Risa Lindsay - IR Matt Molchan - President & CEO Jeff Keyes - CFO.

Eric Gomberg - Dane Capital Keith Hinton - Sidoti.

Welcome to the Digirad Corporation Fourth Quarter And Year-End 2014 Call. [Operator Instructions]. I would now like to turn the conference over to Risa Lindsay. Thank you. Please go ahead..

Thank you, Brenda. Thank you all very much for joining us this morning. If you didn’t receive a copy of our release and would like one, please contact our office at (858) 726-1600 after the call, and we would be happy to get you one. Also, this call is being broadcast live over the web 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 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 at 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 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 be discussing the 2014 fourth quarter and year-end 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 and year-end 2014 results conference call. I'm excited to report that we had another excellent quarter and also wrapped up a record year for Digirad.

This quarter we again generated double digit revenue growth for the fourth quarter in a row compared to the prior year and closed out the most profitable year in Digirad's history. In addition I'm extremely pleased about our other announcement today, the acquisition of MD Office Solutions.

MD Office Solutions like our DIS business is a mobile nuclear diagnostic imaging provider. They are based in Northern California. The owners of MD Office have built a solid business and have a solid reputation in the industry and we’re very excited to have their operations and employees join the Digirad team.

MD Office's operations are expected to add approximately $2.9 million in annual revenue. It opens up a market that we’re not currently in that is very densely populated.

Later on Jeff will add some more color on the operational and transaction details but let me just say again we’re very excited about this acquisition as it is exactly the type of business we have been talking about bolting onto our current business.

Now moving on to our results, revenues for the 2014 fourth quarter were $14.1 million, an increase of 13% over last year's fourth quarter which includes the results of our acquisition of Telerhythmics.

This overall revenue increase like last quarter is very exciting as it shows both an increase from our previously announced acquisition strategy as well as organic growth from our core business. During the quarter we saw organic growth primarily from our diagnostic imaging business which had an excellent year-over-year growth of 13%.

Based on the timing of holidays and other factors in 2014 are traditional diagnostic services was essentially flat year-over-year. Overall we have closed out the year with a 13% consolidated revenue growth.

Year-over-year including 10% growth in our diagnostic imaging business and a respectable 3% year-over-year growth rate in our traditional diagnostics services business excluding the impact of Telerhythmics.

As we have mentioned previously we’re also continuing to invest in our sales and marketing programs for these businesses as well which we believe will help produce even greater returns going into 2015.

I'm also pleased to announce that we’re very nearly complete with our one year integration plan for Telerhythmics, our 24 hour cardiac event monitoring service that we acquired in March of 2014.

During the quarter we have seen some softness in some of our customers at Telerhythmics which was mainly planned however with our integration efforts at Telerhythmics is nearly complete we’re very bullish on our ability to grow this business in 2015 and beyond.

As a reminder our overall corporate strategy is to focus on three main areas for growth, area number one, acquisitions. Our goal is to acquire companies that fit within our business model of providing diagnostic products and healthcare related services on an as needed, when needed and where needed basis in a very financially disciplined manner.

Area number two, adding new services to our portfolio that we can provide through our current distribution channels and area number three, organic growth within our existing portfolio of services and channels. Finally, before I turn the call over to Jeff I would like to note the other important item covered in our press release today.

Our 2015 financial guidance, our entire team is very excited about our expected year-over-year growth rates for 2015 and we’re committed to making these results a reality as we progress throughout the year. In particular I'm excited about the potential growth of Telerhythmics, MD Office as well as other potential acquisitions.

There is still a lot of companies out there that can fit within our services model and we continue to talk to potential targets. Now I would like to turn the call over to Jeff.

Jeff?.

Thanks, Matt. Good morning everyone. In the earnings release 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 such as those associated with restructuring activities or purchased intangible asset amortization.

In addition I will make references to adjusted EBITDA which is also a non-GAAP major 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 a reconciliation of our results on a GAAP versus non-GAAP basis in the earnings release today. I will start with a brief summary of our quarter's activity. As Matt noted total revenue for the fourth quarter of 2014 was 14.1 million compared to 12.5 million for the same period in 2013.

Revenues for diagnostic services which includes a recent Telerhythmics acquisition were 10.4 million compared to 9.3 million for the fourth quarter of 2013. Diagnostic imaging revenue was 3.7 million for the fourth quarter of 2014 compared to 3.3 million in the fourth quarter of 2013.

