Risa Lindsay - Investor Relations Matthew Molchan - President and Chief Executive Officer Jeffry Keyes - Chief Financial Officer.

Mitra Ramgopal - Sidoti & Company.

Greetings and welcome to Digirad Corporation Fourth Quarter 2017 Results Conference Call. At this time, all participants are in a listen-only-mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host, Risa Lindsay. Thank you. You may begin..

Thank you, Dana, 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 maybe accessed at Digirad's Web site via www.digirad.com.

Shortly after the call, a replay will also be available on the Company's Web site.

I would like to remind everyone that certain statements made during this conference call, including the question-and-answer period, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.

These forward-looking statements include but are not limited to, statements about the Company’s revenues, costs and expenses, margin, operations, financial results, acquisitions and other topics related to Digirad’s business strategy and outlook.

These forward-looking statements are based on current assumptions and expectations and involve risks and uncertainties that could cause actual events and financial performance to differ materially.

Risks and uncertainties include but are not limited to, business and economic conditions, technological change, industry trends, changes in the Company’s market and competition. More information about the risks and uncertainties is available in the Company’s filings with the U.S.

Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as today’s press release.

The information discussed on this morning’s conference call should be used in conjunction with the consolidated financial statements and notes included in those reports and speak only as of the date of this call. The Company undertakes no obligation to update these forward-looking statements.

Hosting the call today from Digirad is President and CEO, Matt Molchan. Joining Matt this morning is Jeff Keyes, Digirad’s CFO. Matt and Jeff will discuss the 2017 fourth quarter and full year 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 would like to turn the call over to Matt Molchan. Good morning, Matt..

Thank you, Risa. Good morning, everyone, and thank you all for joining us today for our fourth quarter 2017 results conference call.

As we mentioned in our press release today, our service businesses had a good fourth quarter with mobile healthcare continuing to show improvements from the operational challenges we had earlier in the year and diagnostic services showing a year-over-year growth for the quarter and for the year.

Our diagnostic imaging business continued to be impacted by slower capital spending. Though we have seen this slower capital spend, the backlog of potential deals continues to build and as things ease up, we should be in a good position to capitalize on those sales.

We currently don’t have a specific timeline of recovery but we believe 2018 in general will show modest improvement for diagnostic imaging. As we discussed on our last call, Philips Healthcare informed us in September that they would be cancelling their consolidated agreement with us with an effective date of December 31, 2017.

The activity related to Philips is contained within our MDSS reportable segment and included the following general components. Product sales, where we earned a commission from the sale of certain Philips branded products within the Upper Midwest region of the U.S. Installation revenue from the same products sold in the region.

Warranty revenues from certain products sold in the region, and revenues from post-warranty service contracts sold in the region. Because of the Philips cancellation, after December 31, 2017 we no longer have revenues from MDSS product sales.

Further, in conjunction with the sale of the MDSS service contracts that closed on February 1, after January 31, 2018, we expect to have no further MDSS revenue associated with installation, warranty or service contract revenue. Essentially after the first quarter of 2018, the MDSS reportable segment will no longer exist.

As we discussed on our last call, we have been carefully evaluating the opportunity of running the MDSS service contracts business outside of our relationships with Philips. We did consider all strategic options and ultimately determined that the best value for the company and our shareholders would be to sell the MDSS service contracts to Philips.

The sale did close without any issues and we utilized the proceeds to pay down a portion of our line of credit. As we move forward, we will focus on our core businesses, which will continue to generate revenue, profit, cash flow and grow into the future.

And like always, we will continue to look for opportunities that will contribute to our bottom line and enhance shareholder value from our three tier growth strategy for the company. Which are, number one, acquisitions.

Our goal is to acquire companies that fit within our business model of providing healthcare solutions on as needed when needed and where needed basis in a very financially disciplined manner. Number two.

Adding new services to our portfolio that we can provide to our current distribution channels and number three, organic growth within our existing portfolio of services and products. Now I would like to turn the call over to Jeff for his comments and a more detailed financial update for the quarter and year.

Jeff?.

Good morning, everyone. In the earnings release today and in my comments I will make references to both GAAP results as well as adjusted results. The adjusted results are non-GAAP and do not include non-recurring charges.

