DRAD Digirad Corporation

Digirad Corporation (NASDAQ:DRAD), a leading provider of cardiovascular imaging services and solid-state nuclear medicine imaging products to physician offices, hospitals and imaging centers, today announced financial results for the third quarter and first nine months of 2006. Review of Operations "We made good progress during the quarter in many areas that are key to our drive to profitability," said Chief Executive Officer Mark Casner. "Gross margin improved in our product business compared to last year's third quarter, and the consolidated net loss declined by nearly 25%. Revenue from the sale of our proprietary nuclear imaging systems met our expectations for the period, and DIS leasing service revenue was only slightly lower than we had forecasted. We attribute the shortfall in DIS revenue primarily to a sharper than anticipated seasonal slowdown in demand this past summer." "Throughout this year, we have maintained our focus on reducing our cost structure as we drive toward profitability. In earlier releases we described our success in renegotiating our pharmacy contracts and improving our hub operations. These efforts continued in the third quarter, resulting in headcount reduction and other cost saving measures. We continue to evaluate the productivity of our hubs and will selectively close and open hubs based upon achieving our performance objectives." Casner continued, "Our DIS camera upgrade program continues, with eight triple-head cameras now in operation in our 83-unit DIS fleet. We are pleased by the performance of these cameras. As we anticipated, our new system's high-definition solid-state (HDSD) digital detector technology and other advanced features provide a more comfortable experience for the patient, and more rapid throughput and excellent image quality for the physician-user. Another important benefit is that the XPO platform reduces our cost per system compared to previous designs. "In our product business, we sold 17 cameras during this year's third quarter compared to 14 in the third quarter of 2005, and we anticipate shipping a comparable number of systems in the fourth quarter. We have noted that the cardiac nuclear market is under pressure this year, a trend that started last year and is expected to continue. While our sales numbers remain somewhat flat, they do represent an increase in market share. We believe the release of our advanced Cardius XPO line of imaging systems for nuclear cardiology will help us sustain this increase in market share. "We believe that these improvements to our operating platform and cost structure, and the advanced technology and performance we offer in both our DIS and product businesses, are moving us toward our goal of sustainable revenue and earnings growth. We currently expect Digirad's performance to improve in the fourth quarter compared to the third, and we look for further improvements in 2007." Third Quarter Results For the three months ended September 30, 2006, consolidated revenues decreased 3.7% to $16.7 million compared to $17.4 million for the third quarter of 2005. DIS revenue decreased 9.6% to $11.4 million for this year's third quarter. This compares to DIS revenue for the third quarter of 2005 of $12.6 million, which included stress agent revenue of approximately $1.1 million. DIS service days for the third quarter of 2006 were 3,262 compared to 3,471 for the same period last year. As previously announced, beginning in June 2006, DIS phased out providing stress agents used in some imaging procedures. Instead, DIS' physician customers now provide these agents. Management estimates that this change reduced DIS revenue in the third quarter by approximately $1.1 million compared to what it otherwise would have been under the original delivery model. "We believe the overall impact will be to reduce DIS revenue by about $2.6 million for 2006 as a whole, but to increase DIS gross margin by 50 to 100 basis points with little to no impact on DIS net earnings," Mr. Casner said. Product segment revenue, which includes sales of gamma cameras, upgrades, accessories and maintenance revenue, increased 11.9% to $5.3 million for the third quarter of 2006 versus $4.7 million for the third quarter of 2005. Consolidated gross margin for the three months ended September 30, 2006 increased to 24.5% from 19.6% for the third quarter of 2005. DIS gross margin was 23.8% for this year's third quarter compared to 26.9% for the third quarter of 2005. "As previously announced, we changed the focus and responsibilities of some of our DIS personnel towards increased operational as opposed to administrative tasks as we seek to drive each DIS hub to profitability. Accordingly, beginning in the third quarter, some personnel costs