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Edited Transcript of DRAD earnings conference call or presentation 28-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Digirad Corp Earnings Call

Poway May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Digirad Corp earnings conference call or presentation Friday, April 28, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffry R. Keyes

Digirad Corporation - CFO and Corporate Secretary

* Matthew G. Molchan

Digirad Corporation - CEO, President and Director

* Rica Lindsey

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Conference Call Participants

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* Andrew Jacob D'Silva

B. Riley & Co., LLC, Research Division - Senior Analyst

* L. Mitra Ramgopal

Sidoti & Company, LLC - Research Analyst

* Larry Haimovitch

Haimovitch Medical Technology Consultants - President

* P. Ross Taylor

ARS Investment Partners, LLC - Partner

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Presentation

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Operator [1]

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Greetings, and welcome to the Digirad Corporation First Quarter 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Rica Lindsey. Thank you, Ms. Lindsey, you may begin.

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Rica Lindsey, [2]

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Thank you, Michelle, 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 Forms 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 2017 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. Molchan. Good morning, Matt.

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [3]

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Thank you, Rica. Good morning, everyone, and thank you all for joining us today for our first quarter 2017 results conference call. The first quarter was good cash generation quarter for Digirad. Revenues were $29.1 million and adjusted EBITDA was $1.8 million. Free cash flow was $1.4 million for the quarter, which was $1.7 million greater than our first quarter last year. As we announced this morning, we have experienced some operational challenges within our Mobile Healthcare business unit, which is part of the DMS Health acquisition that we closed on January 1, 2016. This business unit, which includes our trailer-based mobile diagnostic imaging activities achieved revenues of $10.7 million, an 11% decrease year-over-year. Mostly driven by lower utilization of our provisional fleet. To correct this situation, we made some adjustments in focus and alignment to more closely follow and manage our core customers, while continuing to pursue and grow revenue. Specifically, these adjustments included change in leadership within the business, some operational adjustments, including more closely aligning sales and operational activities and adding additional resources to our provisional sales efforts. We believe these are exactly the right moves and we are very confident of success. Obviously, the assets are still there. So the earnings power is still there. But when this business unit suffers from poor utilization, revenues and margins are significantly impacted. We believe we have now stabilized this business unit, and we expect this unit to return to growth in 2018.

Regarding our other business units, our Diagnostic Services business, which includes our in-office Mobile Diagnostic Imaging activities, Digirad Imaging Solutions, or DIS, and our cardiac monitoring business, Telerhythmics, performed well in the quarter. Diagnostic Services revenue was $12.2 million, a 2% increase year-over-year, benefiting from higher volumes from existing customers as well as volume from new customers.

Our Diagnostic Imaging business finished the quarter with total revenue of $2.8 million, which is about $800,000 decrease year-over-year. While overall, we're disappointed we did not have an increase in year-over-year revenue for the quarter, we do believe that this is essentially related to timing of our deal flow we have right now. And we expect capital equipment sales will increase as we progress through the year. We also expect to end the year with positive year-over-year growth for this unit.

Our medical device sales and service business or MDSS, finished the quarter with total revenue of $3.4 million, which was slightly lower than the same period last year. Timing of capital purchases also affected this business unit with a number of potential deals pushed out to later in the year.

As stated each quarter, our overall corporate strategy at Digirad is to focus on 3 main areas for growth: Area #1, acquisitions. Our goal is to acquire companies that fit within our business model of providing health care solutions on an as-needed, when-needed and where-needed basis in a very financially disciplined manner. Area #2, adding new services to our portfolio that we can provide to our current distribution channels; and area #3, organic growth within our existing portfolio of services and channels.

As always, Jeff and I remain committed to sourcing the right opportunities for the company. Of course, we cannot predict the timing of potential acquisitions or any particular outcome, but in the meantime, we will continue to run our cash generating businesses.

Now I'd like to turn the call over to Jeff for his comments in a more detailed financial update for the quarter and year. Jeff?