I will also make references to adjusted EBITDA which is a non-GAAP measure that further excludes depreciation, amortization, interest taxes and stock-based compensation. Finally, I will make reference to free cash flow which is a non-GAAP measure taking operating cash flows 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 release. Now I will give a summary of the quarter's activity.

Total revenue for the fourth quarter of 2017 was $30.9 million compared to $31.1 million for the same period last year. Our overall gross profit percentage in the fourth quarter of 2017 was 24.7% compared to 27.8% in last year's fourth quarter.

In diagnostic services, revenue and gross profit for the fourth quarter was $12.1 million and 14.8% compared to $11.8 million and 21.7% in last year's fourth quarter.

Our mobile healthcare business produce revenues and gross margin in the fourth quarter of 2017 of $10.7 million with the gross profit percentage of 11.2% compared to $11.3 million and 15.5% for the same period in the prior year.

Overall the revenue increase in our diagnostic services business was positively impacted by a higher volume of service days ran in the fourth quarter of 2017 compared to the prior year from both new business and higher volume from existing customers with some offset on lower average price per day.

For mobile healthcare, the year-over-year revenue change was primarily a result of lower provisional business, with some impact on our mobile route business from cancelation. We are continuing to work on initiatives focused on the increasing efficiency, utilization and growth from new customers within both of our service businesses.

In our diagnostic imaging business, revenue and gross profit for the fourth quarter of 2017 was $3.4 million and a 45.5% gross profit percentage compared to $4.2 million and 56.9% in the same period last year.

MDSS had revenue and gross profit of $4.8 million and 65.2% in the fourth quarter of 2017, compared to $4.0 million and 50% for the same period in the prior year. In our diagnostic imaging business, the lower overall revenue and change in gross margin was impacted by the volume and mix of cameras sold.

The volume was due in part to uncertainty around the Affordable Care Act and overall softness in capital spending. In MDSS, the change in revenue and gross profit percentage is mainly attributable to the timing and type of capital equipment sales.

Though we are pleased with the performance of the MDSS business unit, now that the product sales component has ended and our service contracts have been sold, we are focusing on our core services business as we move forward.

As Matt mentioned earlier, with the MDSS product sales ending on December 31, 2017 and the MDSS service contracts ending on February 1, 2018, the MDSS reportable segment as we have presented in the past will effectively be gone after the first quarter of 2018.

Our Form 10-Q in Q1 2018 and results will be modified to reflect this presentation as appropriate in our next update to you. As you all know there were some new tax laws passed in the fourth quarter of 2017.

Based on the changed corporate tax rate from 34% to 21% in the United States as well as updated forecast to recoverability of our net operating losses, we had some significant adjustments to the balance sheet presentation of our deferred taxes which is presented as income tax expense in our income statement.

Neither of these adjustments effect our ability to actually utilize our net operating losses as we move forward.

Moving on to bottom line results for the fourth quarter, adjusted net loss was $2.7 million or $0.14 adjusted loss per share compared to adjusted net income of $3 million or $0.15 adjusted earnings per share in the fourth quarter of last year.

Adjusted EBITDA was $2.8 million in the fourth quarter of 2017 compared to $5.4 million in the fourth quarter of last year. As of December 31, the outstanding balance under credit facility was $19.5 million and our overall net debt position including all cash and cash equivalents was $17.6 million.

As we have stated previously, we will continue to sweep all available excess cash daily to minimize our overall interest expense. Also as of December 31, 2017, we were in compliance with all our bank covenants.

As we discussed at the beginning of February in conjunction with our service contract sales in MDSS being sold to Philips for a gross sales price of $8 million, we agreed to reduce our overall revolver with Comerica by $5 million to a $20 million availability.

This reduction makes sense with the proceeds that we got from the sale is not expected to impact our operations whatsoever. And finally, as a reminder that we previously announced, our regular quarterly cash dividend of 5.5 cents per share that will be paid on February 28, 2018 to shareholders of record on February 15.

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

[Operator Instructions] Our first question comes from the line of Mitra Ramgopal from Sidoti & Company. Please proceed with your question..

First, on the medical imaging segment, sequentially we saw revenue of about $0.5 million but on the gross profit saw a decline. I was just wondering if there was any one time occurrences there..

