Matthew G. Molchan - Chief Executive Officer, President and Director Jeffry R. Keyes - Chief Financial Officer and Corporate Secretary.

Keith Hinton - Sidoti & Company, LLC Paul Nouri - Noble Equity Funds Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc..

Greetings, and welcome to the Digirad 2014 First Quarter Results. [Operator Instructions] I would now like to turn the conference over to your host, Reesa Lindsey [ph]. Thank you, Ms. Lindsey, you may begin..

Thank you, Rob, and thank you, all, very much for joining us this morning. If you didn't receive a copy of today's release and would like one, please contact our office at (858) 726-1600 after the call, and we'd be happy to get you one. Also, this call is being broadcast live over the web and may be accessed at Digirad's website at 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 securities laws.

These forward-looking statements include statements about the company’s revenues, costs and expenses, margin, operations, financial results, restructuring efforts 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 this morning’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 2014 first quarter 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..

Thank you, Reesa. Good morning, everyone, and thank you, all for joining us today for our first quarter 2014 results conference call. I am pleased to report that we had another solid and productive quarter.

We generated double-digit revenue growth despite challenging weather conditions in January and February, up and down the East Coast, which is an important epicenter of our services business. Total revenue for the quarter was $13 million, compared to $11.5 million for the first quarter last year.

Those first quarter 2014 revenues include $255,000 from our acquisition of Telerhythmics, which we closed March 13. We are all very excited about our Telerhythmics acquisition and are well into the process of integrating the business into Digirad. Telerhythmics is a prime example of the kind of strategic acquisition we are targeting.

Telerhythmics is much like our current services business with a solid, entrenched enterprise with nearly 20 years of history, it has an excellent reputation in the industry. Its target market is virtually same as our current service business, with minimal customer overlap.

Telerhythmics fits squarely in our new business model and our mission to provide health care services and technology on as-needed, where-needed and when-needed basis. But perhaps most importantly, Telerhythmics is a scalable platform business that can support additional services.

Right now, it provides outsourced 24-hour cardiac event monitoring, an important established revenue-generating service.

It has a-7-day-a-week, 24-hour call center staffed by registered nurses, a very valuable asset and the fact that it's staffed by registered nurses versus technicians differentiates it significantly from other cardiac event monitoring competitors.

The acquisition also provides us with excellent cross selling opportunities to sell Telerhythmics services to our current customers and our imaging and related -- and our imaging and related services to their customers.

In short, Telerhythmics offers us the potential to drive additional services via our existing channels and to expand and diversify our business operations. That means more opportunities to grow and broaden our geographic reach.

Before I go further, I'd like to note, as we announced in our news release this morning, that based on the acquisition of Telerhythmics, we have renamed our Digirad Imaging Solutions services business also known as DIS, to Diagnostic Services.

We believe the name Diagnostic Services more accurately affects -- reflects our now combined services business, including Telerhythmics, as we branch out and provide a broader range of services on an as-needed, where-needed and when-needed basis.

Our CFO, Jeff Keyes, will get into more details in a minute, but I'm pleased to say, in terms of our core diagnostic service revenue for the quarter, we generated a year-over-year increase of 4%, not including the impact of Telerhythmics, which is significant given the challenges the weather presented and the fact that the first quarter is historically our softest in terms of revenue.

The other side of our business, our Diagnostic Imaging business, which includes camera sales and related camera support, was not as affected by the weather and as a result had a solid first quarter.

The Diagnostic Imaging business generated revenue of $3.4 million compared to $2.6 million for the first quarter of 2013, which was mainly a result of selling several high-margin systems as we continued our focus on disciplined sales and overall rightsized cost structure.

We are still working on a plan to grow camera sales outside the U.S., but at this time, we do not expect to see the results of that effort until at least 2015. The other major event of the quarter was a successful negotiation of an exit from our lease in Poway, California for our former corporate headquarters.