Our overall gross profit percentage in the fourth quarter of 2014 was 30.3% up from 29.4% in the fourth quarter of 2013. In diagnostic services the gross profit percentage for the fourth quarter of 2014 was 24.2% compared to 25.5% in the 2013 fourth quarter.

In the diagnostic imaging business the gross margin percentage in the fourth quarter of 2014 was 47.4% compared to 40.7% in the 2013 fourth quarter. Overall the gross profit percentage in diagnostic services business was impacted by planned integration efforts of our Telerhythmics business as well as some of the softness that Matt mentioned.

In diagnostic imaging we enjoyed year-over-year margin expansion based on reduced manufacturing cost, the benefit of some previously reserved inventory releases and higher year-over-year revenue and product mix.

At the end of December, cash and cash equivalents and available for sale for securities totaled $22 million which was a slight increase from the September 30 balance. During the quarter, the business again produced a good amount of cash for which we returned some of that cash to our shareholders and also invest in our business.

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 dividend.

Moving onto the bottom line results for the fourth quarter, adjusted net income was 0.9 million or $0.05 per diluted share which was the same for both adjusted income and adjusted earnings per share for the same period in the prior year.

Our year-over-year results reflect at our recent investment in additional sales and marketing efforts in both businesses as we continue to drive efforts for growth in the future as well as our integration plan for Telerhythmics.

Adjusted EBITDA, another non-GAAP major we utilized to monitor performance was 1.5 million for the fourth quarter of 2014 compared to an adjusted EBITDA of 1.3 million for the same period in 2013.

As a reminder we do experience some seasonality in our business and notwithstanding other factors, the fourth and the first quarters of our year are slower quarters with the second and third quarters being our higher revenue quarters.

Of course we always experience some volatility in revenues and earnings based on the timing of our nuclear imaging camera sales. As we close out the year I'm also excited to announce that we have started to utilize some of our $95 million in federal net operating losses.

As we file our 2014 tax returns we expect to utilize approximately 2 million of these NOLs and expect to utilize more as we move forward into 2015 and beyond. Next as we announced this morning and Matt mentioned earlier, we close on the acquisition of MD Office Solutions yesterday.

Total upfront consideration for this transaction was 610,000 shares of Digirad common stock.

Following the conclusion of transaction related cost in a very short integration and transition period we expect this acquisition to be accretive immediately on an adjusted income and EBITDA basis which includes the issuance of the common stock for the upfront consideration.

The transaction does also include potential cash earn out of upto $400,000 over the next three years based on financial performance of the business unit. We also announced today financial guidance for the full year of 2015 which includes the expected results of MD Office.

Overall in 2015 we expect to generate revenue between $61 million and $63 million non-GAAP adjusted diluted earnings per share between $0.19 and $0.21 per share and non-GAAP adjusted EBITDA between 6.5 million and 6.9 million.

As we move forward into 2015 we will provide update to each quarter on our expected full year guidance targets but we’re not presently providing quarterly guidance.

The company's non-GAAP financial measures adjusted diluting earnings per share excludes restructuring charges, acquired intangible assets, amortization and related tax impacts and the further in the case of adjusted EBITDA stock based compensation expense. We’re presently not expecting any restructuring activities in 2015.

You might have noticed that we filed a Form S3 Shelf Registration statement in January. This shelf allows Digirad to issue equity and debt instruments with a total value of upto $20 million. Let me make it clear that this shelf registration statement is merely a tool that Digirad has available to provide flexibility in the future.

This is not uncommon for public companies to file a shelf registration statement to provide flexibility and we’re no different. Should we have a need or purpose to utilize this shelf we have every intent that the resulting transaction will be accretive to all of our shareholders.

Finally we provided -- we previously announced early in February our regular quarterly cash dividend of $0.05 per share that was paid on February 23rd. Now I will turn the call back over to Matt..

Thanks, Jeff. I would like to close by saving we believe we’re on the right track for growth and we are excited about our future particularly as we move forward in 2015 which we expect to be a record year for profit.

We continue to believe that the trends in the healthcare market are moving toward our business model of providing healthcare as a service and technology on an as needed, when needed and where needed basis. Now I would like to turn the call back over to the operator, Brenda, for questions..

[Operator Instructions]. And our first question comes from the line of Eric Gomberg with Dane Capital. Please go ahead with your questions..

It looks like you’re paying just over five times EBITDA on a trailing basis on today's acquisition and I'm curious whether due to businesses growth trajectory which I hope you can discuss a little bit or cross selling potentially or cross take out synergies, if you would expect EBITDA improvement post any short term integration cost..

