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

Larry Haimovitch - HMTC Juan Molta - B. Riley & Company.

Greetings and welcome to the Digirad Corporation Second Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms.

Risa Lindsay. Thank you. You may begin..

Thank you, Melissa and 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 involved 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 2015 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 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 second quarter 2015 results conference call. The second quarter of 2015 was another good quarter for Digirad financially, with year-over-year revenue growth to 7%.

In addition the second quarter represents a quarter where we have spend a good amount of time and resources further investing in our businesses and it will continue to build a very bright future for our company. These investments are all across our businesses and range from operational and fixed assets to reviewing a variety of acquisition targets.

Within our diagnostic services business, I’m pleased to announce that we've completed our integration efforts for MD Office Solutions, the mobile nuclear diagnostic imaging business in Northern California we acquired in March of 2015. This business is an excellent example of a tuck-in acquisition we can make in our core business.

It also opened up for as a densely populated new market that we're actively working to grow further. Beyond MD Office Solutions our remaining diagnostic services business is performing well holding a steady and consistent revenue load year-over-year.

Our Telerhythmics business, which is also part of diagnostic services is continuing to grow from its first quarter 2015 levels, with the month of June in particular being a very good month for us. We continue to be excited about the growth prospects for Digirad overall, but in particular within our Telerhythmics business.

Diagnostic Imaging performed well this quarter with good and consistent results. We continue to work initiatives to augment and expand our camera sales opportunities, in particular in the international markets. During the period we were able to sell one unit internationally with a total of three units sold internationally so far this year.

While it is too soon to predict a normal and consistent volume of sales Internationally this is a promising area that we continue to push with our partners as we move forward and this could eventually grow into a regular revenue stream for us.

As I have stated in the last few quarter and will continue to state as we move forward, 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 to our current distribution channels and area number three, organic growth within our existing portfolio of service -- services, products and channels.

During the quarter we did spend a good amount of effort and resources reviewing potential acquisitions and have continued to be a number of interesting acquisition targets that are in various stages.

As we have stated before, the timing and size of these deals vary, but we believe there is a lot of opportunity as long as we can secure these deals at the right financial metrics. Finally, we're still very confident that we will achieve within our previously announced 2015 financial guidance ranges.

Now I would like to turn the call over to Jeff to give a more detailed financial update for the quarter.

Jeff?.

Thanks Matt and good morning, everyone. In the earnings release today and in my comments, I'll make reference 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 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 reconciliation of our results on a GAAP versus non-GAAP basis in the earnings news release today. I'll start with a brief summary of the quarter's activity. Total revenue for the second quarter of 2015 was $15.5 million compared to $14.6 million for the same period last year.

Revenues for Diagnostic Services, which includes the acquisition of MD Office Solutions in March of this year were $12.2 million compared to $11.3 million for the same quarter last year. Diagnostic Imaging revenue was $3.4 million for the second quarter of 2015 compared to $3.3 million in the second quarter last year.

Our overall gross profit percentage in the second quarter of 2015 was 30.7%, which was down slightly compared to the 30.9% in last year's second quarter. In Diagnostic Services, the gross profit percentage for the second quarter of 2015 was 24.4% compared to 27.7% in last year's second quarter.

In the Diagnostic Imaging business, the gross margin percentage in the second quarter of 2015 was 53.5% compared to 42.2% in the prior year's second quarter.

Overall, the gross profit percentage in the Diagnostic Services business was impacted by some pricing pressure we have experienced in some markets along with the investment in our business that Matt mentioned.

In Diagnostic Imaging, we enjoyed year-over-year margin expansion based on reduced manufacturing cost, primarily from the benefit of some previously reserved inventory releases as well as the mix of cameras sold.

As a reminder, we do experience some seasonality in our business and notwithstanding other factors the fourth and the first quarters are our slowest 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 the sales of our nuclear imaging cameras. At the end of June, cash and cash equivalents and available for sales securities totaled $21.7 million, which was an increase from our March 31 balance of $20.9 million.