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Jeffry R. Keyes, Digirad Corporation - CFO and Corporate Secretary [4]

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Good morning, everyone. 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, such as those associated with acquisition integration costs and purchase intangible asset amortization. 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 the reconciliations of our results on a GAAP versus non-GAAP basis in the earnings news release today.

As previously discussed, we closed on DMS Health on January 1, 2016. The results of DMS operations are included in our results for the entire quarter and for the year-to-date periods since January 1, 2016. Therefore, our results for the first quarter of 2017 are comparable year-over-year for the same period of time for the same businesses.

Next, I will give a brief summary of the quarter's activity. Total revenue for the first quarter of 2017 was $29.1 million compared to $31.2 million for the same period last year. Our overall gross profit percentage in the first quarter of 2017 was 24.4% compared to 29.1% in last year's first quarter. In Diagnostic Services, revenues and gross profit percentage for the first quarter was $12.2 million and 23.2% compared to $12.0 million and 21.2% in last year's first quarter. In our Diagnostic Imaging business, the revenue and gross profit percentage was $2.8 million and 40.5% compared to $3.6 million and 47.9% in the prior year first quarter. Overall, the revenue increase in our Diagnostic Services business was positively impacted by higher volume of service days ran in the first quarter of 2017 compared to the prior year from both new business and higher volumes from existing customers.

In our Diagnostic Imaging business, the lower overall revenue and gross margin was impacted by the volume and mix of cameras sold as Matt mentioned earlier. The Mobile Healthcare business produced revenue and gross margin in the first quarter of 2017 of $10.7 million with a gross profit percentage of 14.8% compared to $12.0 million and 24.6% in the prior year. MDSS had revenues and gross profit percentage of $3.4 million and 45.6% in the first quarter of 2017 compared to $3.6 million and 52.8% in the prior year. As Matt previously discussed, we've had some challenges with our Mobile Healthcare business, primarily in our shorter-term provisional business, which we are addressing. In MDSS, the change in revenue and gross profit percentage is mainly attributable to the timing and type of capital equipment business sales with our partnership with Philips. We do experience some seasonality in our service business and notwithstanding other factors, the fourth and the first quarters are our slower quarters for our Mobile Healthcare and Diagnostic Services businesses, while the second and third quarters being our higher revenue quarters. Also, for MDSS and Diagnostic Imaging businesses, we can experience some seasonality related to the timing of equipment sales and capital budget timing of our customers. Notwithstanding acquisitions, we would expect this trend to continue as we move forward.

Moving on to bottom line results for the first quarter, adjusted net loss was $0.2 million or $0.01 loss per share compared to net income of $1.3 million or $0.07 earnings per share in the first quarter last year. Adjusted EBITDA was $1.8 million for the first quarter of 2017 compared to $3.7 million in the first quarter of last year. As a reminder, we do have a credit facility with Wells Fargo that we used to help fund the acquisition of DMS Health. This credit facility has 3 components: Line of credit, that has a borrowing base up to $12.5 million and bears interest at LIBOR plus 2%, a tranche A that has a borrowing base up to $20 million and bears interest at LIBOR plus 2.5% and amortizes over 7 years; and a tranche B, that has a total borrowing base of $7.5 million and bears interest at LIBOR plus 5% and amortizes over 3 years.

At March 31, 2017, our weighted average interest rate on our overall credit facility was 3.81% and total principal balance outstanding was $20.6 million. Our net debt position, less all cash and equivalents, securities available for sale and restricted cash was $15.3 million. At March 31, we had no outstanding balance on our line of credit, leaving an availability of $6.2 million on our credit agreement revolver. Going forward, we may make extra payments on our credit facility depending on cash needs and the goal of deploying our cash for the highest and best use relative to our capital allocation and value.

And finally, we announced our regular, quarterly cash dividend of $0.05 per share that will be paid on May 30 to shareholders of record on May 15.

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 comes from Andrew D'Silva with B. Riley and Company.

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Andrew Jacob D'Silva, B. Riley & Co., LLC, Research Division - Senior Analyst [2]

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Just a couple of quick ones here. Your guidance year-over-year top line that seems to be pretty much flat, but EBITDA is going down a little bit more meaningfully. Can you maybe provide more color on what the margin pressure is there? And what the rationale is worth?