previously accounted for as general and administrative expense were reported as cost of goods sold. This resulted in approximately $300,000 in additional cost of goods sold in the period," Mr. Casner explained. Product segment gross margin improved to 25.9% for the third quarter of 2006 versus 0.3% for last year's third quarter. The favorable impact on gross margin in this year's third quarter of higher sales volume, operational efficiencies and lower camera maintenance costs was offset by lower average selling prices related to product mix, and a $250,000 additional reserve against inventory in anticipation of the transition to the XPO series. Results for the third quarter of 2005 reflected $700,000 of excess capacity costs due to low production volumes in that quarter. The net loss for the third quarter of 2006 was $2.1 million, or $0.11 per share, including stock-based compensation expense of $344,000. This compares to a net loss of $2.8 million, or $0.15 per share, for the third quarter of 2005, which included stock-based compensation expense of $103,000. Cash and equivalents and securities available for sale at September 30, 2006 were $44.1 million compared to $49.5 million at December 31, 2005. Net receivables were $7.2 million at September 30, 2006 compared to $8.1 million at December 31, 2005. Net inventories were $5.8 million at September 30, 2006 compared to $5.1 million at December 31, 2005. Nine Months Results For the nine months ended September 30, 2006, consolidated revenues increased 7.7% to $54.7 million compared to $50.8 million for the first nine months of 2005. DIS revenue was essentially unchanged at $38.0 million compared to $38.2 million last year. Product revenue increased 32.1% to $16.7 million from $12.6 million. Overall gross margin for this year's first nine months improved to 25.9% versus 23.6% for the same period last year. The net loss for the first nine months of 2006 was $6.1 million, or $0.33 per share, which includes stock-based compensation expense of $1.4 million. This compares to a net loss for the first nine months of 2005 of $6.8 million, or $0.37 per share, including stock-based compensation expense of $411,000. Fourth Quarter and 2006 Guidance Management currently expects DIS revenue for the fourth quarter ending December 31, 2006 in the range of $11.1 million to $11.5 million, which would include the impact of the change in the delivery of stress agents; product revenue between $4.9 million and $5.3 million; and consolidated revenues between $16.0 million and $16.8 million. The consolidated loss for the fourth quarter is expected to be between $1.1 million and $1.6 million, including estimated stock-based compensation expense of $335,000. For 2006 as a whole, the Company now anticipates consolidated revenues in the range of $70.7 million and $71.5 million, consisting of DIS revenue between $49.1 million and $49.5 million (including the impact of the stress agent delivery change) and product revenue between $21.6 million and $22.0 million; and a consolidated loss between $7.3 million and $7.8 million, including estimated stock-based compensation expense of $1.7 million. Conference Call Digirad has scheduled a conference call at 11:00 a.m. ET today. A simultaneous web cast of the call may be accessed at the Investor Relations page of www.digirad.com. A replay will be available for one year at this same Internet address. A telephone replay will be available for 48 hours after the call by dialing (800) 642-1687, reservation #8452379. About Digirad Digirad Corporation develops, manufactures and markets solid-state, digital gamma cameras to hospitals, imaging centers and physician offices. Digirad offers a comprehensive line of solid-state nuclear gamma cameras that produce high-quality images for use in the detection of many medical conditions, including cardiovascular disease. Digirad's cameras are unique as their lightweight and compact design allows them to fit easily into small office spaces. Digirad's wholly owned subsidiaries Digirad Imaging Solutions and Digirad Imaging Systems offer a comprehensive, mobile imaging leasing and services program for physicians who wish to perform in-office nuclear cardiology procedures but do not have the patient volume, capital or resources to justify purchasing a gamma camera. For more information, please visit www.digirad.com. Digirad�, Digirad Imaging Solutions�, and Cardius� are registered trademarks of Digirad Corporation. Forward-Looking Statements Digirad cautions that statements included in this press release that are not a description of historical facts are forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts and use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with a discussion of future operating or financial