Collectors Universe, Inc. (NASDAQ:CLCT)
F1Q09 Earnings Call
November 10, 2008 5:00 pm ET
Leslie A. Snyder – Investor Relations Counsel
Michael R. Haynes – Chief Executive Officer & Director
Joseph J. Wallace – Chief Financial Officer
Welcome to the Collectors Universe first quarter fiscal 2009 conference call. (Operator Instructions) I would now like to turn the conference over to Lesley Snyder, Investor Relations Counsel for Collectors Universe.
Lesley A. Snyder
Good afternoon everyone and thank you for joining us to discuss Collectors Universe’s financial results for the first quarter of fiscal year 2009. With us today from management are Michael Haynes, Chief Executive Officer and Joe Wallace, Chief Financial Officer. Management will provide a brief overview of the quarter and then open up the call to your questions.
Comments made during today’s call may contain statements regarding the company’s expectations about its future financial performance, including forecasts and statements concerning business trends and profitability that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company’s actual results in the future may differ, possibly materially, from those forecasted in this call due to the number of risks and uncertainties. Certain of these risks and uncertainties in addition to other risks are more fully described in the company’s filings with the Securities & Exchange Commission. The forward-looking statements are made only as of the date of today’s conference call and the company undertakes no obligation to update or revise the forward looking statements whether as result of new information, future events or otherwise. With that I would now like to turn the call over to Michael Haynes.
Michael R. Haynes
Welcome to today’s conference call. We will first review our results in the first fiscal quarter of 2009. Next Chief Financial Officer, Joe Wallace, will provide a quick overview of our financials. At the conclusion of these remarks we will then be happy to answer any questions you may have.
As announced on September 30, 2008, in response to the economic and market conditions, the company suspended its cash dividend and declared a 10% stock dividend, which dividend was recently paid. The Board of Directors considered it prudent to maintain an extremely strong and conservative balance sheet as the company holds almost 50% of total assets in cash with no debt.
From an operating perspective the company is focused on properly sizing capacity and reducing operating costs with the objective of increasing cash flow from all divisions to provide a consolidated positive cash flow and consolidated, profitable operations.
In that effort, every division and department has been examined and changes are in motion to achieve this objective. At the same time, the growth initiatives in both the markets we dominate and those that hold high potential are being honed, shaped, and specifically directed toward those initiatives with more immediate and higher returns.
The market for high-quality and high-value items authenticated and graded by our collectibles group continues to be firm for the while. The market for the lower-value items has been weakening. The coin market has also been influenced by the volatility of gold and silver, but the sports card market has been more consistent with the themes of increases for high-value items and decreases for low-value items. These market reactions are typical of what management has seen and experienced over the last 30 years through several business cycles in the general economy.
With respect to our coin division these market conditions are manifested with modest increases in both units and revenue from our sector in vintage [pour] coin which generally are comprised of the coins with higher value, and with decreases in units in revenue from the modern sector, which generally relates to coins of lower value.
Because the coin trade show sector is tied to units submitted only at coin shows for immediate delivery of our services, the volume at these shows is more volatile, as dealers at the coin shows respond to the market conditions that exist during the few days of the specific coin show.
Outside of these trends is the growth in units and revenue from our world coin sector as evidenced by an increase of 77% in units processed in the first quarter of fiscal 2009 as compared to the same quarter of fiscal 2008. Approximately half of the volume in the global coin market is realized for coins outside of the United States where third-party authentication and grading has not yet been significantly promoted. As we continue the execution of our plans to penetrate the global market, we anticipate further increases in unit volume and revenues from this sector.
Overall, the collectibles group provided positive cash flow which we expect will improve as the planned reductions in operating costs and adjustments in capacity are more fully implemented in the second quarter of fiscal 2009.
The jewelry group achieved revenue growth of 14% in the first quarter of fiscal 2009 as compared to the comparable period in fiscal 2008, while the cash investment in this initiative declined by 12% for the comparable period. This is the second consecutive quarter of operational improvement in the jewelry group as we continue to capture more market share utilizing a lower cost and more focused marketing plan.
For our diamond sector submissions increased 27% for the first quarter of fiscal 2009 over the first quarter of fiscal 2008. The aggregate value of the diamonds submitted for authenticity and grading increased to approximately $35.0 million in the first quarter from approximately $32.0 million in the same period in the prior year.
In terms of the aggregate value of items submitted for authenticity and grading, the diamond division now possesses and processes the second largest aggregate value behind the aggregate value of our coin division.
Our diamond division benefits from the growing success of our Certified Diamond Exchange, or CDE, an Internet-based business-to-business distribution system that connects sellers of our diamond grading divisions certified diamonds directly to jewelry retailers across the country.
The CDE is a central element in our marketing plan in that it provides direct access for jewelers to diamonds certified by our diamond division. CDE was launched about one year ago in the second quarter of fiscal 2008 and as of today has over 2,400 independent retailer members with offerings of thousands of diamonds valued at tens of millions of dollars.
By launching CDE we have created our own distribution network for our certified diamonds that rivals even the largest of the jewelry chain stores. As we continue to grow this distribution network we will intensify the training of these stores to first access and check CDE for their diamond needs.
For the colored gemstone sector unit volume was up 56% in the first quarter of fiscal year 2009 over the comparable quarter of fiscal year 2008 with unit values increasing by 162% for the same comparable period. The aggregate value of the colored gemstones submitted for authenticity and grading is now the third largest aggregate value behind our coin and diamond divisions.
During the first quarter of fiscal 2009 we launched the Colored Gemstone Exchange, or CGE, using basically the same concepts and software platform as we used when we launched the Certified Diamond Exchange. Using similar marketing programs, the CGE offers only colored gemstones with documents of authenticity and identification issued by our colored gemstone division. We expect that the CGE will influence more submissions to our colored gemstone division in fiscal 2009.