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Jeffry R. Keyes, Digirad Corporation - CFO and Corporate Secretary [3]

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In general, the revenue guidance is -- obviously, the combination of all our businesses, but the EBITDA pressure that we mentioned has to do with our Mobile Healthcare business, and is primarily related to the timing and utilization of our provisional business. I mean, overall, we expect some revenue growth across our DS business and across our businesses in general, but Mobile Healthcare is being impacted, and so the resulting EBITDA is the impact of that utilization of those fleet assets.

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Andrew Jacob D'Silva, B. Riley & Co., LLC, Research Division - Senior Analyst [4]

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Can you help me understand that just a little bit better, I guess, because when I -- when we are doing our models, Mobile Healthcare services side of the business is generally lower margin? And then the product offerings are generally -- equipment offerings are generally higher margin businesses, right? So if your revenue is staying largely flat year-over-year and your decline is in the services business, I would assume that some of the ops that sort of stay flat would be through the equipment side of the business, which is higher margin. So in that in of itself results in your gross margin increasing?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [5]

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Hey Andy, it's Matt. Well, a couple of things. So where we see some of that growth though is in the DS side of the business, which is not the product side. So that's -- that's a good portion of our business, as you know, comes from Diagnostic Services, where we did experience growth in the first quarter, we anticipate to continue to grow that business in -- for the rest of the year. And as you know, that is a lower-margin business than our product business.

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Andrew Jacob D'Silva, B. Riley & Co., LLC, Research Division - Senior Analyst [6]

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Okay. Fair enough. And then can you give a little bit of color on CapEx. Obviously, just a little interested there since you've had DMS for a year, I want to get a sense of what the new run rate is from the maintenance standpoint at least?

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Jeffry R. Keyes, Digirad Corporation - CFO and Corporate Secretary [7]

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Okay. Sure. So overall, Andy, we expect on average that maintenance CapEx will be $4 million to $5 million a year. However, on a year-by-year basis, it can ebb and flow based on the timing of capital equipment we deploy and what our maintenance windows are. As an example, we spent almost $6 million in 2016, but in 2017, we expect to spend in the low $3 million range. On average, we think that it's going to be in that $4 million to $5 million, but it can vary on a year-to-year basis because some of the assets we put in place at Mobile Healthcare are larger in nature and occasionally, it might be opportunistic to put something in place based on looking out forward in the future.

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Andrew Jacob D'Silva, B. Riley & Co., LLC, Research Division - Senior Analyst [8]

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Got it. Okay. And then just kind of touching more on Mobile Healthcare, when did you start to notice some of these utilization issues, I suppose? It seems like, at least, when I was reading the lay of the land based on the conference calls previously, that the integration was going well and things were running smoothly. Was it just a hiccup that happened in the first quarter or is this something else there that maybe I missed during '16?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [9]

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It's definitely more -- I would relate it as a hiccup in the first quarter in terms of just asset utilization. I mean, that's really -- our provisional business in that -- in the Mobile Healthcare unit, is basically when we're taking an MRI or head CT or unit and we were placing it in a very short-term manner in a hospital system for a -- where they're doing the renovation, where they might be doing an upgrade as they take one of their own systems down before they can turn on the new system, this provisional business kind of serves as a stopgap. This business is very transactional in nature. It's very short term in nature as well. And very opportunistic as well. So we -- in the first quarter of January, this is really where we were seeing that the opportunities that we had seen in the previous quarters were not materializing. Those deals were not available to us. We and -- and then we had unused utilization of our equipment, which led to our first quarter results performance. So very temporary though. We've restructured the business to better focus ourselves on the transactional nature of this portion of our business. We've redirected some of our sales team and added to our sales team to really focus on this very transactional business. And as our guidance is showing, we anticipate that we will recover and that this was very temporary. We still have all the units. We still have the earning power that those units carry. And we still have the ability to fulfill the needs that are out there in the healthcare market for these types of resources.