During the quarter, our businesses produced good cash flow for which we utilized some of our cash to pay our regular quarterly dividend. Moving on to the bottom line results for the second quarter, adjusted net income was $1.1 million or $0.06 per diluted share which was essentially flat compared to the second quarter last year.

Again as Matt had mentioned earlier, we did make some investments in our business along with efforts in reviewing potential acquisition during the quarter of which there was some bottom line impact. We do expect these investments to help grow of the business in the future with a positive impact to our bottom line.

Adjusted EBITDA was $1.7 million for the second quarter of 2015 an increase from the $1.5 million in the second quarter of last year.

As Matt mentioned earlier as well we do expect to achieve within our financial guidance range we announced earlier this year, which was to produce revenue between $61 million and $63 million, adjusted earnings per share of $0.19 to $0.21 per share and adjusted EBITDA of $6.5 to $6.9 million.

Finally as we also announced today, our regular quarterly cash dividend of $0.05 per share was declared and will be paid on August 31 to shareholder of record of August 21, 2015. Now I would like to turn the call back over to Matt..

Thank you, Jeff. I would like to close by saying we continue to believe we’re on the right track for growth in all of our core businesses. We've the right overall model for the healthcare industry today and where we see it moving in the future.

Further, we're excited about our recent acquisition and the potential of other deals we're seeing in the market. These are exciting times for Digirad, and we're taking every step to capitalize on these opportunities. Now, I would like to turn the call over to the operator for questions.

Melisa?.

Thank you. [Operator Instructions] Thank you. Our first question comes from line of Larry Haimovitch with HMTC. Please proceed with your question..

Good morning, Matt. Good morning, Jeff..

Good morning..

Hi Larry..

Couple of questions for Matt and question for you Jeff. Matt there was a couple of 8-K filings that I wanted to discuss with you, one I did discuss with Jeff maybe a week or two ago, the investment you have made and a foreign company to secure, it seems to secure some better supply for technician.

I wonder if you could kind of discuss your thinking and philosophy on that deal..

Yes, Perma-Fix Medical actually the parent company to Perma-Fix Medical is Perma-Fix Environmental, which is local Atlanta-based business.

Yes this was an opportunity that we came across and they have developed an interesting process that could dramatically decrease the pricing on rated pharmaceutical that we use in our DIS mobile nuclear service business.

And we thought that there was some opportunity for us to make an investment to also partner with Perma-Fix Medical to help them on a few things through the process to bring their process to commercialization and we're very excited about the potential opportunities with our partner in Perma-Fix Medical..

Matt, what the main driver for that deal? Was it to secure supply? Was it to secure cheaper supply? Was it the investment potentially that Perma-Fix someday could be worth a lot more money and you might mix some on the investment? Can you characterize what was most important to you about that deal?.

Yeah, you hit on all three. All three areas were important to us. I think the most important piece that we thought was the most interesting piece is, that there was opportunity for additional supply through this new process and that we could potentially get that at a -- or we would get that at a cheaper price.

As we look at our cost in our DIS business, our second largest cost is the purchase of radiopharmaceuticals and so that we felt that was a smart move to help secure our future gross margins..

Okay, second question there was another 8-K filling may be about a week ago relating to the change in the share -- the need for shareholder approval or I can't remember exactly but I’m sure you know what I’m talking about, that I thought was interesting, can you discuss that?.

Yes so, couple years ago, when Digirad was going through a transition moving from, really moving models to a model that was really more based on providing healthcare solutions rather than simply products.

As we’re going through that transition we were in discussion with a number of our shareholders and one of the things that as we talked about our one of our growth strategies being acquisitions and we self imposed a limit on the size of the acquisitions that we would contemplate.

This was all self imposed by Digirad and our Board and we that since the past two years as we continue to look at opportunities, we felt like we no longer and has we had success with our acquisitions and our ability to stick with our discipline that we’re using in these acquisitions we felt like that the safeguard was no longer necessary.

