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

Keith Hinton - Sidoti & Company, LLC.

Greetings and welcome to the Digirad Financial Results for the Second Quarter and First 6 Months of 2014 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Reesa Lindsey [ph]. Thank you, you may begin..

Thank you, Jesse, 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 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 second 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..

area number one, acquisitions. Companies that fit within our business model of providing Diagnostic Services on an as-needed, when-needed and where-needed basis. Area number two, finding new services that we can provide through our distribution channels. And then area number three, organic growth, utilizing our existing services and channels.

We believe Telerhythmics contributes in all 3 of these areas. On the subject of acquisitions, I can tell you that we are talking to many companies looking for the right opportunity that will add value to our business model and shareholders. From this, we have established a good pipeline of potential candidates.

When we find one that fits our goal of providing health care services on an as-needed, when-needed, and where-needed basis and fits it into the strict financial metrics we have established, we will move forward.

Organically, we continue to make targeted investments in our sales and marketing programs to take advantage of the opportunities presented in the current health care marketplace.

As more hospitals and more health care systems look for ways to become more efficient or for ways to solve capacity issues, we can help as we can provide our Diagnostic Services better, more cost-effective and more efficient than any company in the marketplace.

Our Diagnostic Imaging business continues to move forward at a good pace, closing on several good margin systems and providing excellent camera support. For the quarter, our Diagnostic Imaging revenue was down slightly year-over-year, reflecting the impact that timing of camera sales can have on our revenue on a quarter-by-quarter basis.

We know that the market continues to look for cameras like ours that are portable, can be used in a variety of settings, and create a high-quality image. We continue to see enthusiasm for our cameras in the marketplace, and we are taking advantage of that enthusiasm.

Before I turn the call over to Jeff, I'd like to note 2 other important items covered in our press release today. First, this morning, we announced our regular quarterly cash dividend of $0.05 per share.

The continued payment of our quarterly dividend at Digirad reflects the confidence we have in our business model and our ability to continue to generate cash and create value going forward.

This also a reflection of our commitment to return a portion of the value we are creating to all our shareholders in the form of a quarterly cash dividend on an ongoing basis. Second, we believe we have reached a point in the implementation of our new business strategy that we are now able to provide greater insight into our business going forward.

As a result, we have decided to begin providing annual top and bottom line guidance, which we plan to update periodically. Now I'll let Jeff provide the details and more color on the financial results.

Jeff?.

Thanks, Matt, and good morning everyone. In the release today and my prepared comments I will 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 restructuring activities or [indiscernible] intangible assets.

In addition, I will make references to adjusted EBITDA, which is also a non-GAAP measure that further excludes stock-based compensation. 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 today's news release. I'll start with a brief summary of the quarter's activity. As Matt noted, total revenue for the second quarter of 2014 was $14.6 million compared to $12.9 million for the same period last year.

Revenues for Diagnostic Services, which includes our recent Telerhythmics acquisition, were $11.3 million compared to $9.5 million for the second quarter of last year. Diagnostic Imaging revenue was $3.2 million for the second quarter of 2014 compared to $3.4 million in the second quarter of last year.

Our overall gross profit percentage in the second quarter of 2014 was 30.9%, up from 29.4% in last year's second quarter. In Diagnostic Services, the gross profit increased to 27.7% from 24.2% in the 2013 second quarter.

In Diagnostic Imaging, the gross margin percentage in this year's second quarter was 42.2% compared to 43.8% in the prior-year quarter. At the end of June, cash and cash equivalents and the available-for-sale securities balance totaled $21.4 million.

Our cash increased approximately $2 million from the March 31 date, mainly due to cash flow generation of the business and positive working capital changes, totaling $2.9 million, partially offset by our quarterly dividend payment of approximately $0.9 million.

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 regular quarterly cash dividend. Moving on to the bottom line results for the second quarter.

The GAAP net income, which includes $0.1 million of restructuring costs associated with our previously announced lease termination in Poway, California, was $0.8 million or $0.04 per diluted share compared to a GAAP net loss of $0.6 million or $0.03 loss per share in the prior-year quarter.

Excluding adjustments related to restructuring charges and purchased intangible asset amortization totaling $0.2 million, adjusted net income for the second quarter of 2014 was $1.1 million or $0.06 adjusted net income per diluted share.

Excluding $0.7 million of restructuring charges and purchased intangible amortization from the prior year, we are essentially breakeven in the prior year.

