Collectors Universe, Inc. (NASDAQ:CLCT)
F3Q13 (Qtr End 03/31/2013) Earnings Call
May 8, 2013 4:30 PM ET
Robert Deuster - Chief Executive Officer and Director
Joseph Wallace - Chief Financial Officer
Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe financial results for the third quarter ended March 31, 2013. With us today from management are Robert Deuster, Chief Executive Officer; and Joe Wallace, Chief Financial Officer. The management will provide a brief overview of the quarter, and then open up the call to your questions.
Comments made today 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 to 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 and the company undertakes no obligation to update or revise the 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 Robert Deuster. Robert?
Thank you. And welcome to today's third quarter conference call. I will spend a few minutes discussing our business activity during the quarter, some of them are noteworthy events that occurred, and then some commentary on the outlook for the balance of the year. Then I will turn it over to Joe to discuss our financial results in more detail.
I am very pleased to report to you that our service revenue for the third quarter was a company record. While the third quarter is normally our seasonally highest quarter, the $14.5 million in service revenue report, it was a full $1.5 million better than the previous high mark.
A number of factors contributed to this excellent result. Notwithstanding, a very strong coin market, as for the holiday season and the start of the new coin year, but also we experienced growth during the quarter in all of our PCGS businesses.
In particular, we are seeing a very strong consumer preference for grading coins at shows and expos. We had 77% more grading service revenue at our show events in the third quarter as well as sold-out attendance at each of our members-only Las Vegas show since last fall.
Significantly, the grading activity in both gold and silver coins has improved with the start of the new mint year. Calendar year-to-date sales from the U.S. mint are on a record pace. Gold Eagle sales are a 118% above last year's pace and Silver Eagle sales are full 20% above the record 2011 pace.
As of today, there still is not enough coin production capacity to fill customer demand for Silver Eagle and U.S. mint is on a rationing program. If this customer demand profile continues, it is likely that a new U.S. mint sales record level could be reached by the end of this calendar year.
As you may recall, I mentioned on our last call, that bulk coin submissions too have started to pickup at the end of our second quarter. That pace has continued throughout the third quarter. Output from many of the world's mints is also strong, so it's turning out to be a good year for the bullion coin market.
All of this is subject to potential demand change as is frequently experienced in the coin market. But we will watch it over the next several months to see what effect it may have on our grading volume for the balance of the year.
The rare coin market in the United States is also very strong as many high-value PCGS graded coins were sold at auction. During the quarter, we saw the sale of the most valuable U.S. coin, a 1794 Flowing Hair Silver Dollar that went for $10.1 million, and a 1792 Martha Washington half dime sold for $1.4 million. Last month, a very rare 1913 Liberty Head Nickel sold at auction for $3.2 million, after being lost and off the market from more than 40 years.
Looking outside of the U.S., the global numismatic activity and interest is high as well. In particular, the climate for bullion and coin collecting in China is very strong, but the government promoting the purchase of gold coin issue and the output of China state run-mints' increasing annually.
The numismatic market in vintage Chinese coins rivals the U.S. and European market. So addressing it directly offers an attractive market expansion to our growth strategy going forward. We recently announced the formation and funding of a wholly-owned business unit in Mainland, China, to service this budding market and it will be based in Shanghai. I will cover this subject in a little more detail later in my remarks.
Changing gears somewhat, we continue to see a steady and increasing volume of submissions for grading sports cards and autograph collectables too. Our PSA card grading business is tracking 12% ahead of last year's pace. And the DNA autograph grading service revenue again exceeded $1 million during the quarter.
This is due in part to the young crop of talent that has created excitement in virtually all the major sports over the past year. From quarterback Andrew Luck to outfielder Bryce Harper, several fresh names made a big impression at the professional level.
This is how spur demand and reinvigorate overall interest in sports collectables, as a new generation of start athletes has shown the potential to be the superstars of tomorrow. A very high profile sale of rare cards also continues to make news, such as the sale of a T206 Honus Wagner Card recently for $2.1 million.
We've also seen a substantial growth in the last 12 months in the number of collectors, who list their collections on our Set Registry. The Set Registry for cards is an online form for collectors to display their PSA graded card collections, compete for the best sets recognition and potentially find missing collectables to complete their sets.
This form is also available for the coin market and is one of the most popular web services we offer our customers. Thus collections and the sale of important items continue to fascinate the general public and stoke interest in the card and coin collectable space worldwide.
