Michael J. McConnell - Interim Chief Executive Officer, Director
David G. Hall - President, Director
Joseph Wallace - Chief Financial Officer
Collectors Universe (CLCT) F3Q09 Earnings Call May 11, 2009 5:00 PM ET
Good afternoon, everyone and thank you for joining us to discuss Collectors Universe financial results for the fiscal third quarter ended March 31, 2009. With us today from management are Michael McConnell, Chief Executive Officer; and Joe Wallace, Chief Financial Officer. Management will provide a brief overview of the quarter and then open the call up 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 forecast in this call due to a number of risks and uncertainties. Certain of these risks and uncertainties, in addition other risks, are more fully described in the company’s filings with the Securities and 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 such forward-looking statements whether as a result of new information, future events, or otherwise.
With that, I would now like to turn the call over to Michael McConnell.
Michael J. McConnell
Thank you and good afternoon. Before turning the call over to Joe Wallace, who will discuss the financial results in more detail, I would like to comment on four key areas. They are company strategy, one; two, economic conditions in our core collectibles businesses and management’s response; three, our exit from the jewelry divisions; and four, our consideration of the company’s capital structure.
Touching on point one, company strategy -- at present, our focus is on our core grading activities with PCGS and PSA and PSA DNA representing the vast majority of the revenue and profit. Our current thinking centers on how we develop incremental growth opportunities and market share gains within these existing markets in which we currently operate.
With that as background, I would like to make it clear -- the company is currently not for sale. However, consistent with its fiduciary duties, the board will of course carefully consider any credible third party offer.
Moving on to item two, the current economic environment -- given top line softness in submissions generally and the challenging economic environment, our focus has been and will continue to be to aggressively manage all costs, seek to improve operating efficiencies where applicable and thereby improve upon the company’s profitability.
Moving to item C, our exit from the jewelry division, the board first made the right decision in acting quickly and decisively following the conclusion of the 2008 holiday season to shut down the two jewelry divisions. That exit from the jewelry divisions, which was announced on March the 2nd, is largely complete with most employees having exited, hard assets monetized and cash received, and all other related transition issues when you close a business completed quickly and professionally.
The primary remaining obligation requiring resolution are two separate building leases in midtown Manhattan. As mentioned in the press release, we are actively working to mitigate these financial obligations. This will be a critical focus area for me and Joe over the coming months.
And lastly, a brief comment on the consideration of capital structure -- going forward, we believe that the core collectibles businesses will generate positive free cash flow. Additionally, capital expenditures, working capital, and cash taxes are currently expected to be minimal. Therefore, we are taking a close look at the amount of capital, that is the cash on the balance sheet, at the company. The board will consider a range of alternatives both strategic and financial in this regard. Of course, the board has not yet made any definitive determinations and we will certainly apprise the market when and if it does.
I simply wanted to acknowledge that with the closure of the jewelry divisions and our expectations in the core collectibles markets, the board is examining its balance sheet closely.
At this stage, I will turn the call over to Joe. Joe.
Thank you, Mike and good afternoon, everyone. First, some general comments -- as announced on March 2, 2009, the company decided to exit its jewelry grading businesses and therefore the remaining assets and liabilities of those businesses have been classified as held for sale and the related operating results, along with the operating results of the currency grading business through the date of sale of that business, have been classified as discontinued operations for all current and prior periods.
We are evaluating our patented Gem Print identification technology for use in the licensing business and therefore the operating results for Gem Print are classified as continuing operations.
There are some added complexities in our income statement around impairment losses, taxes, and discontinued operations, so I will review the results of continuing operations first and then discuss impairment losses, taxes, and discontinued operations.
First, third quarter and nine months -- for the third fiscal quarter 2009, net service revenues were $9.1 million, and income from continuing operations was $754,000 or $0.08 per diluted share. This compares to net service revenues of $10.3 million and income from continuing operations of $271,000 or $0.03 per diluted share for the third fiscal quarter of 2008.