So, Mitra, just to make sure I am clear.

Are you talking about diagnostic imaging?.

Mobile healthcare..

Good morning, Mitra. I think that there is a -- from the standpoint -- are you talking about the mobile healthcare unit or you talking about....

Yes. Mobile healthcare, I think in 4Q was $9.5 million, up about $0.5 million from 3Q but it looks like the gross margin came in a little..

There was a couple of impacts that we had in the fourth quarter mainly related to some delayed healthcare expenses that effected overall margins that happened in the fourth quarter. We did have that experience. We did have some volume challenges as well in some of our areas that were hit with some weather in the upper Midwest.

But we felt that all of these changes were very seasonal impacts in terms of when healthcare expenses come in and in terms of challenges that we normally run into in the fourth quarter..

Okay. That’s great. And I know obviously this is going to be your biggest segment and probably your biggest focus going forward. Just a couple of questions on it in terms of if you could share maybe some of the initiatives you have in mind to grow this segment.

And I know you alluded earlier to some operational or personnel changes you have made to right size the business in light of the MDSS divestiture. If you can give us a sense as to when we can start maybe seeing that impact..

Yes. We will start seeing that impact obviously year-over-year, we won't see it till next year but, yes, we are going to start seeing those impacts as we have implemented those changes. Those will be going throughout this first quarter so we should see some, obviously with severance and everything like that, that would correlate with those changes.

That will happen within this first quarter. So beyond the first quarter of 2018, we should see the impact of that right sizing based on the removal of the MDSS business. As far as the outlook for the mobile businesses. I feel really good about the opportunities that we have.

I feel like now especially within the mobile healthcare segment, we have had a full year under our belts. We, I guess, are integrating that business into Digirad. We had to make some personnel changes.

As we had mentioned earlier in 2017 and we had to ship some functions and move some more focus into our interim sales efforts within mobile healthcare and we are really starting to see the benefits of those changes and we are excited to see what's happening in 2018 here in the first quarter compared to last year in the first quarter.

So funnels are full, contracts are getting sold and signed, and we feel positive about our mobile healthcare business. As well as our DIS and our diagnostic imaging businesses as we start 2018..

No. That’s very helpful. I know you talked also about looking longer term in terms of adding some new services, potentially expanding the product line etcetera. I was just wondering if there are any areas in particular you really feel you need to prioritize or look into at this point..

Yes. Right now really the focus is on what we have to sell. So we are really concentrating on our DIS segment. We are seeing, taking advantage of the portability and the mobility of the use of our cameras in that service. And really getting our arms around our MRI and PET/CT services within our mobile healthcare units.

So really feel like there is opportunity in those areas and we are going to continue to focus on those. We will be opportunistic though, as things come up and we are continuing to look for other services that we could fold into our current infrastructure. But at this point those are too early to really comment on.

Really the gist is that we are really focused on what we have and trying to maximize our current resources..

Okay. And then, Jeff, just a couple of quick questions on numbers. If I look at the ARs at the end of the year, it seemed like it popped up a little. I was wondering if anything in particular drove that and also if you can give us a sense as to how much you have in terms of NOLs at the end of the year..

Yes.

And sorry, to be clear, Mitra, did you say accounts receivable went up a little bit?.

Yes..

Okay. Accounts receivable went up just based on timing of sales in particular on the closing out of the MDSS business and the receivables we have from those commission from the sales. So nothing unusual. This is a little cyclical timing going on there.

And remind me of your other question?.

The NOLs in terms of the end of the year.

Where you stood on that?.

Yes. We are still kind of in the mid $80 million range or our operating losses that we can utilize as we go forward, obviously I think many companies reported big tax adjustments related to tax law change.

We did have to evaluate our NOLs from an accounting standpoint, the rules that are prevalent for accounting on recoverability of those and so there is some adjustments related to our NOLs, related to that. But outside of that, our NOLs remain fully intact and available to utilize to offset future taxable income.

So there wasn’t really any change from an IRS standpoint..

So at least for the next few years, you have enough to sort of, there will be a discrepancy in terms of the cash taxes versus the effective rate you are incurring..

Yes. We are still going to be very low on a cash tax rate, absolutely..

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back over to Matt Molchan for closing remarks..

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

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