performance or events. Examples of such statements include the statements regarding our expectations of improved performance from our upgrade of the DIS fleet to the mobile version of the Cardius 3 XPO system, our expectations of achieving reduced operating costs as a result of headcount reductions, hub closures and other cost cutting measures; our statements regarding increasing our market share in a declining market; statements regarding the expected financial impact of our decision to discontinue offering stress agents and, in general, our anticipated financial results for the fourth quarter of 2006, 2006 fiscal year and our anticipated further performance improvement in 2007. The inclusion of these and other forward-looking statements should not be regarded as a representation by Digirad that any of its plans will be achieved. Actual results may differ materially from those set forth in this press release due to the risks and uncertainties inherent in Digirad's business including, without limitation: the degree to which personnel changes and related disruptions in our business activities may affect Digirad's products, customers, work force, suppliers, and our overall business prospects and operations; the degree to which Digirad's camera systems and related services will be accepted by physicians and hospitals some of whom may experience reliability issues or technical problems; the ability of Digirad to effectively market, sell and distribute its medical devices, and related services given its limited capabilities in these areas; Digirad's ability to manage risks relating to product liability, warranty claims, recalls, property damage and personal injury with respect to its imaging systems; and other risks detailed in Digirad's Securities and Exchange Commission filings, including its Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission. Given these uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. All forward-looking statements are qualified in their entirety by this cautionary statement and Digirad undertakes no obligation to revise or update this press release including the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Digirad Corporation Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited) � � Three Months Ended Nine Months Ended September 30, September 30, 2006� 2005� 2006� 2005� Revenues: DIS $ 11,388� $ 12,604� $ 38,008� $ 38,166� Product 5,314� 4,748� 16,671� 12,618� Total revenues 16,702� 17,352� 54,679� 50,784� Cost of revenues: DIS 8,681� 9,208� 29,080� 27,115� Product 3,937� 4,735� 11,450� 11,692� Total cost of revenues 12,618� 13,943� 40,530� 38,807� Gross profit 4,084� 3,409� 14,149� 11,977� Operating expenses: Research and development 1,036� 914� 3,249� 2,767� Sales and marketing 2,272� 1,825� 6,797� 5,560� General and administrative 3,455� 3,742� 11,689� 11,255� Amortization of intangible assets 6� 139� 35� 173� Total operating expenses 6,769� 6,620� 21,770� 19,755� Loss from operations (2,685) (3,211) (7,621) (7,778) Interest and other, net 551� 384� 1,480� 929� Net loss $ (2,134) $ (2,827) $ (6,141) $ (6,849) Net loss per share - basic and diluted $ (0.11) $ (0.15) $ (0.33) $ (0.37) Weighted average shares outstanding: Basic and diluted 18,782� 18,690� 18,751� 18,390� Stock-based compensation expense is included in the above as follows: Cost of DIS revenue $ 33� $ 23� $ 125� $ 84� Cost of Product revenue 24� 9� 66� 45� Research and development 41� 15� 129� 54� Sales and marketing 89� 8� 237� 39� General and administrative 157� 48� 832� 189� Digirad Corporation Condensed Consolidated Balance Sheets (in thousands) Sep. 30, Dec. 31, 2006� 2005(1) (Unaudited) Assets Cash and cash equivalents $ 4,368� $ 16,303� Securities available-for-sale 39,732� 33,202� Accounts receivable, net 7,158� 8,132� Inventories, net 5,810� 5,136� Other current assets 1,857� 1,687� Total current assets 58,925� 64,460� Property and equipment, net 9,108� 9,582� Intangibles, net 439� 402� Restricted cash 60� 60� Total assets $ 68,532� $ 74,504� Liabilities and stockholders' equity Accounts payable $ 2,161� $ 2,152� Accrued compensation 2,857� 2,585� Accrued warranty 824� 825� Other accrued liabilities 3,729� 4,614� Deferred revenue 2,805� 2,858� Current portion of long-term debt 319� 766� Total current liabilities 12,695� 13,800� Long-term debt, net of current portion 162� 368� Deferred rent 313� 348� Total stockholders' equity 55,362� 59,988� Total liabilities and stockholders' equity $ 68,532� $ 74,504� � (1) The�condensed�consolidated�balance�sheet�as�of�December�31,�2005�has�been derived from�the audited�financial�statements�as�of�that�date. Digirad Corporation (NASDAQ:DRAD), a leading provider of cardiovascular imaging services and solid-state nuclear medicine imaging products to