Let me take this, I will Jeff follow-up on it, but in terms of growth we feel very good about the area that they are in. North California obviously very densely populated, so we do see a lot of potential there.

We have kind of accounted for any types of changes, obviously we bought the company from a an individual who is very excited about Digirad's future that’s why -- we did this as a stock deal. But we do see a lot of potential in that area for growth.

Jeff, do you want to add anything to that?.

Eric, I think the only other thing that I would say is we expect over 500,000 of EBITDA. I think we have a little of flexibility as we move forward on how far that grow.

I think our main objective in the near term is just to stabilize the business and make sure that all customers remain with us as we move forward and we have every expectations that that will happen.

But again as Matt said, the Northern California is a very densely populated area and we think with our infrastructure and backbone that we can grow that overtime but the near term goal is to sustain the business as it is..

Both today's acquisition and Telerhythmics last year, it seems like you have had excellent price discipline in terms of acquisitions.

So I'm curious your -- if you could discuss maybe your current deal pipeline, what it looks like and if we should expect you would multiples kind of in the range of what you’ve paid and what would you expect in terms of price discipline going forward?.

Eric, I will say we’re definitely going to stick within that range that we committed to and when we first started talking about our acquisition strategy and that range 3 to 5 times EBITDA is the range that we’re currently operating in.

We do have a pretty, what I would say robust pipeline of targets out there but it's still a matter of timing and it's still a matter of ensuring that we can stick, you know that we do stick to the discipline that we have put in front of us.

So we feel there is a lot of companies out there where Digirad is the natural owner of in terms of providing these types of healthcare services on an as needed, where needed and when needed basis. So we do believe that we will continue to be successful within that range that we have put forward..

And just a couple more if I could. In your opening remarks you touched on the S3 and obviously paid for this with stock and based on your multiple and their multiple this looks very accretive.

Just wondering if the S3 is useful for things like today's acquisition or maybe more tax efficient for the seller to get stock rather than be cashed out and again if there would be any need for you to do an equity deal in today's prices, since it looks like your cash flowing and should be increasingly cash flowing in coming quarters..

Eric, I mean the S3 as I mentioned is mainly a tool that the company can use for flexibility. We saw an opportunity to get one file and have that in our toolkit of items so that we can utilize going forward. As far as this particular transaction issuing equity was the most sufficient mechanism for the owners. It provided a tax free exchange for them.

So it's very tax efficiency for them. We will have an S3 to register the shares that were issued as part of the transaction only those shares so we will see another filing go out there.

But as we move forward, yes, I mean, we look at every transaction and especially in the smaller situations on what is going to be the best conduit for the owners to get them what they need and in this particularly the tax free reverse merger was most appropriately mechanism but you guys can expect us to use kind of whatever we have within our means to facilitate a transaction closing and making it advantages to both the company and the former owners..

Okay. And then just one last thing, last year you didn’t provide full year guidance I don’t think until when you reported the second quarter and obviously those were numbers which you ultimately beat. So I'm curious what gives you confidence to provide full year guidance today and if we should expect that guidance for 2015 is similarly conservative..

I mean we started this mid-year last year -- we had a restructuring back in 2013, took us some time to fully get our new plans implemented and then the middle of last year we had the confidence to project going forward. I would say that and as that continues we feel very bullish about our abilities to project our business within the next year.

So we feel very confident about that. We give a range and that’s the range we hit for, we aim for obviously we would target ourselves at the high end but in terms of our confidence that’s why we give a range.

So our thought as a management team is that we want to give our shareholders an idea of where we’re taking the business that’s why we put this guidance together and we feel fully confident that we will end this year within that range that we have given you today..

[Operator Instructions]. Our next question comes from the line of Keith Hinton with Sidoti. Please go ahead with your questions..

My first question is regarding the expectations for Telerhythmics in 2015, I was wondering if you could kind of just talk a little bit broad strokes there about sort of what you’re expecting from that business versus what you did in 2015 and how much you’re expecting that to be responsible for the growth in the service segment and how much you’re expecting to be kind of truly organic?.

From our standpoint we’re bullish on Telerhythmics because now we have owned them for almost a year now, it's taken some time granted, it's taken a little bit longer than we would hope in terms of integrating the business through our sales force and training our sales force on event monitoring and whatnot but that has occurred and that has happened and now really beginning the end of the fourth quarter and into the first quarter we’re starting to see, we’re really starting to see benefits in terms of cross selling the Telerhythmics services into our existing customer base and that’s really where we have the excitement in 2015 about Telerhythmics.

