Collectors Universe, Inc. (NASDAQ:CLCT)
F1Q 2014 Earnings Conference Call
November 6, 2013 04:30 PM ET
Robert Deuster - CEO
Joe Wallace - CFO
Adrian Day - Adrian Day Asset Management
Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe Financial Results for the First Quarter ended September 30, 2013. With us today from management are Robert G. Deuster, 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 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 call 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? Please go ahead.
Thank you, and welcome to today's first quarter fiscal 2014 conference call. On our last conference call I reported that we closed on a record quarter and yearly performance marked by strong revenue growth in the second half of the year and excellent profit leverage. Today I am pleased to report that this trend has continued and we again have achieved a record revenue level for our first quarter period and a significant improvement in income and earnings over the prior year period.
All of our businesses performed very well, and for the first time we're able to report grading revenue from Mainland China through our newly opened office in Shanghai. Our service revenue for the quarter came in at 14.2 million, continuing strong growth trends for our PCGS coin and PSA/DNA sports card and autograph businesses. This compares to 10.7 million recognized in last year's first quarter. While we see healthy market conditions for both businesses currently I would like to note that our increased revenue is aided by the continuously enhanced product services and information offered to customers in both markets and the excellent progress we are making in improving the customer experience.
Our reported services gross margin percent reached 63% this quarter, improving 400 basis points over the prior year period. The stronger product services mix and resulting pricing strength was a major contributor along with targeted operational efficiency gains. Because of this improved revenue in cost structure our operating income performance came in at a very strong 2.9 million or 20.2% of sales, more than doubled last year's level.
Both of our primary grading businesses have shown excellent top line growth in the last year. comparing our performance to the last healthy coin market year which was 2012, grading revenues for PCGS are up 18% and PSA is up 26% during that same first quarter time period.
As mentioned earlier PCGS Shanghai opened for business this last quarter and is off to a great start, much more than just a submission center, our Shanghai team will support and develop our key marketing partnerships in China as well as providing a platform for the grading of modern and vintage Chinese coins.
In our first grading events there in August and September we received and processed more than 14,000 coins. Since that opening we are establishing a continuous modern coin grading capability and a regularly scheduled calendar for vintage coin grading in Shanghai. I am very pleased with our start in China, which has a very robust coin market much like the U.S. and Europe. The opportunity in China however, has enhanced because of the high population of ungraded coins in collectors and dealers hands thus providing us an excellent platform for growth.
This last month marked another milestone for coin grading at PCGS with us surpassing the 27 million coin graded. When you combine that with more than 21 million sports cards graded Collectors Universe has quickly converging on reaching the 50 million graded collectables mark. This tremendous accomplishment is merely a further indicator of the collector community confidence and value in our brand and service since our founding in 1986. This brand preference is one of the primary growth engines for our company long term.
Just to round out the activity profile for PCGS; we typically see our first and second quarters of the fiscal year as the weakest, sometimes reflecting the slower state of coin production at the men's worldwide until the normally more robust start of the new miasmatic year in January when newly minted coin issues are promoted. But capping off what is turning up now to be a record year at least for the U.S. Mint, we are encouraged by the moderately strong mint output occurring now ahead of that New Year and it showing up in our results with higher than normal bulk and modern grading activity.
Grading of high value vintage coins at shows has been strong all year and continues to be. All in all these are encouraging trends. For all of you coin enthusiasts out there, we just released our latest mobile app for the iPhone called Mobile CoinFacts. It’s a great mobile resource that brings the full fact set for a rare or modern U.S. coin including its population data, images and market value to your fingertips and is accessible on the go. This comprehensive database is one of those essential tools to finding those missing coins in your collection out there in the marketplace and what their current market values might be.
Looking over at PSA/DNA, our sports card business continues its steady growth trajectory accomplishing its 13th consecutive year-over-year growth quarter. As mentioned earlier grading revenue this quarter is 26% higher than the 2012 pace, and we’re averaging double digit annual growth over the last three years. Like the coin grading milestone reached by PCGS last quarter, the PSA business saw Collectors’ Set Registry reached its 100,000 member level.