physician offices, hospitals and imaging centers, today announced financial results for the third quarter and first nine months of 2006. Review of Operations "We made good progress during the quarter in many areas that are key to our drive to profitability," said Chief Executive Officer Mark Casner. "Gross margin improved in our product business compared to last year's third quarter, and the consolidated net loss declined by nearly 25%. Revenue from the sale of our proprietary nuclear imaging systems met our expectations for the period, and DIS leasing service revenue was only slightly lower than we had forecasted. We attribute the shortfall in DIS revenue primarily to a sharper than anticipated seasonal slowdown in demand this past summer." "Throughout this year, we have maintained our focus on reducing our cost structure as we drive toward profitability. In earlier releases we described our success in renegotiating our pharmacy contracts and improving our hub operations. These efforts continued in the third quarter, resulting in headcount reduction and other cost saving measures. We continue to evaluate the productivity of our hubs and will selectively close and open hubs based upon achieving our performance objectives." Casner continued, "Our DIS camera upgrade program continues, with eight triple-head cameras now in operation in our 83-unit DIS fleet. We are pleased by the performance of these cameras. As we anticipated, our new system's high-definition solid-state (HDSD) digital detector technology and other advanced features provide a more comfortable experience for the patient, and more rapid throughput and excellent image quality for the physician-user. Another important benefit is that the XPO platform reduces our cost per system compared to previous designs. "In our product business, we sold 17 cameras during this year's third quarter compared to 14 in the third quarter of 2005, and we anticipate shipping a comparable number of systems in the fourth quarter. We have noted that the cardiac nuclear market is under pressure this year, a trend that started last year and is expected to continue. While our sales numbers remain somewhat flat, they do represent an increase in market share. We believe the release of our advanced Cardius XPO line of imaging systems for nuclear cardiology will help us sustain this increase in market share. "We believe that these improvements to our operating platform and cost structure, and the advanced technology and performance we offer in both our DIS and product businesses, are moving us toward our goal of sustainable revenue and earnings growth. We currently expect Digirad's performance to improve in the fourth quarter compared to the third, and we look for further improvements in 2007." Third Quarter Results For the three months ended September 30, 2006, consolidated revenues decreased 3.7% to $16.7 million compared to $17.4 million for the third quarter of 2005. DIS revenue decreased 9.6% to $11.4 million for this year's third quarter. This compares to DIS revenue for the third quarter of 2005 of $12.6 million, which included stress agent revenue of approximately $1.1 million. DIS service days for the third quarter of 2006 were 3,262 compared to 3,471 for the same period last year. As previously announced, beginning in June 2006, DIS phased out providing stress agents used in some imaging procedures. Instead, DIS' physician customers now provide these agents. Management estimates that this change reduced DIS revenue in the third quarter by approximately $1.1 million compared to what it otherwise would have been under the original delivery model. "We believe the overall impact will be to reduce DIS revenue by about $2.6 million for 2006 as a whole, but to increase DIS gross margin by 50 to 100 basis points with little to no impact on DIS net earnings," Mr. Casner said. Product segment revenue, which includes sales of gamma cameras, upgrades, accessories and maintenance revenue, increased 11.9% to $5.3 million for the third quarter of 2006 versus $4.7 million for the third quarter of 2005. Consolidated gross margin for the three months ended September 30, 2006 increased to 24.5% from 19.6% for the third quarter of 2005. DIS gross margin was 23.8% for this year's third quarter compared to 26.9% for the third quarter of 2005. "As previously announced, we changed the focus and responsibilities of some of our DIS personnel towards increased operational as opposed to administrative tasks as we seek to drive each DIS hub to profitability. Accordingly, beginning in the third quarter, some personnel costs previously accounted for as general and administrative expense were reported as cost of goods sold. This resulted in approximately $300,000 in additional cost of goods sold in