So we did recently eliminate from that restriction which would allow us to look at potentially larger acquisitions. Obviously though we would still continue to use the same discipline that we have been using in our previous acquisitions..

Great, thanks.

And Jeff quick question for you in your prepared remarks you mentioned something about a little bit of price pressure, could you discuss that a little bit more please?.

Sure. In certain of our markets we compete with local competitors. It’s going to vary market-by-market, but we have been in over the last few quarters been experiencing some price pressure in some of these markets, which has impacted our operations to a certain extend.

We are working through other strategies in those markets to provide our products and services in alternative ways to differentiate ourselves even more than what we believe we are differentiated right now in our service and commitment to our customers to combat that price pressure.

But it is in certain markets, we did see some of it in the second quarter. We have seen some in the past quarter, but we’re working through the process to successfully compete on those levels and I wouldn’t say that it’s a high concern, but we have been saying in..

So is that you’re losing business because they're cutting price or because you’re having to cut price to meet their lower prices is what the impact is?.

We are having to lower some prices in some markets to be competitive and keep our customers but we’re actually seeing some higher volumes -- higher volume across all of our businesses.

So there is a mix of price and volume concepts going on, but we have been working on some different business model changes in certain markets to be able to differentiate and -- provide services more on just volume of pricing for rate of pharmaceuticals and days of services and we’re still deploying that, but it is really Larry is a market by market concept..

Okay. Great. Thank you very much..

Thank you Larry.

Thank you. Our next question comes from the line of Juan Molta with B. Riley & Company. Please proceed with your question..

Hi, good morning Matt and Jeff..

Good morning Juan..

Yeah, a few questions for you.

From a high level, you mentioned Q2 and Q3 are you seasonally strong quarters, do you have any visibility that you can provide into Q3 at this time?.

We normally look at it on an annual basis. So we don’t really put a forecast forward for our third quarter, but we continue to see a lot positive like we mentioned, lot of positive trends.

We’re seeing good things happening within our Telerhythmics business that’s very promising and we’re also feeling pretty good about all the efforts that we have been putting forth over the past couple of years and we’re starting to see some payoffs in the product side and on our services side.

So very excited, but as far as particulars we have not -- we don’t really give Q by Q guidance there..

Okay.

Fair enough and regarding Telerhythmics, you mentioned something in your remarks, is it possible to maybe get a little bit more color you mentioned in the last quarter that the integration efforts were finished in Q1, if possible give a little more color if you have revenues on hand at this time if that is possible to share?.

Yes we don’t have that details something that we do share because it does not make it -- we're excited about Telerhythmics. It's a smaller portion of the business compared to our overall mobile nuclear business and our products business.

But I will say this that in this year, we have seen growth -- 25% growth in our enrolment since the beginning of the year. A lot of that is due to our ability to be able to push the Telerhythmics services through our existing distribution channels our existing relationships that we have built over the years in providing our services.

So we feel very good about the growth potential Telerhythmics and our ability to be able to offer this service and execute on this service to our existing clientele. So that's what we're seeing a lot of our growth in that business..

Okay, perfect that's good to hear and then regarding MD Office, was going to ask you, can you at least say if there is growth from that business there relative to the quarter when it was an independent company year-over-year?.

Jeff, I don't know if you have details, but can you..

Juan I think what we could answer on MD Office is it holding steady/slight increase to where it was traditionally on a quarter-by-quarter basis. Our main objective for MD Office really in the first couple of quarters of ownership are A, getting it integrated which Matt mentioned that we had completed.

And B, getting it stabilized to make sure that we don’t lose any of the existing customers.

As we go forward we're certainly going to be attacking those growth efforts and they have had slight growth compared to traditional amounts, but it wasn’t the near term focus to immediately grow them, but it will be the mid and longer term initiative for the business..

Okay.

Very good if I can go back into you, and ask a couple of more about your cost, whatever you think is best?.

I’m sorry.

I didn’t understand your question here?.

Yes I have a couple more about the cost, about the operating expenses, but I don’t know if I can ask them right now or let somebody ask a question and come back?.

