Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Collectors Universe, Inc. (CLCT)

F2Q10 (12/31/09) Earnings Call Transcript

February 9, 2010 4:30 pm ET

Executives

Michael McConnell – CEO

Joe Wallace – CFO

Analysts

Adam Whitten [ph]

Adrian Day – Adrian Day Asset Management

Dan West [ph] – West Capital [ph]

Operator

Good afternoon, everyone and thank you for joining us to discuss Collectors Universe Financial Results for the Second Quarter Ended December 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 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 Private Securities Litigation Reform Act of 1995. The company's actual results in the future they different 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 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 like to turn the call over to Michael McConnell. Michael?

Michael McConnell

Thank you. Welcome, everyone to today's conference call. I will comment briefly on the second quarter and then Joe Wallace will provide a quick overview of the quarterly financials. At the conclusion of Joe's remarks, we will then be happy to answer any questions that you might have.

Regarding the quarter, despite the economic environment that we all are well aware of, we are pleased with the company's performance for what is typically our slowest quarter of the year. And before Joe walks you through those specifics, I'd like to make several overall comments about the direction of the company and sort of the strategy that we are embracing moving forward.

The first is, with a third consecutive quarter of operating margins in the high teens, low 20s and this is excluding stock-based compensation and the impairment charges of course. We feel confident that the restructuring and turnaround efforts during the past year have firmly taken hold. Less than a year ago, we believed it both possible and reasonable to set our standard for acceptable performance at levels of operating at a profit last achieved a number of years ago and we are pleased that this internal expectation is proving to be correct.

Second, with our two main divisions, there are subsets or niches of operations not all of which correlate to one another or hold similar tactical and operating characteristics. In this quarter, our modern business performed extremely well. First, I would like to give kudos to Miles Standish and his team here for this performance. It truly was exceptional.

And having said that, I want to caution that this business line for us is inherently more volatile and lumpy than, say, our vintage grading business. But at the same time, there seems to be a general feeling among our clients and customers that in today's environment, hard assets are increasingly desirable store value. And of course, that includes gold.

Third and looking forward and you have heard me talk about on the last call, we have a number of new services and initiatives aimed at driving incremental growth to our base business. Today, I'm going to provide specifics with respect to CoinFacts. That was our subscription information model last – launched last fall.

And to go to the headline there we believe there are approximate 75,000 to 100,000 serious coin collectors for whom a CoinFacts subscription might make sense. We also believe that the primary industry publication, Coin World, has a circulation of approximately 115,000.

We held a soft launch of the CoinFacts service late in the summer of '09 and I am pleased to say, at the end of the first six months, we have approximately 2,100 paying subscribers with renewal rates approaching 90% plus. Our goal is to grow that number to 10,000 over the next several years and that sort of rounds out to a 10 to 15% penetration rate of sort of the headline market statistics I shared earlier in the paragraph. And we believe that's reasonable given our past experience and industry knowledge.

We would anticipate this initiative adding between more than 2% of revenue above the baseline for the business and most importantly, at a very, very high incremental profit margin with very high returns on incremental invested capital.

Finally, we believe that, strategically and competitively, CoinFacts, if we do our job, has an extremely strong long-term sustainable competitive advantage making this revenue and profit stream to the company very durable and very valuable. Now I know 1 to 2% may not be something that we should all feel too great about, but we operate in a fairly mature business. And I think what CoinFacts – with this example, trying to show to you is, we are very cautious about the incremental growth that we seek and particularly with respect to the capital required for that business, as well as how closely related to our core business these initiatives are.

Far too often and this company suffered from the same, people stray from their core and talk about big growth opportunities only to end up turning $1 of incremental capital into $0.50. We are not going to do that. And to me, this is a terrific first initiative out of the gate for us. And it's going to be very nicely additive to the value proposition at collectors for a very long time.

There are other initiatives that are under way and I hope to be in a position to share two of those on our next conference call, maybe three. But what I can share with you is that all of these fall into the category of not requiring a large amount of capital, having very, very high returns and being closely related to the strengths of our core operations all of which should meaningfully impact baseline business for our fiscal year 2011.

With that, I will pass the call over to Joe. And I look forward to Q&A at the end of the call.

Joe Wallace

Thank you, Mike and good afternoon everyone. I will now give a brief overview of the operating results of the second quarter and first half of fiscal 2010.

For the current second quarter, the company reported net service revenues of $8.9 million, operating income of $1.5 million and after-tax income from continuing operations of $1.7 million or $0.22 per share. This compares to net service revenues of $7.8 million and an operating loss of 419,000 and an after-tax loss of continuing operations of 1.6 million or $0.17 per diluted share for the second quarter of fiscal 2009.

For the first half of fiscal 2010, the company's net service revenues were $18.2 million, operating income was $3.3 million and after-tax income from continuing operations was $3.4 million or $0.45 per diluted share. This compares to net service revenues of $16.8 million, an operating loss of $86,000 and an after-tax loss from continuing operations of $1.1 million or $0.12 per diluted share for the six months ended December 31, 2008.

Income tax benefits of $0.2 million and $75,000 for the current year's second quarter and six months reflect an estimated annual effective tax rate of 5% due to tax net operating losses from prior years, offset by a benefit that arose in the current second quarter related to a change in the rules for alternative minimum taxes.

The company continues to have net operating losses and other tax attributes available that should offset our minimize taxes over the short term depending upon our financial performance over the next few years. The company continues to have net operating losses and other tax attributes available that should offset or minimize taxes over the short-term, depending upon our financial performance over the next few years.