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Andrew Jacob D'Silva, B. Riley & Co., LLC, Research Division - Senior Analyst [10]

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Got it. Can you give me maybe a little more -- delving into that. Can you give me maybe context in a customer dynamic that you saw during the quarter and maybe a little bit more long-term as well? So are you seeing that maybe in the fourth quarter, you had potential utilization placements that could be taking place that just fell off due to cancellations? Or are they more of a structural issue where you had customers that are no longer your customers, and so that is an -- maybe an opportunity that won't reoccur going forward?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [11]

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Yes, it's really opportunistic, right. So it just all matters about getting in the flow of capital equipment, as capital equipment is being put into different hospital systems and whatnot, we would -- they wouldn't have any need for this temporary service. So it's where -- it might just be 2 weeks, it might be 4 weeks, it might be 6 months. And then it's very -- also very dependent on how long that cycle takes in that hospital system. It's just -- everything came together in the first quarter where we had units that were coming off of short-term situations that were revenue in the third and fourth quarter, but they came off in the first quarter. And because of the lack of sales focus on this transactional business, we didn't have a next step for this -- for those units and they went unutilized. So it wasn't a matter of we've lost customers or this is -- the statements that you were making are more long-term in nature. This is a short term in nature business. It is very dependent upon the opportunities that are out there, but it's also very dependent that you stick with -- stick on it. You have the right resources dedicated to it and focusing on it and that was what was lacking, and so that's why we had to make those changes based on what we were seeing come January in our provisional -- with our provisional fleet and the utilization of our fleet. So now we have a more focused group that are -- that is working as that transactional business. And we anticipate that we -- as we're put in our guidance, we anticipate that we will recover and that this will just be a temporary situation.

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Andrew Jacob D'Silva, B. Riley & Co., LLC, Research Division - Senior Analyst [12]

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That was a very helpful answer. Last question, the Birner Dental 13b proxy contest. Maybe a little color on what the strategic ideas were used to be involved with that, with the 1,000 share ownership? And then, just wondering the proxy contest, maybe give us a little context of how much it's going to cost and how much it cost -- what the cost was thus far?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [13]

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So from a -- from a strategic standpoint, Andy, Digirad continues to look for high-value opportunities for our company and for our shareholders. So we -- as you know, a major portion of our growth strategy is to grow through acquisition and to add accretive acquisitions to Digirad. And we feel that we -- through Birner we had an opportunity to get involved in a situation with a healthcare company that has deep value. And so we are -- we are participating because we feel like this situation has the opportunity to bring long-term deep value to Digirad and to our shareholders.

In terms of the cost that you mentioned, the cost is less than $100,000. But all that is expected to be recovered, if successful, with this proxy contest.

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Andrew Jacob D'Silva, B. Riley & Co., LLC, Research Division - Senior Analyst [14]

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So the cost was $100,000 in the first quarter or $100,000 expected to be total?

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Jeffry R. Keyes, Digirad Corporation - CFO and Corporate Secretary [15]

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So it was $100,000 in the first quarter, Andy. I don't think we have an estimate of what total cost for it would be, but we wouldn't expect it to be significant.

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Operator [16]

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Our next question comes from Larry Haimovitch with HMTC.

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Larry Haimovitch, Haimovitch Medical Technology Consultants - President [17]

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Andy has covered a lot of the ground that I was going to cover. Following up though on a couple of things. The acquisition has -- it seems from my standpoint not quite delivered what you'd hoped. And I'm wondering if there was some management issues at that, at acquisition time that maybe weren't as apparent that are now becoming apparent now. Is that a reasonable way to look at some of the challenges there, Matt?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [18]

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Well, we definitely had a focus issue and it was something that -- I would say that we have corrected that and that did involve changing some of the management that was brought on during the acquisition. So certainly, that -- that is something that we have addressed. And certainly, we feel like we're in a very recoverable situation. Obviously, with the guidance that we're putting forward. And -- but yes, that's something that we have -- we assessed and we addressed. I would say this, though -- the acquisition we feel is still a very positive acquisition for Digirad, and we feel that we have 15, 16 months after the completion of the acquisition our management team feels very comfortable and very much in control of that business, and very excited about the opportunities that lay in front of us with that acquisition and through that acquisition.