We will continue to keep a smaller facility in the Poway area to house our camera and camera support businesses, but it was important to terminate the costly lease for the large facility since it was no longer needed in conjunction with our new strategy. This change in facilities result in an annual savings of around $400,000 to $500,000.

Now I'd like to turn the call over to Jeff, who can provide more color on our financial results and the major transactions entered into during the quarter.

Jeff?.

Thanks, Matt, and good morning, everyone.

In the release today, and in my comments, I will make reference to both GAAP results, as well as adjusted results, for which, the adjusted results are non-GAAP and do not include nonrecurring charges associated with restructuring activities, as well as references to adjusted EBITDA, which is also a non-GAAP measure.

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 earnings on a GAAP versus non-GAAP basis in today's news release. I'll start with a brief summary of the quarter's activity.

As Matt noted, total revenue for the first quarter of 2014 was $13 million compared to $11.5 million for the same period last year. Revenues for Diagnostic Services, which we used to call DIS, was $9.6 million, including $255,000 related to Telerhythmics, compared to $8.9 million for the first quarter of last year.

I'd like to add that the weather impacts were indeed significant and much more extensive than we'd plan for in a typical first quarter. Diagnostic Imaging revenue, which generally was not as significantly impacted by weather, was $3.4 million for the first quarter of 2014, compared to $2.6 million for the last year.

Our gross profit percentage in Q1, 2014 in our Diagnostic Imaging business was 41.3%, compared to 27% in the prior year. This increase was a result of, both margin improvement and mix of systems sold in 2014, but also related to inventory reserves that were taken in the prior year as our restructuring program was deployed in Q1 of 2013.

We also announced that a cash dividend of $0.05 a share will be paid on May 27, 2014 to shareholders of record on May 13. At the end of March, cash, cash equivalents and available-for-sale securities totaled $19.4 million.

Our cash did decrease approximately $7 million from December 31, mainly related to cash used to purchase Telerhythmics, cash to pay last quarter's dividend, cash for our restructuring activities, and expected normal Q1 cash flow activity.

We continue to have plenty of cash to deploy our strategic plan and make strategic acquisitions in a financially disciplined manner, as well as fund our sustainable cash dividend.

Adjusted EBITDA, a non-GAAP measure of operating performance, was $0.8 million for the first quarter of 2014, compared to an adjusted EBITDA loss of $0.8 million for the same period last year. As we've previously announced, and Matt just discussed, we terminated our lease in Poway, California for our former corporate headquarters.

As a result of the termination, we took a one-time restructuring charge of approximately $0.4 million in the quarter. We do expect some further charges in Q2 as we continue with our transition into our new smaller facility. Those charges are expected to be approximately $100,000 or so in Q2.

However, the savings we received by virtue of moving to a smaller facility to house our camera and camera support operations are expected to range between $400,000 to $500,000 annually, once the transition is complete.

These savings will present itself via lower G&A costs, as well as relative improvement to margin, and some of the facility costs related to our customer support and manufacturing process and runs through margins. That's a significant benefit going forward, and it underscores the importance we placed on terminating the lease.

As Matt mentioned too, we are also working quickly to integrate Telerhythmics into our ongoing operations. Many of the back office items are well underway and some are near completion. Other operational items will take a little longer, but we have a clear path to completion.

We previously announced on March 14, when we acquired Telerhythmics, that at the same level of revenues that Telerhythmics generated in 2013 at $5.6 million, we expected to generate EBITDA of $350,000 in the first 12 months and once the integration was fully complete, expected to generate EBITDA of $800,000 annually thereafter, again at the same level of revenues.

Based on the information that we have today, we continue to expect to generate at those same previously quoted EBITDA levels related to the Telerhythmics business.

Moving on to the bottom line results, the GAAP loss for the first quarter of 2014 was $1.1 million or a loss of $0.01 per diluted share, including that $0.4 million in one-time lease termination charges, and approximately $155,000 in transaction costs related to Telerhythmics.