For the nine months, net service revenues were $25.9 million, and the company incurred a loss from continuing operations of $2.2 million, or $0.25 per diluted share. This compares to net service revenues of $29 million, and income from continuing operations of $723,000, or $0.08 per diluted share, for the same nine months of 2008.
The 12% decline in net service revenues in the current third quarter was comprised of a $1.2 million, or 14% decline from grading and authentication fees, while related services were essentially at the same level as in the prior third quarter. The fee-to-client comprised decreases of 11% in coins, 17% in trading cards, and a 28% decline in our other grading businesses, consisting of autographs and stamps.
For the nine months, net service revenues declined by 11%, compared to the same nine-month period in 2008 and comprised a $2.9 million, or 12% decline in grading and authentication fees, and a $137,000 or 3% decline in revenues from other related services.
The fee reductions comprised declines of 12% in coins, 10% in trading cards, and 19% in our other grading businesses.
The reduction in our coin fees was due to general economic conditions currently prevailing and comprised net decreases due to one, lower trade show grading revenues of $0.4 million, or 33% in the third quarter and $1.4 million or 34% in the nine months; two, lower modern coin grading revenues of $0.1 million, or 6% in the third quarter, and $0.9 million, or 70% in the nine months; and three, a small decrease of 2% in the third quarter and an increase of $0.4 million, or 4% in the nine months in our vintage coin grading submissions.
We believe that lower trade show fees were due to the continued high price and high level of volatility in the price of gold in the three and nine month periods. The lower modern coin grading revenues, which can be impacted by specific customer programs in place in a given period, were due primarily to lower activity combined with changes in average service fees earned in the third and nine months, in the third quarter and nine months, due to a mix of coins graded and the customer programs in those periods.
Our trading cards and other grading businesses were also adversely affected by the continuing economic recession and credit prices. As a result, revenues generated for trading card submissions declined by $0.3 million, or 17%, and by $0.6 million or 10% in the third quarter and nine-month periods compared to the same period as the prior fiscal year, while revenues generated by our other businesses also declined by about 28% and 19% in the third quarter and nine month periods.
The decrease in revenues from other related services of $137,000, or 3%, in the nine months ended March 31, 2009, was primarily related to lower collector [inaudible] revenues.
Product sale revenues, which are not part of our continuing ongoing -- which are not part of our ongoing revenue generating activities and relate to the sale of collectible coins acquired by us under the terms of our coin warranty -- coin grading warranty, were $0.2 million and $0.3 million for the three and nine months ended March 31, 2009, and $0.8 million and $0.9 million for the three months -- three and nine months ended March 31, 2008.
When we purchase a coin under warranty, we include the coin in inventory at its estimated value, so generally we do not expect to generate any significant profit or loss on the ultimate sale of these coins. The loss of about $200,000 in current on sales of coins in the nine months ended March 31, 2009, reflects losses incurred on sales due to current market conditions. We review and recognize changes in the value of the remaining inventory on a quarterly basis.
The gross profit margin on services revenue increased to 57% in the third quarter of the current year, from 52% in the same quarter of fiscal 2008. The gross profit margin on service revenues in the nine months ended March 31, 2009, increased to 55% from 54%, and the prior nine months are adjusted for the unusually large coin warranty claims of $822,000 recognized in that period.
The improvements in our gross profit margins from our services business are the result primarily of cost reductions in our coin grading business implemented in the nine months, first nine months of 2009, in response to the anticipated decline in revenues as a result of the economic recession and credit crisis.
These improvements were partially offset by a lower gross margin on trading card revenues, due primarily to the decrease in such revenues in the three and nine-month period ended March 31, 2009.
Operating expenses for the third quarter of fiscal 2009 were $4.4 million, compared to $5 million for the same quarter of last year. The current nine months operating expense before impairment loss of $1.5 million were $13.6 million, compared with $14.4 million in the prior nine months to March 31, 2008.