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Larry Haimovitch, Haimovitch Medical Technology Consultants - President [19]

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Matt, how many changes were made there? Are there not necessarily in numbers, but are we talking substantial management changes or modest management changes?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [20]

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No problem. Yes, basically, the leader of the business that came over with the acquisition is no longer with us. And then there were additional changes as well. But then that was the most significant piece of it.

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Larry Haimovitch, Haimovitch Medical Technology Consultants - President [21]

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Okay. So do you feel at this point you've got the right leadership in place to get this business moving better again?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [22]

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I do. I believe we're focused. I believe that we've got a good plan and we're out there executing it. Yes.

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Larry Haimovitch, Haimovitch Medical Technology Consultants - President [23]

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Okay. On the camera business, it seems like it's very lumpy consistently. Consistently, not predictable. Is that -- is there anything you can do about that? Or is that just the way the business is?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [24]

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Given the size of that business, it's going to be lumpy. It's going to be seasonal, too. And when I say seasonal, a lot of it is a function of different funding cycles. Now that we are -- we are selling the majority of our cameras, hospital systems, very dependent upon fiscal years, starting and stopping within hospital systems. A lot of that -- a lot of our business will continue to be strong in the fourth quarter, weaker in the first quarter, but certainly, you know the business will continue to kind of map that type of trajectory, where we're going to have higher fourth quarters and lower first quarters. And then there's timing in between the quarters when we can get some of these deals done. Certainly, we have other systems that have quarter ends in June 30. So those -- those also, kind of tend to lend us to have a nicer second quarter, maybe a slower third quarter, higher fourth quarter and a slower first quarter. But we look at it on an annual basis and that's how we guide.

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Larry Haimovitch, Haimovitch Medical Technology Consultants - President [25]

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Okay. And then I can't remember the words you used on the last conference call, but it sounded like some sort of -- I wouldn't call corporate restructuring, but maybe special dividend, maybe -- I don't remember your words well Matt. I'm sure you remember them much better than I, but could you address those comments you made, and where you stand in that regard at this point?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [26]

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I think it's all opportunistic, right, from the standpoint of looking at our strategy as a business. We feel we are a -- a cash-generating service and Products business, operating in a -- in a growing healthcare market. And we will always continue to look for opportunities and ways that we can deliver shareholder value. Certainly, increasing dividends are things that we have on the table. Certainly, in the past, we bought back shares. And then obviously, appreciation of our stock through our performance. So all those things are goals of our team, of our company, of our board to look for ways to continue to grow and increase shareholder return and value.

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Larry Haimovitch, Haimovitch Medical Technology Consultants - President [27]

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It sounded from those comments though that you may have had some specific things in mind. I'm wondering if those change given that the first quarter was a little on the difficult side for you?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [28]

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From a strategic standpoint, we have not changed any of our plans. So all of those things continue to be goals for Digirad.

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Operator [29]

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(Operator Instructions) Our next question comes from Ross Taylor with ARS Investment Partners.

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P. Ross Taylor, ARS Investment Partners, LLC - Partner [30]

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I'm trying to get a better handle on the mobile side. You talked about the fact that the issues were temporary. And you see a return to growth in 2018. Your guidance seems to indicate that you don't see a significant improvement in the operating conditions between here and maybe the fourth fiscal quarter or even the next year. Is that a correct read? Or do you think we should see improvements beginning in Q2?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [31]

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I would say that we will probably have some continued pressure in the second quarter, but specifically, as we talk about the Mobile Healthcare unit, as we recover, but it was -- it's definitely -- we'll have general improvement, obviously in third quarter and fourth quarter to meet our guidance. But really, we're not really putting other than saying that we anticipate that we will be growing in 2018, we're not being very specific in issuing guidance at this time on 2018. It's really just a whole matter of -- sales is about selling your funnel and executing on your funnel. And ensuring that you have those opportunities. And because of the lack of focus that we had experienced in this transactional business, we really had a depleted funnel, that has changed. We are back. We have rededicated resources and dedicated new resources to really fill that funnel and to execute on that funnel.