It’s fine, go ahead..

Yes so you mentioned regarding the DIS cost of sales, you mentioned the pricing pressure and some local markets and investments you're making into the business, that draw your gross margin down and is the gross margin level there at 24%, is that something that we should model forward more or less at that level or do you expect some recovery there as those investments bear fruit maybe later this year?.

I would say that our goal or targets for DIS in terms of gross margins is 25%, 26% business that's where we see that business in the long term in its current stage. So I would say that you would see some recovery to those levels Juan based on what we're working on..

Okay.

Perfect and then depreciation and amortization relative to prior quarters that increased a little bit, can you attribute that to something in particular?.

It's mostly through the growth that we’re having within the Telerhythmics business as we grow that business, it does require us to purchase additional equipment for monitoring..

Okay.

Perfect all right and back to the question the first gentlemen asked the Perma-Fix collaboration, do you at this time have any milestones that you can share with us in terms of when does developments you expect to start bearing fruit and you will see some cost benefits?.

Yes as far as specific milestone obviously we are -- I don’t know if I am going to those details, but I will say that we're looking at this is an investment that has a we're talking two year type or more type, two to three year type operational.

We're hoping that we're working towards to speed that up, but we would say that that's the ballpark for that business. There is still a variety of things that they need to do. They've got a great -- they've had some very good success.

I think if you read some of their press releases, they've had good success in certain tests that they've made with their process and we're seeing continued success there, but we're still looking at a two-year horizon for that is my best understanding for that in terms of operation.

Now that could depend on a lot of -- that could change based on a lot of different factors, but that's -- at this point that's my answer to that..

Okay. Perfect.

And one last one which is an industry question it maybe a little early to answer but the consolidation with the health insurance companies like the Cigna and Aetna, what type of impact do you expect for your business and I know it can be a little early, but have you considered that?.

Obviously there would be certain impacts that are still unknown but we would say at this point a lot of we don't see any positives or any negatives immediate positives or any immediate negatives, most of those, those health insurance companies those providers they really do operate very similar in their treatment of imaging services and monitoring services.

So we see -- we don't really see a tremendous difference whether it's three or four or one or two..

Got it. All right. Thanks guys. I have a couple more, but I'll go back into queue and if there is time, I can ask a couple more..

Okay..

Thank you..

Thank you. [Operator Instructions] Our next question comes from the line of [indiscernible] with B Riley. Please proceed with your question..

Guys I'll just keep them brief.

Regarding the diagnostic imaging business, wanted to ask do you, how has pricing remained there and have you seen any general changes in the marketplace there and you mentioned you're making sales into international and it's still unknown, but you're seeing progress, but what about the domestic market?.

Yes, as far the domestic market, we have seen pick up. Last year we saw a pick over the previous year. This year we're projecting that we're going to sell more cameras this year than we did last year.

I think there is our ability just like on the services side, we see more and more healthcare systems taking advantage of the opportunity that our unique cameras provide in terms of not only the quality of imaging, but the mobility of imaging and our ability for our technology to be used in a variety of different ways.

We're seeing continued market acceptance of the Digirad cameras and we foresee that to continue to happen into the future. So we're -- so definitely excited about the business. I think that we will continue to see our prices hold steady.

We're not seeing the same sort of price pressures that we've seen in our services business as Jeff had mentioned earlier because in a lot of cases, with our cameras because of the uniqueness we're definitely able to get the prices that the value demand..

Okay. Perfect, very good. So that's all for me. I appreciate it guys. Thank you very much..

Thank you, [Von] [ph] appreciate you..

All right..

Thank you. Ladies and gentlemen, we've come to the end of our time for questions. I would like to turn the floor back to Mr. Molchan for any further comments..

Okay. Thank you, operator. Thank you, Melisa. Thank you all of our stockholders and other interested parties who joined us this morning. We appreciate your interest in Digirad, and Jeff and I look forward to discussing our results and business update with you next quarter. Have a great afternoon..

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