So [Technical Difficulty] channels. So in terms of percentages of growth between the Telerhythmics and our traditional DIS business we both feel that both of them are in a good position. I feel like both companies are able to grow.

You know now we have something more that we can talk to our doctor, physician and healthcare groups about what Digirad can bring in terms of bringing more efficiency and more effectiveness to the healthcare system or to the doctor's office.

So we’re getting a lot of positive response from doctor's that like the fact that they can just go to one vendor to provide these types of services, cardiac event monitoring and nuclear cardiology imaging.

So I anticipate Keith that we will -- as this continues to be integrated, as it continues to -- we’re able to cross sell that we will be -- our anticipation is that we will be talking more and more about Telerhythmics and with our new acquisition with MD Office Solution same thing will happen, right.

So now we have a new group of customers mostly cardiology type customers who all outsource their event monitoring services and now MD Office Solutions is going to be able through Telerhythmics offer additional services. And let me just tell you the MD Office Solution team is highly efficient.

They are a great group who has built strong relationships up in the Northern California area. I have met with some of their customers and I will say that I can tell you that I think the cross selling up there will go smoothly once we get everyone trained on the delivery of the event monitoring service..

My next question was, I believe the first quarter of '13 had some issues with the margins in the diagnostic service area due to the weather and we have obviously had some poor weather up here in the North-East in this quarter as well.

I was curious if you had any expectation that margins or the revenue in the service segment was going to be depressed for that same reason and also whether that had any impact on the fourth quarter as well?.

Yes there was a little bit in the fourth quarter that occurs, it's mostly really -- the fourth quarter really were the holidays fell, you know that was the problem just having Thursday, Friday type holidays really, Christmas and New Year's that really affected our December.

But overall we know, the weather has been brutal, it hasn’t just been in the North East, it has been much like last year. It's been all over. I mean we had snow in Dallas last weekend. So it's been brutal.

We factored that in to our full year forecasting guidance, has the impact of the weather, but yes I would say the first quarter impact this year very similar to the first quarter impact that we had last year..

And last thing I had was obviously imaging had a really, really strong fourth quarter revenue and gross margins wise and imaging for the full year ended up about 10% I think that was the first year, it's been up in 5 or 6 years.

So I'm curious if you sort of see that as a sign of the demand for your cameras, kind of turning around or whether that was kind of just a function of order timing and things like that?.

Yes, I mean we definitely are also bullish on this part of our business as well but I will say that timing affects that business much more so than the other -- our businesses in terms of deal closings and shipments of cameras and what not because we’re strictly dealing a lot in this -- it's a strictly equipment type business selling mostly into hospital.

So depending upon just purchasing cycles and whatnot. So there is a timing factor but certainly much like we spoke about, the market is turning towards what Digirad offers and it's a complete offering, right, so our ability to provide a healthcare services and healthcare equipment.

It's a when we present to a healthcare customer whether they want to purchase or whether they want to lease or whether they want to rent camera we can offer them all of those different solutions whether we provide the actual personnel or they provide the personnel. You know that’s all part of the solution.

So I would say though just much like we have talked about, that the market is turning towards our offering of really injecting efficiency into the healthcare system, we’re seeing that with our camera. So we do expect continued growth in that division again in 2015..

Our next question comes from the line of [indiscernible] with B. Riley. Please go ahead with your questions..

Just had a question for you regarding this past quarter on the growth. Is it possible to give a little more color on where growth came from, the recent acquisition, same clients, new clients, a little more color..

Yes, I mean as we stated the growth in the quarter really was from our diagnostic imaging, our camera business is where we saw the majority of our growth in the quarter year-over-year. Of course also with the acquisition of Telerhythmics. So those were the two main areas where the growth came from in 2015 or in the fourth quarter of 2015.

As far as your question about the new acquisition and the customers like I said, I think that’s they are net new customers, that’s an area that we were not providing services in and now we will be providing services. So all those customers will be net new to Digirad which is exciting.

I don’t Jeff, was there any other color that you wanted to add?.

I think that’s just about exactly. I mean diagnostic services year-over-year was 13% and that’s essentially from the Telerhythmics acquisition but diagnostic imaging year-over-year 13% and yes just higher volume in cameras and the camera mix that we sold this year compared to last year..

Thank you. And it seems that we have no further questions. At this time I would like to turn the floor back over for closing remarks..

Okay, before we close today's conference call. I do want to thank all of our stockholders and other interested parties who joined us this morning and express our appreciation for your continued interest and support. I'm very excited about our potential in 2015 and beyond and Jeff and I look forward to discussing our results with you next quarter.

Take care and have a great afternoon..

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