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P. Ross Taylor, ARS Investment Partners, LLC - Partner [32]

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And what's the sales kind of horizon from -- obviously, what -- the funnel is empty because there's been a lack of effective selling effort or even though selling effort it sounds like from what you're saying. What's the start to finish when you're doing this, when you are going out and approaching these people? Are these things that are done fairly quickly, fairly short term? Or are they much longer-term as the sales effort? I mean, does it take 6 months to take a sale in this space or is this the kind of thing we should -- you should expect to see traction much sooner than that?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [33]

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The sales cycle in this -- in that particular business that we're talking about is anywhere from 1 month to 6 months, right. So it varies across the board. In varies on the opportunities that are out there and they really are. Sometimes, even sales cycle is shorter than a month. So it is -- like I said, it's very transactional in nature and it's not dependent on an area or anything. It's really depending on ensuring that you are aware of the opportunities, you have the right resources that can find the opportunity, the right abilities in terms of the resources that you have available to execute on those opportunities.

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P. Ross Taylor, ARS Investment Partners, LLC - Partner [34]

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And what's the competitive environment like? What's the alternative? Because it sounds like a lot of this is if someone is shutting down a system either for extended maintenance or to upgrade and things of that nature are they -- do they have a lot of options? Can they look at this and say you're 1 of 3, 4, 5 people, it's obviously perhaps market-dependent. But it would seem that this is not a place where there's a huge amount of option as to -- I mean, these are expensive equipment and it is something that would seem to not be some -- well, kind of globally mobile?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [35]

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Yes, it's very true, Ross. I mean -- there are certainly, there are certain markets that have more competition than others. Certain pieces of equipment that we have that we're able to use in this force are very unique in terms of the make and designs and they've been -- they complete the order, exactly what the client needs. So it -- that also does vary though. So to say there is no competition is not correct. To say there is a lot of competition is also not correct. So these are -- it's -- really comes down to ensuring that you have the right resources, talking to the right people that are aware of what you have available and really managing that to get that equipment to the right places at the right time.

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P. Ross Taylor, ARS Investment Partners, LLC - Partner [36]

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Okay. Great. Well, good luck in getting the situation addressed as quickly as possible.

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Operator [37]

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And our next question from Mitra Ramgopal with Sidoti & Company.

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L. Mitra Ramgopal, Sidoti & Company, LLC - Research Analyst [38]

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Matt, I was wondering if you could just provide a little more color or remind us in terms of the sales process. My understanding is each of the business lines have their own sales force. And I know there's one thing you talked about or it's maybe the lack of focus on the Mobile Healthcare side. And if you could give us a sense to how you're going around -- going about sort of fixing the sales force, if you have to hire more from outside or just bring some from the other business lines?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [39]

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Yes, so it was -- thank you, Mitra, and good morning. Yes. No, what we basically did was there was a -- addition and a little bit of reorganization in terms of focus for some of the sales people who were focusing on other efforts that were not generating the required returns that we had. So we were -- we had some sales resources that were focused on some strategic initiatives that were longer term in nature, and that was becoming a distraction from this type of very transactional business. So we made some moves. We had some people move out of the organization. We had some people move into the organization that will allow us to better focus on these current opportunities that we have in front of us. So it was net adds to our sales team within the Mobile Healthcare units. So this is all -- this all happened within the Mobile Healthcare unit. And there was some reshuffling of some of those resources to better focus them on the needs that we have in this business.