Without these costs, we had -- we would have been profitable, again in the first quarter of 2014 for the third quarter in a row. Excluding the $0.4 million restructuring charges for the lease termination, adjusted net income for the first quarter of 2014 was $0.3 million or $0.01 income per diluted share.

For adjusted results, we do not adjust out the acquisition-related charges. As I have noted in prior quarters, we have -- we can see the progress on a quarter-by-quarter basis over the past year, ever since we made our strategic shift to our current diagnostic services-related business model late in Q1 2013.

In Q1 2013, we had an adjusted net loss of $1.4 million, we broke even in Q2 2013, had an adjusted net income of $1 million in Q3 2013, an adjusted net income of $0.8 million in Q4 2013.

During Q1 of 2014, historically a slow quarter and this year challenged by the weather, we would've again shown a profit without the one-time restructuring charges and Telerhythmics transaction cost.

We remain confident in our strategic plan and expect to continue our profitable momentum as we move into Q2 and Q3 of this year, the quarters in which we traditionally see increases in our results. Now I'd like to turn the call back over to Matt..

Thanks, Jeff. I'd like to close by saying all of us at Digirad are excited about the progress we're making. Our new acquisition and the potential it represents and by the traction we are making in the marketplace.

Today, given the dynamics of the healthcare marketplace and the increasing demand for efficiencies and mobility, we believe our mission to provide health care services and technology on an as-needed, where-needed and when-needed basis, has never been more timely.

We believe the healthcare industry is moving towards us and our business model, which will allow us to continue to build Digirad and grow revenue and value for our shareholders going forward. Now, I'd like to turn the call over to the operator for questions.

Rob?.

[Operator Instructions] Our first question comes from the line of Keith Hinton with Sidoti & Company..

I have 2 things I wanted you to address. The first one is the Diagnostic Service segment gross margins were down about 240 basis points year-over-year, down around 2011 levels despite some revenue growth in the segment.

I was wondering, if you could provide some color on what drove up costs in the segment this quarter? And whether you expect that to continue?.

Yes. Thank you for the question, Keith. Really what happened there really was a function of the weather. You know when the weather hits, the way our staffing works, we still obviously have to employ our staff -- our full-time staff, they're being paid, but they cannot go out to generate revenues.

So, we had an increase on our costs with lesser revenue and that depressed our margins. We do not expect that to continue as we expect to have our people going out there and providing the services to our customers. So revenue would continue to match with costs..

Okay. The second question I had was, obviously, the imaging segment had a very good quarter, revenue and gross margin-wise.

Being at that segment is naturally pretty lumpy in terms of revenue, do you see this quarter as kind of just a good quarter or a sign of some increasing demand for Digirad's cameras?.

I definitely think it's a good quarter. I would also say that the market has -- we have seen pickup in the market in terms of demand for the systems that we provide, but we're still being very opportunistic about that and very strategic as we target real opportunities that we can -- that fit our cameras.

So, I would say that, we're seeing a little bit of -- not a huge amount of dynamic shift towards our cameras, but we're definitely seeing increased demand that over what we had seen in the previous 2 years. So, we're really excited about the diagnostic imaging business.

Now, offsetting that, is the fact though that we also that have -- within the diagnostic imaging business, we have our camera support business, and as we get -- as those cameras we have continue to have older cameras that we're supporting as those go away. We do see some pressure on our camera support business.

But as far as our new cameras are concerned, compared to the past 2 years, we're seeing a little bit increased market demand for those cameras..

Our next question is from the line of Paul Nouri with Noble Equity..

I was wondering, if you could talk a little bit about the cardiac monitoring acquisition? I understand how it fits -- kind of fits and what you guys are doing? But, when you look at acquisitions going forward, is this part of [indiscernible] or is it just kind of Diagnostic Services in general?.

You broke up a little bit, Paul, but you're asking about the -- if we're going to continue to look for additional cardiac event monitoring businesses, is that the question kind of -- it got choppy there Paul, I'm sorry.?.

