

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Michael E. Santelli, Ancora Advisors, LLC - Portfolio Manager [8]

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Okay. When does the window open? Does the ATRM transaction keep the window closed for a while?

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Jeffrey E. Eberwein, Digirad Corporation - Independent Chairman [9]

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Well, we approved the stock repurchase authorization I think at the very end of October, beginning of November. And there is 2 things -- 2 big picture requirements for the window to be open, one is the whole earnings cycle, and the window in general opens -- I think it's 2 or 3 days after we report earnings and then it closes 2 weeks before the end of a quarter. So that's one factor and then the second factor is, there can't be any material nonpublic information that the company knows about that's not out in the marketplace. And if those 2 criteria are met, then the company is able to buy back stock either just through doing -- buying in the market or putting in place a 10b5 plan.

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Michael E. Santelli, Ancora Advisors, LLC - Portfolio Manager [10]

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So does the ATRM transaction that's kind of out there, does that come under one of those restrictions, i.e. material nonpublic information perhaps?

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Jeffrey E. Eberwein, Digirad Corporation - Independent Chairman [11]

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Only if there is undisclosed information that the Board knows about. So the -- what's been announced so far doesn't cause the window to be closed.

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Operator [12]

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(Operator Instructions) It seems we have no further questions. I would like to turn the call back over to management for any closing comments.

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Matthew Gabel Molchan, Digirad Corporation - President, CEO & Director [13]

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Thank you, Brenda. As always, we appreciate all our shareholders and your continued feedback and support. We are looking forward to our next update call. Thank you.

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Operator [14]

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