the period," Mr. Casner explained. Product segment gross margin improved to 25.9% for the third quarter of 2006 versus 0.3% for last year's third quarter. The favorable impact on gross margin in this year's third quarter of higher sales volume, operational efficiencies and lower camera maintenance costs was offset by lower average selling prices related to product mix, and a $250,000 additional reserve against inventory in anticipation of the transition to the XPO series. Results for the third quarter of 2005 reflected $700,000 of excess capacity costs due to low production volumes in that quarter. The net loss for the third quarter of 2006 was $2.1 million, or $0.11 per share, including stock-based compensation expense of $344,000. This compares to a net loss of $2.8 million, or $0.15 per share, for the third quarter of 2005, which included stock-based compensation expense of $103,000. Cash and equivalents and securities available for sale at September 30, 2006 were $44.1 million compared to $49.5 million at December 31, 2005. Net receivables were $7.2 million at September 30, 2006 compared to $8.1 million at December 31, 2005. Net inventories were $5.8 million at September 30, 2006 compared to $5.1 million at December 31, 2005. Nine Months Results For the nine months ended September 30, 2006, consolidated revenues increased 7.7% to $54.7 million compared to $50.8 million for the first nine months of 2005. DIS revenue was essentially unchanged at $38.0 million compared to $38.2 million last year. Product revenue increased 32.1% to $16.7 million from $12.6 million. Overall gross margin for this year's first nine months improved to 25.9% versus 23.6% for the same period last year. The net loss for the first nine months of 2006 was $6.1 million, or $0.33 per share, which includes stock-based compensation expense of $1.4 million. This compares to a net loss for the first nine months of 2005 of $6.8 million, or $0.37 per share, including stock-based compensation expense of $411,000. Fourth Quarter and 2006 Guidance Management currently expects DIS revenue for the fourth quarter ending December 31, 2006 in the range of $11.1 million to $11.5 million, which would include the impact of the change in the delivery of stress agents; product revenue between $4.9 million and $5.3 million; and consolidated revenues between $16.0 million and $16.8 million. The consolidated loss for the fourth quarter is expected to be between $1.1 million and $1.6 million, including estimated stock-based compensation expense of $335,000. For 2006 as a whole, the Company now anticipates consolidated revenues in the range of $70.7 million and $71.5 million, consisting of DIS revenue between $49.1 million and $49.5 million (including the impact of the stress agent delivery change) and product revenue between $21.6 million and $22.0 million; and a consolidated loss between $7.3 million and $7.8 million, including estimated stock-based compensation expense of $1.7 million. Conference Call Digirad has scheduled a conference call at 11:00 a.m. ET today. A simultaneous web cast of the call may be accessed at the Investor Relations page of www.digirad.com. A replay will be available for one year at this same Internet address. A telephone replay will be available for 48 hours after the call by dialing (800) 642-1687, reservation #8452379. About Digirad Digirad Corporation develops, manufactures and markets solid-state, digital gamma cameras to hospitals, imaging centers and physician offices. Digirad offers a comprehensive line of solid-state nuclear gamma cameras that produce high-quality images for use in the detection of many medical conditions, including cardiovascular disease. Digirad's cameras are unique as their lightweight and compact design allows them to fit easily into small office spaces. Digirad's wholly owned subsidiaries Digirad Imaging Solutions and Digirad Imaging Systems offer a comprehensive, mobile imaging leasing and services program for physicians who wish to perform in-office nuclear cardiology procedures but do not have the patient volume, capital or resources to justify purchasing a gamma camera. For more information, please visit www.digirad.com. Digirad(R), Digirad Imaging Solutions(R), and Cardius(R) are registered trademarks of Digirad Corporation. Forward-Looking Statements Digirad cautions that statements included in this press release that are not a description of historical facts are forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts and use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with a discussion of future operating or financial performance or events. Examples of such statements include the statements regarding our expectations of improved performance from our upgrade of the DIS fleet to the