This year-over-year increase of our non-GAAP adjusted net income of over $1 million is very significant as we had already deployed our new business model in the second quarter of 2013, showing that we are clearly making progress on a year-over-year basis under our new strategic model.

For the remainder of 2014, we do expect to record additional restructuring charges of about $100,000 to $200,000 related to our new lease -- related to our lease termination and facility movement at Poway, California, most of which we expect in the third quarter.

As we released today and Matt mentioned earlier, we believe we've reached a point in the implementation of our new business strategy that we're now able to provide greater insight into our business going forward, which also reflects the confidence we have in our business model and therefore, we are providing financial guidance for our 2014 fiscal year.

For the full year of 2014, we expect to generate revenues between $53.5 million and $55 million, non-GAAP adjusted diluted earnings per share between $0.13 and $0.15 per share and non-GAAP adjusted EBITDA between $4.5 million and $5 million.

The company's non-GAAP financial guidance for adjusted diluted earnings per share excludes restructuring charges, acquired asset -- acquired intangible asset amortization and related tax impacts and further, in the case of adjusted EBITDA, stock-based compensation.

Finally, as Matt mentioned, we announced this morning our quarterly cash dividend of $0.05 per share, payable on August 25 to shareholders of record of August 12. At our recent stock price, this sustainable dividend represents approximately a 6% yield to our shareholders. Now I'll turn it back over to Matt..

Thanks, Jeff. I'd like to close by saying we believe we're confidently executing our strategy to bring value to all of our stakeholders. As we have noted in the past, we believe the trends in the health care market are moving toward our business model, which accentuates efficiency and value-added services.

Our mission to provide health care services and technology on an as-needed, when-needed and where-needed basis has never been more timely or more well-received in the marketplace. Now I'd like to turn the call over to the operator for questions.

Jesse?.

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

I'm curious about the full year 2014 revenue guidance. You guys said you expect to generate between $53.5 million and $55 million. You're at $27.6 million right now for the first 6 months, with the first quarter not having any Telerhythmics revenue.

So the way I'm sort of looking at it, if you're assuming similar organic growth rates in the Service segment and Telerhythmics revenue is similar to what we saw this month, that seems to me to be a little bit low and that would seem to indicate pretty poor 2 quarters for the Imaging segment.

Can you just provide some more color on that revenue guidance and, sort of, how you arrived at that number?.

Yes. Two areas. So traditional seasonality is one, in terms of our fourth quarter and the seasonality that occurs with our Services business in terms of how the holidays affect our fourth quarter, and that's traditional seasonality in our business. Another thing is just the timing of camera sales as those work their way through their pipeline.

So that accounts for where we're projected to end the year. Still, even at the numbers that we're projecting, a nice growth rate year-over-year for the business..

Okay, terrific. I had one other question.

Looking forward to a little bit further in the future of 2015 and 2016 for the Imaging segment, can you talk a little bit about what your expectations are in terms of international demand via the partnership with Dilon? And also, what kind of savings you're looking for and sort of margin expectations you have with the outsourcing of the manufacturing process?.

So yes. I could tell you on the Dilon side, you're right, Keith, on the standpoint that we put the deal together last year. We're still working through with the distribution network that Dilon has, and we do anticipate a few sales in 2015 and beyond.

But we really have some work to do still this year to really fully understand that impact and whether that few will turn into a handful, which will turn into many. So that is still an ongoing process, clearly, Dilon. And same with the outsourcing. Right now, we do have a great partnership with SAI.

We're beginning to -- we've been working through past inventory that we've had with our cameras, and now we're getting to the point where SAI's build-out will start impacting our bottom line. And that's still a work in progress as well. We are definitely working towards gaining additional efficiencies.

As that -- as the learning curve and as that progresses with SAI, but it's hard for us to really make an estimate of what that impact would look like on 2015 and 2016. But now that we are in the business of providing guidance, as these things become more line of sight for us improves, obviously, we will begin discussing those items as necessary..

[Operator Instructions] It appears we have no additional questions at this time. I would now like to turn the floor back over to Mr. Molchan for any additional or concluding comments..

Thank you, Jesse. Before we close today's conference call, I want to thank all of our stockholders and all other interested parties who joined us this morning to express our appreciation for your continued interest and support. Jeff and I look forward to speaking with you again when we report our third quarter results and progress this fall.

Jesse, that concludes today's conference call..

Thank you, ladies and gentlemen. This does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time..