Set Registry is an online forum offered by PSA through which card collectors can catalog and display their graded card collections to dealers and other card collectors safely and prominently. Card collectors buy for recognition for their sets displayed online but also the registry is a primary tool for them to seek out other cards that might be available to be acquired or traded, enhancing their ultimate complete set value. Since only PSA graded cards are included in the registry collections, services like this and the increasing use of online tools like this is another driver of our growth for our sports grading business.
In prior reports I frequently mentioned the value of the PCGS and PSA brand when collectibles are graded. Extremely high value coins or cards are excellent examples of this for the rarest of collectible items. But today I’d like to highlight a few examples of PSA graded versus ungraded valuation, which show the rationale and desire for collectors to have their items authenticated and graded. This is clearly evident we’re looking at sport cards. Here is a couple of recent example. A 1967 Topps Mickey Mantle #150 sport card, this card in ungraded form is valued at round $250, as a PSA Gem Mint 10 which is an excellent specimen by the way, this card just sold at auction for $68,676, another example, a 1972 Topps Hank Aaron #299 card, this card in ungraded form is valued at $40, as a PSA Gem Mint 10, this card just sold for $20,654. Both examples really drive home the point for collectors and dealers of what the brand and value of PSA certified and graded card have for them in the marketplace.
Certified and graded cards minimize the risk of fraud and secure the value over the long term much more than an ungraded card would. So, I hope you can see from these examples and those that I have previously mentioned in prior calls on the coin market side that the fundamental value proposition for Collectors Universe globally is securing and enhancing collectables value for our customers. This is why there are so many items graded yearly.
Lastly before I turn the call over to Joe, to further detail our financial performance, I am delighted to mention that our company has been recognized by Forbes Magazine as one of America’s best small companies in its latest issue.
On behalf of all of our team members, I would like to say we are very proud of that distinction. Every day they work very hard to meet to customers’ expectation and in the process build our company into a great place to work and prosper.
Now, let me turn over to Joe.
Thank you, Bob, and good afternoon, everyone. I'll now give a brief overview of the financial results for the first quarter of fiscal 2014. For the first quarter, the company reported record first quarter service revenues, which comprised our grading, authentication and related service revenues of $14.2 million, record first quarter operating income of $2.9 million and after-tax income from continuing operations of $1.7 million or $0.20 per diluted share.
This compares to service revenues of $10.7 million, operating income of $1.3 million and after-tax income from continuing operations of $0.8 million or $0.10 per diluted share for the first quarter of fiscal ’13.
In the first quarter, the increase in our service revenues of 3.5 million or 33% compared to last year's first quarter included increases of 2.9 million or 46% in coin service revenues and 0.5 million or 16% in our card and autograph service revenues. The 43% increase in coin service revenues in the quarter reflects the continued momentum in the coin market that began in the second half of fiscal 2013 and included a 20% increase in the number of coins authenticated and graded in the quarter.
We saw a strong growth in all our coin lines of business with modern coin authentication and grading fees increasing by 1.2 million or 78% over the first quarter of fiscal 2013. Coin revenues also included over 400K earned in our first quarter of operations to Shanghai, China. In addition, our cards and autographs business continues to show consistent growth and the 16% increase in the first quarter of fiscal 2014 represents a 13th quarter on quarter revenue growth in that business.
The favorable market conditions appear to be continuing into our second fiscal quarter of 2014 although our second fiscal quarter is typically our seasonally slowest quarter of the year due to the winter holidays.
For the first quarter 2014 our coin business represented approximately 66% of service revenues and reflects continued importance of our coin authentication grading business to our overall financial performance. Our services gross profit margin increased to 63% in the first quarter from 59% in the last year’s first quarter. The improved gross profit margin in the first quarter compares to the first quarter of fiscal ’13 reflects the higher proportion and mix of corn service revenues in the quarter.