mobile version of the Cardius 3 XPO system, our expectations of achieving reduced operating costs as a result of headcount reductions, hub closures and other cost cutting measures; our statements regarding increasing our market share in a declining market; statements regarding the expected financial impact of our decision to discontinue offering stress agents and, in general, our anticipated financial results for the fourth quarter of 2006, 2006 fiscal year and our anticipated further performance improvement in 2007. The inclusion of these and other forward-looking statements should not be regarded as a representation by Digirad that any of its plans will be achieved. Actual results may differ materially from those set forth in this press release due to the risks and uncertainties inherent in Digirad's business including, without limitation: the degree to which personnel changes and related disruptions in our business activities may affect Digirad's products, customers, work force, suppliers, and our overall business prospects and operations; the degree to which Digirad's camera systems and related services will be accepted by physicians and hospitals some of whom may experience reliability issues or technical problems; the ability of Digirad to effectively market, sell and distribute its medical devices, and related services given its limited capabilities in these areas; Digirad's ability to manage risks relating to product liability, warranty claims, recalls, property damage and personal injury with respect to its imaging systems; and other risks detailed in Digirad's Securities and Exchange Commission filings, including its Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission. Given these uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. All forward-looking statements are qualified in their entirety by this cautionary statement and Digirad undertakes no obligation to revise or update this press release including the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. -0- *T Digirad Corporation Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2006 2005 2006 2005 --------- -------- -------- -------- Revenues: DIS $11,388 $12,604 $38,008 $38,166 Product 5,314 4,748 16,671 12,618 --------- -------- -------- -------- Total revenues 16,702 17,352 54,679 50,784 Cost of revenues: DIS 8,681 9,208 29,080 27,115 Product 3,937 4,735 11,450 11,692 --------- -------- -------- -------- Total cost of revenues 12,618 13,943 40,530 38,807 --------- -------- -------- -------- Gross profit 4,084 3,409 14,149 11,977 Operating expenses: Research and development 1,036 914 3,249 2,767 Sales and marketing 2,272 1,825 6,797 5,560 General and administrative 3,455 3,742 11,689 11,255 Amortization of intangible assets 6 139 35 173 --------- -------- -------- -------- Total operating expenses 6,769 6,620 21,770 19,755 --------- -------- -------- -------- Loss from operations (2,685) (3,211) (7,621) (7,778) Interest and other, net 551 384 1,480 929 --------- -------- -------- -------- Net loss $(2,134) $(2,827) $(6,141) $(6,849) ========= ======== ======== ======== Net loss per share - basic and diluted $(0.11) $(0.15) $(0.33) $(0.37) ========= ======== ======== ======== Weighted average shares outstanding: Basic and diluted 18,782 18,690 18,751 18,390 ========= ======== ======== ======== Stock-based compensation expense is included in the above as follows: Cost of DIS revenue $33 $23 $125 $84 Cost of Product revenue 24 9 66 45 Research and development 41 15 129 54 Sales and marketing 89 8 237 39 General and administrative 157 48 832 189 *T -0- *T Digirad Corporation Condensed Consolidated Balance Sheets (in thousands) Sep. 30, Dec. 31, 2006 2005(1) ----------- -------- (Unaudited) Assets Cash and cash equivalents $4,368 $16,303 Securities available-for-sale 39,732 33,202 Accounts receivable, net 7,158 8,132 Inventories, net 5,810 5,136 Other current assets 1,857 1,687 ----------- -------- Total current assets 58,925 64,460 Property and equipment, net 9,108 9,582 Intangibles, net 439 402 Restricted cash 60 60 ----------- -------- Total assets $68,532 $74,504 =========== ======== Liabilities and stockholders' equity Accounts payable $2,161 $2,152 Accrued compensation 2,857 2,585 Accrued warranty 824 825 Other accrued liabilities 3,729 4,614 Deferred revenue 2,805 2,858 Current portion of long-term debt 319 766 ----------- -------- Total current liabilities 12,695 13,800 Long-term debt, net of current portion 162 368 Deferred rent 313 348 Total stockholders' equity 55,362 59,988 ----------- -------- Total liabilities and stockholders' equity $68,532 $74,504 =========== ======== (1) The condensed consolidated balance sheet as of December 31, 2005 has been derived from the audited financial statements as of that date. *T