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L. Mitra Ramgopal, Sidoti & Company, LLC - Research Analyst [40]

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Okay. And the one thing you highlighted again in terms of the long-term growth strategy with acquisitions, but given the issues you're dealing with now in terms of mobile, is it fair to assume that you're probably not looking to do anything until maybe 2018 or beyond?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [41]

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Well, we're going to continue to be opportunistic. So we feel like that is something that we will continue. As we've stated previously, we have a funnel of opportunities that are in front of us. We continue to communicate with those opportunities. We are continuing to -- a lot of them are due to whether we're going to be successful in those opportunities, a lot of them have to do with timing. And so we continue to keep those thing -- those opportunities alive. And -- so it's hard to predict. The temporary nature of what happened to us here in the first quarter is not putting us in a position where we're going to abandon our acquisition strategy, not at all. We'll continue to look for opportunistic -- opportunities and acquisition, continue to look at the funnel in those opportunities, and we will continue to look to execute as timing and opportunity comes available.

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L. Mitra Ramgopal, Sidoti & Company, LLC - Research Analyst [42]

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Okay. And then coming back to the first quarter, I know you mentioned the seasonality was a bit -- the impact was more than normal. If you can give a sense maybe how much of that softness probably to the seasonality side of things versus the Mobile Healthcare?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [43]

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Definitely, majority of the change was due to the Mobile Healthcare units. But there was a normal seasonality in terms of our services business as well, right. So that's where we really did not experience a lot of seasonality changes. On Mobile -- there continues to be -- whenever you are running a mobile business, when you're moving from one site to the next, during the winter, you are going always continue to have challenges, but within the services business, within our -- not our provisional units, but just our mobile units, within DIS and also within Mobile Healthcare, we actually experienced growth year-over-year in terms of the number of scans that we provided and whatnot. Not to that point -- the seasonality hit us hard. Really, the seasonality that we are addressing was what we experienced on the product side of the business, where due to different capital cycles and whatnot, the seasonality of shifting into a new fiscal year where we had a very strong fourth quarter, we did not have -- we kind of cleared out and booked and shipped the orders in the fourth quarter and, we didn't have a lot of carryover into the first quarter that helped us that -- and we didn't have any new orders just because of the new fiscal year. And also, some -- there continues to be in the healthcare market a lot of uncertainty and that uncertainty definitely translates into delayed purchases. So all of that working together, really is what we experienced in the product business in the first quarter.

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L. Mitra Ramgopal, Sidoti & Company, LLC - Research Analyst [44]

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That's very helpful. Given that you mentioned the uncertainty, I know it's still very early in terms of any repeal of Obamacare, so to speak. I was just wondering if you can give me just a big sense in terms -- big picture how you sort of view it right now. I mean, did you really benefit much from ACA or you see this as sort of probably not a big issue for you?

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [45]

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Yes, I mean, from the standpoint of the uncertainty, we feel like that is -- that occurred in the first quarter due to a lot of, obviously, the new election, new President and whatnot. But we're not really experiencing it now in the second quarter in terms of -- seems like it's all systems go. Certainly, certain parts of our business were affected by ACA. And some on the good side, some on the bad side. So for us overall, because we are in a product business where we can sell equipment or we can just outsource that equipment to be used in an operational manner, we get hit on both sides of it. Overall, if ACA continues or if ACA goes away, we think the -- we feel the overall impact to Digirad will not be tremendous either way. So -- but we do feel though that when there are changes and when there is uncertainty injected into the situation, that does caused delays, mainly in capital purchases.

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L. Mitra Ramgopal, Sidoti & Company, LLC - Research Analyst [46]

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Okay. And then finally, Jeff, just a quick question. How should we view the tax rate for 2017?

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Jeffry R. Keyes, Digirad Corporation - CFO and Corporate Secretary [47]

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So the tax rate is going to be in the low 40% range. It's right around 42% to 44%, Mitra. There could be some slight tweaks based on calculation of NOL utilization on a year-by-year basis but overall, we expect a GAAP rate of 42% to 44%.

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Operator [48]

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Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Matt Molchan for closing remarks.

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Matthew G. Molchan, Digirad Corporation - CEO, President and Director [49]

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Thanks, Michelle. As always, we appreciate all our shareholders and your continued feedback and support. We remain very excited of our business and Digirad's future. Jeff and I look forward to discussing our results and business update with you next quarter. Thank you.

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Operator [50]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.