$0.6 million and $0.8 million decrease in our operating expenses in this year’s third quarter were related to lower selling and marketing expense and G&A expenses, realized as a result of cost reductions and lower stock-based compensation costs, partially offset by a $400,000 severance cost relating to the company’s former Chief Executive Officer.
Operating expense for the current nine months included a non-cash impairment loss of $1.5 million recognized in the second quarter related to reductions in the carrying values of certain [long-life] and other intangible assets of Gem Print.
The resulting operating income was $0.8 million in the quarter of fiscal 2009, as compared to $0.4 million for the same quarter of last year. The nine months fiscal 2009 due to the $1.5 million Gem Print impairment loss, we incurred an operating loss of $1.2 million, as compared to operating income of $0.4 million for the same nine months of fiscal 2008.
Interest income was $53,00 and $252,000 in the three and nine months ended March 31, 2009, compared with $238,000 and $978,000 respectively in the three and nine months ended March 31, 2008. These decreases reflect: one, a shift of our cash and cash equivalent balances into lower yielding, government guaranteed money market funds; two, lower average cash balances in the current year periods compared to the prior year; and three, lower prevailing interest rates.
I will now discuss impairment losses -- of the total losses of $7.7 million recognized in our jewelry businesses in the second quarter of the current year, $1.5 million has been classified as part of continued operations for the Gem Print product, and $6.2 million has been classified as part of discontinued operations in the nine months ended March 31, 2009.
Income taxes -- the income tax expense of $0.1 million and $1.3 million recorded in the three and nine months ended March 31, 2009 represented an increase in a non-cash valuation allowances against deferred tax assets due to uncertainty as to the realizability of those assets. Under the accounting rules, the increased valuation allowance that is required to be allocated entirely to our continuing operations.
For the three and nine months ended March 31, 2008, the income tax expense reflects the effective tax rates for those periods, such that income tax benefits of $0.7 million and $2 million have been allocated to discontinued operations in the three and nine months ended March 31, 2008.
Discontinued operations -- losses from discontinued operations for the three and nine months ended March 31, 2009 totaled $5.5 million and $14.8 million respectively. Those losses were comprised of: one, losses from the operations of the jewelry and currency grading businesses through the respective dates of sale or closure; two, losses of $4.2 million, recognized in this year’s third quarter as a result of the closure of our jewelry grading businesses; and three, the non-cash impairment losses totaling $6.2 million discussed above that related to the write-off of good will and long live assets of the jewelry grading businesses.
The losses of $4.2 million resulting from the closure of our jewelry businesses includes estimated losses on the sale of assets, severance costs, and accruals for losses on the jewelry facility lease in New York City. Due to current economic conditions, the market for rental space in New York City is uncertain.
Turning to our balance sheet, At March 31, 2009, cash and cash equivalents totaled $20.8 million, compared with $19.6 million at December 31, 2008, and $23.3 million on June 30, 2008.
Net cash usage of $2.6 million for the nine months ended March 31, 2009 included $2.7 million of cash generated by our continuing operations, net repayments of $2.4 million on loans made to collectible dealers, offset by cash used for discontinued operations of $5.5 million and payments of $2.1 million of cash dividends to stockholders.
At March 31, 2009, the company had working capital of $19.5 million.
With that, I would like to thank you for your attention. Operator, we are now ready to take questions from the audience.
(Operator Instructions) Gentlemen, I show that there are no questions in the queue.
Michael J. McConnell
I would like to thank everybody for joining us on the call today. I would like to acknowledge that this quarter’s result is obviously complex with a number of parts moving about between continuing and discontinued operations as we streamline the company, and would like to let each of you know to give either Joe or myself a call if you would like to talk further about the quarter’s financial release and perhaps after we’ve had a chance to review the 10-Q, we will make ourselves obviously available to work through what is arguably a complicated third quarter result. I’ve got nothing further. Thank you, everybody.
Ladies and gentlemen, this concludes the Collectors Universe third quarter 2009 earnings conference call. You may now disconnect. Thank you for using AT&T teleconference.
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