While this last quarter produced record revenues for our company, they also showed significant improvement in our profitability on several dimensions. Gross profit was 64%, which is significantly higher than the prior two quarters that averaged 59%. This improvement was due to the increase in efficiency and productivity within our operations and the introduction of several new popular services for our PCGS business at the beginning of calendar 2013.
Those services included more opportunities to have high-value coins graded at shows, express grading service options for our international customers out of Paris and Hong Kong, reconsideration and restoration services for collectors' coins and a new pricing structure for the U.S. market. The previously discussed higher unit volumes of bulk coin submissions we experienced this last quarter also added to the efficiency gains, because of more optimal loading of our coin grading service facility.
In our PSA business, as we continue to see increasing submissions of sports cards and autographs, we implemented better staffing profiles and production tracking, which produced margin improvement as well. The result was an operating profit of $3.9 million and net earnings per share of $0.29 for the quarter.
Looking forward, our investment in China should start to contribute revenue in early fiscal 2014. We established a wholly-owned entity, which will be based in Shanghai and it will serve the mainland China market for bullion and vintage coins. This will compliment our Hong Kong office and allow us to then efficiently handle customers throughout Southeast Asia. Both offices will tie into our U.S. based networks and grading systems and will have full time administrative and grading staff.
I'm also very pleased to announce that we have entered into a strategic marketing partnership with the leading media and information company for the numismatic market in Mainland China, Jibi.net. They along with two other major dealer networks in Guangzhou and Beijing will give our new PCGS business unit there a well-established incredible channel to the growing market for graded coins. Jibi.net alone has the most active web presence for the numismatic market in China, with daily volume of 150,000 visitors a day to their website.
One of the more important aspects of our investment in the broader Chinese and for that matter European markets is that our international presence develops more fully, we expect it to provide a better balance to our total PCGS revenue profile throughout our fiscal year, which is now seasonally synchronized only with the U.S. market. Our PSA business shows much less annual seasonality and so our goal is a much better balanced collectors' universe revenue profile in the coming years.
Now, I'd like to turn this call over to Joe, who will give you a little bit more detail on the financials for the third quarter. Joe?
Thank you, Bob, and good afternoon, everyone. I'll now give a brief overview of financial results for the third quarter of fiscal '13. For the third quarter, the company reported record quarterly service revenues, which comprise our grading authentication related service revenues of $14.5 million, record operating income of $3.9 million and after-tax income from continuing operations of $2.4 million or $0.29 per diluted share. This compares to service revenues of $13 million, operating income of $2.9 million and after-tax income from continuing operations of $1.7 million or $0.22 per diluted share for the third quarter of fiscal '12.
For the nine months, the company's net service revenues were $34.8 million, operating income was $6.2 million and after-tax income from continuing operations was $3.8 million or $0.47 per diluted share. This compares to net service revenues of $36.2 million, operating income of $7.3 million and after-tax income from continuing operations of $4.3 million or $0.54 per diluted share for the nine months ended March 31, 2012. The increase in our service revenues compared to the last year's third quarter of $1.5 million or 11% included increases of $1.2 million or 13% in coin service revenues and $0.3 million or 12% in our cards and autograph services revenues.
As discussed in our Form 10-Q filed with the SEC today, the increase in coin service revenues in the current quarter reflects increases in the average service fees earned on coins authenticated and graded in the quarter due to a number of factors, including new service offerings, a favorable mix of coins authenticated and graded in the quarter and price increases implemented effective January 1, 2013. The number of coins authenticated and graded in the quarter was substantially same at the third quarter of fiscal '12.
For the nine months period $1.4 million or 4% decline in service revenues reflects a $0.8 million on 10% increase in service revenues from cards and autographs, offset by a $2.2 million or 9% decline in coin service revenues, reflecting the previously disclosed more challenging conditions for coins in the first half of the year.
We believe the record level of revenues earned in the third quarter reflects strong momentum in the coin market. As evident by record sales in gold and silver Eagles by the U.S. Mint in the three months ended March 31, 2013, combined with the factors as discussed above that gave rise to the increase in coin revenues in the quarter.
In addition, our trading cards and autographs business continues to show consistent growth and the three months ended March 31, 2013, represented the 11 straight quarter-on-quarter revenue growth in that business. These favorable market conditions appeared to be continuing into the fourth quarter, and although our third fiscal quarter is typically our strongest quarter of the year, and recent declines in precious metal prices may impact market sentiment in the fourth quarter. Therefore, it remains uncertain as to what level of revenues the company can achieve in the fourth quarter.
For the nine months ended March 31, 2013, our coin business represented approximately 63% of total revenues and reflects the continued importance of our coin authentication and grading business to our overall financial performance.