Yes. That's correct..

Yes, I mean, once again, we're from a strategic standpoint, yes, this cardiac event monitoring business, we feel fits right into what we're trying to do in terms of offering services on an as-needed, where-needed and when-needed basis. It's a business that we felt matched the quality that we provide in our current Diagnostic Services business.

So there was even on a customer type, when you're talking to the customers, there -- the Telerhythmics customers valued the quality that, that company brought to them much like the Diagnostic Services customers value the quality that we bring to them. So we saw a match there.

We will continue to look for strategic opportunities that will help us grow the business. But, also from a strategic standpoint, the Telerhythmics footprint really didn't overlap our current Diagnostic Services business.

So we saw opportunities where we could sell our traditional nuclear and ultrasound mobile services into those markets that they were already had established relationships, as well as bringing the Telerhythmics business into our established relationships that we have customers, cardiac customers already within Diagnostic Services.

So we really saw a case where 1 plus 1 equals 3, or 4 or 5, and we're really excited about the Telerhythmics business.

Now, as far as finding other companies in that space, that can match that quality, we're going to continue to look absolutely as well as look for other types of imaging companies that could fit within our current strategy, growth by growing -- increasing the density within the current areas that we are in or looking for opportunities that will allow us to grow our top line and our bottom line through acquisitions that are in a like space.

We had talked about our 3 main areas of growth in -- at Digirad would be -- and through Diagnostic Services would be through acquisition, would be through finding a new service, and Telerhythmics fits both of those. It's an acquisition and a new service that we can provide through our distribution channel and in organic growth.

So, we're continuing to be committed to those 3 strategies, and we'll continue to execute them as we have through this acquisition of Telerhythmics..

[Operator Instructions] Our next question is from the line of Edward Schwartz of Schwartz Investment Capital..

Just a follow-up question to a question I had a couple of conference, 2 or 3 conference calls ago, where you announced a deal on a alliance to sell your product in Europe?.

Yes..

Yes. And at that time you said revenues from that would be second half of 2014.

Is that still on target?.

No. What I suppose, we just talked about the -- we were looking at 2015 impact. 2014 is still a year that we are using to develop those relationships. There are still a number of things that we have to do in terms of that would allow us to sell our products overseas.

So we still look at 2014 as a year to kind of continue the process, so that we'll be ready to reap the rewards in 2015 and beyond. So that relationship we announced them at the tail end of the third quarter of last year's with Dilon Diagnostics and we're working with them and their distribution network around the world to help them move our products.

So, we're certainly in the middle of that. We're working through that. Dilon's been a great partner and we're continuing to train and bring on more distribution partners as we ready ourselves for moving our products internationally. But we see that as a 2015 program..

Okay.

And do you have -- can you -- is it too early or can you give some color as to what revenue you expect going forward, like in 2015 or 20 -- what would be good to you, for you from the European -- from the [indiscernible] operations?.

Yes, it's probably a little bit too early still Ed. I mean as we're definitely making progress looking at opportunities and kind of trying to fill that up, but it's a little bit too early for us to make any projections on that at this point..

Our next question is a follow-up from the line of Keith Hinton with Sidoti & Company..

Matt, one more question for you.

As we start to see some Telerhythmics revenue, some more Telerhythmics revenue coming in the second quarter, what kind of effect do you expect that to have on the margins in the service segment? Do you think of that as a business that has similar margins to the overall service segment or is there kind of a material difference there?.

Yes, very similar. Very similar..

At this time, I will turn the floor back to Mr. Matt Molchan for additional comments..

Well, as we close this, I really do appreciate the questions and we're excited here at Digirad. We are very excited about the opportunity in front of us.

We appreciate the support that we have from our shareholders, and we're really excited about the business that we are in, and as we continue to execute our strategies, we will continue to see positive results. We're really looking forward to a great 2014. Thank you so much for your time, today, and we look forward to talking to you next quarter..

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