Over the last three fiscal years our quarterly gross profit margin has varied between 59% and 64%. Selling and marketing expenses represented 15.5% of revenues in the first quarter compared to 16.2% of revenues in the first quarter of fiscal ’13. G&A expenses represented 27.3% of revenues in the first quarter of fiscal ’14 concurrent to 28.8% of revenues in the first quarter last year. The dollar increased in sales and marketing and G&A expense reflect costs incurred associated with our expansion into China, incentive cost related to the improved performance in the business and cost incurred to support the growth of the business.
Operating income for the quarter increased by 1.6 million or 121% to 2.9 million or 20% of revenues in this year’s first quarter compared to 1.3 million or 12% of revenues for the first quarter of last year. Due to the increase in service revenues at pacing the increase in operating expenses the increased operating income of $1.6 million represents an incremental operating margin of 45% on the increased revenues -- services revenues of 3.5 million.
Turning to our balance sheet, the company’s cash position was $17.5 million at September 30, 2013 compared with 18.7 million at June 30th. Net cash used of 1.2 million in the first quarter comprised cash generated from continuing operation of 2.2 million offset by dividends to stockholders of 2.7 million, 0.4 million for capital expenditures, 0.2 million used in the discontinued operations and 0.1 million for repurchase of common stock, income tax payments were 0.7 million in the first quarter.
At September 30th the company continued to have $3.7 million remaining at its previously announced stock buyback program. The company has not made any open market repurchases into this program since the fourth quarter of fiscal 2008.
On October 31, 2013 the company announced its quarterly cash dividend of $0.325 per share to be paid on November 30, 2013 to stockholders of record on November 15, 2013 with that I would like to thank you for your attention. Bob?
Thanks Joe and now I would like to open up the call for any questions you might have.
Thank you very much ladies and gentlemen at this time we will begin the question and answer session. (Operator Instructions). And our first question does comes from line of Adrian Day with Adrian Day Asset Management.
Adrian Day - Adrian Day Asset Management
I had a couple of questions actually, but just one to begin with if I may and that is sort of two part question on the overseas operations. If you look at China first of all, I’m wondering if there is any kind of differences about the sort of coin market in China [indiscernible] are they more interested in new coins, more interest in old coins, are the grading [spenders] you use over there the same as you use over here [indiscernible] people appreciate the same kind of things in a coin.
And a second question if I may, you didn’t really say too much about Paris, Europe. Is the European operation actually making money at the moment and if not, sort of when do you expect it to? Thank you.
Let me cover the questions on China for you Adrian. First of all, I think that as far as the type of coins and the interest in coins over in China they are very much like the U.S. market in that regard, there are many vintage coins in circulation -- in collections around China and there are an awful lot of modern coins being minted. And so, we have nice opportunity to address both markets in that regard.
The standards and one of the reasons why we are initially feeling pretty optimistic about China is that the coins over there hold basically their coins to the same standards as ours. So the measurement scale that we use which everyone uses in the [indiscernible] market is quite applicable to coins in China and so the PCGS grading or the brand over there is we feel pretty highly valued and is completely transferable from our experiences in the United States and Europe.
As far as the Paris question goes, we’re seeing similar activity this year in Paris as we did about a year ago and as far as we don’t give profitability up by operating office so to speak, but we are operating and approaching breakeven in that regard.
(Operator Instructions). And gentlemen at this time I’m not showing any further questions.
Well, thank you very much for joining us today. We’re quite excited about the results presented and we’re very optimistic about the future. We’re hopefully going to see another active coin here in next year after the new coins are issued in January. But thanks for joining us today and we look forward to talking to you again next quarter.
Ladies and gentlemen, I will conclude the conference call for today. If you would like to listen to a replay of this conference you may do so by dialing either 303-590-3030 or 1-800-406-7325 you will need to enter the access code 4646027. Thank you for your participation on today’s call, you may now disconnect your lines.
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