Our services gross profit margin increased to 64% in the third quarter from 62% in last year's third quarter, reflecting the record service revenues and a relatively fixed nature of certain of our direct costs.
For the nine months, our services gross profit margin was 61% for both nine month periods. The increase in selling and marketing expense was $0.3 million for the quarter and $0.4 million for the nine months reflects increased costs in connection with our e-commerce activities and the international initiatives, partially offset by reductions in business development incentives in the nine months due to the lower coin revenues and operating results in that period.
G&A expense were essentially flat in the third quarter and down $0.2 million for the nine months compared to the same periods of the prior year and reflects lower stock-based compensation expense.
Operating income for the quarter increased 35% to $3.9 million or 27% of revenues, compared to $2.9 million or 22% of revenues for the third quarter of fiscal '12. For the nine months, operating income was $6.2 million or 18% of service revenues compared to $7.3 million or 20% of service revenues for the nine months ended March 31, 2012.
Turning to our balance sheet. The company's cash position increased to $18.7 million at March 31, 2013, from $17.5 million at December 31, 2012. Cash was $21.2 million at June 30, 2012. Net cash used of $2.5 million for the nine months comprised cash generated from continuing operation of $6.5 million, offset by dividends to stockowners of $8.2 million, $0.5 million for capital expenditures and $0.3 million used in our discontinued operations.
At March 31, 2013, the company, continue to have $3.7 million remaining under its previously announced stock buyback program. The company has not made any open market repurchase under this program since the fourth quarter of fiscal 2008.
On April 04, 2013, we announced that our PCGS coin business will expand its international services by establishing operations in Shanghai, China. On April 29, 2013, the company announced its quarterly cash dividend of $32.5 per share to be paid on May 31, 2013, to stockholders of record on May 17, 2013.
With that I will hand the call back to Robert.
Thanks, Joe. As you may have sense by now, we are very focused on two prime areas for growth and profitability at Collectors. In the last six months, we have instituted many fundamental business management tools for running our business on day-to-day basis. That will help delivery efficiency and improve customer service.
This is substantial in the market like ours, where our product is the authenticating and grading service that builds value for our customers. We are passionate about delivering the best experience for them. The recent sales of high value coins I referenced in my comments earlier is the evidence of the ultimate value our customers as collectors can receive through the high prices, PCGS graded coins and PSA graded cards realized at auction.
We believe this is the power of our brand. This brand value is not limited only to the U.S. market and now is sought after in these significant international collector markets of Europe and Southeast Asia. We intend to bring our service to collectors worldwide. To achieve that goal we are investing now for the future. Because we are leveraging our strong U.S. experience and capabilities, we expect that investment to result in the same high brand value for PCGS grading and authenticating of coins in these new markets and building additional avenue for revenue growth for collectors in the coming years.
So all the collectable markets can and will ebb and flow with the economic and collectors sentiment, it is currently strong providing collectors a popular alternative asset investment opportunity or active hobby interest. In this environment, Collectors Universe delivers to the market the value-enhancing services they speak. We're excited about the future and the opportunities it brings for our company and investors.
Operator, we're now ready to take any questions from the audience.
(Operator Instructions) And our first question comes from the line of (Seth Chandler).
I just got the email and obviously you just released the 10-Q, but one thing that caught my eye that I thought was interesting is your declared value for this quarter was $501 million versus the similar quarter of last year was $328 million. I mean, that's a staggered increase in the value of coin that had come through. I am not a math genius, but it looks likes it's around plus 60% and just looking through the previous 10-Qs going back a few years, that's a lot of deviation. Do you have any reason for that? Why there was so much value coming through the first quarter?
Well, we introduced some new services in the quarter which profit some of the higher value coins that come through our system. Also it just really gets back to the mix of coins in the quarter we had activity more at our trade shows as well. So both, those factors combined to make the numbers look a little bit higher at this quarter versus comparable quarter last year.
So you get a lot of higher valued coins. I see that your coin show submission revenue was up 77%. Do you tend to believe that high valued coins get submitted at shows?
Yes they do. And it's an encouraging trend actually.
And I am showing no more questions at this time.
Well, thanks again for joining us today. We certainly enjoy reporting this last quarter and we look forward to speaking with you again at the end of next quarter. Have a good day.
Thank you, ladies and gentlemen. That concludes our call for today for the Collectors Universe third quarter call. This conference will be available for replay after 4 PM today through May 22 at midnight. You may access the replay system at any time by dialing 800-406-7325 and entering the access code 4181738. Thank you again. Have a good day.
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