Corporate, general, and administrative costs decreased during the first quarter of fiscal 2009 as compared to the prior year period as evidenced by the reduction in non-allocated expenses by 7% and a reduction in the cash requirement for such unallocated expenses of 9% for the comparable period.
The first fiscal quarter of 2009 represents the fifth consecutive quarter of decreases in corporate unallocated expenses.
Our core business in the collectibles group continues to provide positive cash flows and enjoys large market shares with potential for growth both domestically and globally. We expect that the continuing deployment of operational improvements and adjustments in capacity will lead to improved operating margins and increasing cash flow.
We also have several initiatives to monetize our significant website traffic from our top-ranked coin and sports websites and to obtain relationships in the global coin market. Although the initiative into the jewelry markets has yielded slower growth than anticipated, we are encouraged with the direction and progress of our jewelry business.
We have several new and exciting pilot programs in place for the 2008 holiday season and we expect some of these programs to develop into mainstream volume in calendar year 2009.
I thank you for your time and at this stage I would like to turn the call over to Joe Wallace who will give us a financial review of the quarter.
Joseph J. Wallace
I will now give a brief overview of the financial results of the first quarter of fiscal 2009.
For the first quarter of fiscal 2009 our net revenues were $9.7 million and we incurred a loss from continuing operations of $1.3 million, or $0.14 per diluted share. This compared to net revenues of $10.8 million and a loss from continuing operations of $100,000, or $0.01 per diluted share, for the first quarter of fiscal 2008. The loss per share data has been retroactively adjusted to give effect to the 10% stock dividend.
The revenue decline of $1.1 million, or 10.5%, in the current first quarter, compared to the same quarter of the prior year primarily was the results of the decrease of $1.0 million, or 11%, in authentication grading fees and a decrease of $122,000, or 7%, in our other related services.
The decrease in authentication grading fees comprised decreases of $855,000, or 16%, in coin grading and authentication revenues, a $158,000, or 38%, decrease in stamp grading and authentication revenues, and $91,000, or 5%, decrease in sports cards grading and authentication revenues.
Those decreases were partially offset by a $93,000, or 8%, increase in the revenues generated by our other smaller grading and authentication businesses.
The 16% decrease in coin authentication grading revenues was primarily the result of: one, a decrease in revenues earned from coin grading at trade shows, which we believe was due to the continued high price and a high level of volatility in the price of gold in the quarter; and two, a decrease in modern coin grading revenues due primarily to lower activity combined with lower average service fees earned on the mix of coins graded in the quarter.
Both declines were partially offset by increases in the number of units and revenue earned from our vintage coin submissions.
The decrease in stamp grading revenues in the quarter reflects a decrease in submissions of modern stamps, which we believe was due to excess supply and lower market prices in the modern stamp market, partially offset by increased average service fees as we increased our focus on grading vintage stamps.
The decrease in sports cards grading authentication revenues was the result of a lower number of units graded in the quarter due to less demand for our services for lower value sports cards, partially offset by the positive effects of an increase in the average service fee for the units graded in the quarter.
The decrease of revenues from other related services was primarily due to a decline in sale of coins purchased under our warranty policy and to a lesser extent, lower advertising revenues resulting from the company’s decision to discontinue the publication of the rare coin marketing report, the revenues from which no longer justified the publication expenses.
The gross profit margin was 46.5% in the current first quarter compared to 52% in the same quarter of last year. This decline in our gross profit margin reflects: one, the relatively fixed nature of many of our direct costs, such that the decline in our coin, sports cards, and stamps revenues as discussed above did not result in a proportionate reduction in our direct costs; two, the 17% reduction in our coin revenues, on which we earn a higher gross profit margin than on our other grading businesses, such that our coin revenues in the current first quarter represented 51.5% of revenues compared with 55.8% of revenues in the first quarter of last year, and three, increased infrastructure costs allocated and other direct costs incurred in support of our other businesses.
Total operating expenses for the current first quarter were $5.9 million compared to $6.2 million for the first quarter of fiscal 2008. The reduction in $0.3 million primarily reflects decreases in sales and marketing expenses related to our jewelry businesses.
The resulting operating loss for the quarter was $1.4 million compared with $0.6 million for the first quarter of last year.
Income from continuing operations benefitted from interest income of $0.1 million in the current first quarter compared with $0.4 million in the first quarter of last year. The reduction in interest income reflects lower available cash balances and lower interest rates in the current first quarter compared to the same quarter of last year.
Turning to our balance sheet. On September 30, 2008, cash and cash equivalents were $23.0 million. The net cash usage of $0.4 million in the current quarter related to net cash proceeds generated from customer notes receivables of $3.3 million, offset by cash dividends to stockholders of $2.1 million, expenditures for capital equipment software of $0.6 million and cash used in operations of $1.0 million.
On September 30, 2008, the company had working capital of $23.0 million and no long-term debt.
As previously announced, the company declared a 10% stock dividend to stockholders of record on October 20, 2008, with a distribution of such shares on November 3, 2008.
With that I would like to thank you for your attention. We are now ready to take questions.
There are no questions in the queue.
Michael R. Haynes
Thank you very much for your time today. We have launched a few pilot programs, as mentioned earlier, for our jewelry group. One with Ideal Diamond Solutions to increase the availability of G-cal diamonds, through even retail sites, and with our Botswana Diamond Program, which is launching in the northeastern United States with Days Jewelers. If you have the opportunity you might check www.daysjewelers.com. I will be in New York at the Needham in early January and perhaps we will have the opportunity to see many of you at the event.
This concludes today’s conference call. If you would like to listen to a replay of today’s call please dial 303-590-3000 or 800-405-2236, enter access code 11122375.
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