Net income for the second quarter and first half of fiscal 2010 was $1.2 million or $0.15 per diluted share and $2.8 million or $0.37 per diluted share, respectively and included losses from discontinued operations of $0.5 million for the quarter and $0.6 million for the six months.

Net losses for the second quarter and first half of fiscal 2009 were $10.9 million and $12.2 million respectively and included operating losses and impairment charges related to our discontinued operations of $9.4 million for the second quarter and $11.1 million for the first half of fiscal 2009.

The losses from discontinued operations of $0.5 million and $0.6 million for the three and six months ended December 31, 2009 relate to additional fair value accruals for the leased facilities in New York City, associated with our former jewelry businesses.

The higher earnings per share reflects the improved operating results of our continuing businesses and in the case of the per-share amounts, a lower weighted average number of shares outstanding as a result of the purchase of shares in the July 10, 2009 Dutch tender offer.

In the current second quarter, the $1.1 million or 14% increase in net service revenues was comprised of a 18% increase in grading authentication fees and a 4% decline in other related services. The decline and other related services related to lower interest earned on CFC advances through the pay down of a customer note receivable in the current second quarter. For the six months, grading authentication fees increased by 9% and other related service increased by 2%.

Our coin revenues in the second quarter increased by $1.5 million or 34% and for the six months increased by $2 million or 22%. The strong coin performance was driven by increased revenues earned for the grading authentication of modern coins, which increased by $1 million or 95% in the quarter and $1.5 million or 68% for the six months.

In addition, our coin revenues included increases in revenues earned at coin shows and from vintage coins. So, overall a very strong showing in our coin business in what is typically our most challenging quarter due to the holidays.

Our other grading authentication businesses, being trading cards and autographs and stamps, faced more challenging trading conditions due to the continued economic recession. Our trading cards and autographs business experienced a 9% decline in revenues in both the second quarter and six months compared to the comparable quarters of the prior year.

In addition, the volume of stamp submissions decline by 29% and 27% for the current quarter and six months. Although this was a term success in the quarter, we have seen strong growth in the level of modern coins submissions. The level of those revenues can be influenced by specific customers or marketing problems in a given period.

So it was uncertain if the increase in modern coin submissions is sustainable. Therefore, we are not able to predict that with any assurance whether the increase in coin authentication grading revenues will continue in future quarters of fiscal 2010, nor the level of authentication and grading revenues for trading cards, autographs and stamps for the second half of fiscal 2010. In addition, coin revenues represented 63% of total revenues in the first half of the year, up from 56% in the first half of last year, thereby increasing the importance of coins to our overall financial performance.

Gross profit margins and service revenues increased to 59% for both the current three and six-month periods, compared with 48% and 52% in the same periods of fiscal 2009. The improved gross profit margin is a result primarily of cost reduction programs and operational efficiencies achieved in our coin business. In addition, the higher proportion of quarter revenues in the absence of direct stock-based compensation costs helped increase the overall gross profit margin.

Operating expense has declined by 10% and 14% in the current second quarter and six months to $3.8 million and $7.5 million respectively compared to $4.2 million and $8.8 million for the same periods of fiscal 2009.

Selling and marketing expense increased by $147,000 for the quarter and $94,000 for the six months, reflecting increased costs incurred due to attending more trade shows and increased incentive compensation. G&A costs declined $0.6 million or 17% in the three months and $1.3 million or 20% for the six months, reflecting staff reductions and other cost-saving measures that we began implementing in fiscal 2009.

G&A expenses reflects stock-based compensation costs of $209,000 recognizing the current year second quarter for performance-based stock awards where vesting was determined to be probable in the second quarter. Resulting operating income in continuing operations was $1.5 million or 16% of revenues in the second quarter and $3.3 million or 18% of revenues for the current six months, compared to losses of $419,000 and $86,000 for the three and six months ended December 31, 2008.

Turning to our balance sheet. At December 31, 2009, cash and cash equivalents totaled $18.7 million compared with $23.9 million at June 30, 2009. Net cash used of $5.2 million in the first half of the year comprised of cash generated from continuing operations of $3.9 million, the collection of a CFC note receivable of $2.3 million, the repurchase of shares in the Dutch auction tender offer for cash of $8.9 million, payment of dividends to stockholders of $1.9 million and cash of $0.6 million used in discontinued operations.

As previously disclosed on July 10, 2009, we completed a modified Dutch auction tender offer and accepted for purchase 1.75 million shares for a total cost of $8.9 million cash.

At December 21, 2009, the company continued to have $3.7 million remaining under its previously announced stock buyback program. The company has not made any open market purchases under this program since the fourth quarter of fiscal 2008.

On January 25, 2010, the company announced the payment of its quarterly cash dividend of $0.25 per share per quarter, on February 22, 2010, to stockholders of record as of February 8, 2010.

With that I would like to thank you for your attention. Operator, we are now ready to take questions from the audience.

Question-And-Answer Session

Operator

Thank you, sir. (Operator instructions) And our first question comes from the line of Adam Whitten [ph], private investor. Please go ahead.

Adam Whitten

Hey, Mike, Thank you. Thanks for a great quarter. Just had a couple of questions for you guys. You guys spoke about seasonality. Now, you guys did really well year-over-year. How should we think about kind of the seasonality kind of this quarter and kind of what the gross effect on your kind of run rate profitability is? I mean in the grand scheme of things, you guys did much better than previous year-over-year. So what kind of implications do you think that has on your run rate profitability?

Michael McConnell

Yeah. Joe alluded – this is Mike, Adam. Joe alluded to that and look, the hard aspect of answering that question is this quarter's outperformance certainly compared to last year was driven by our modern or our bulk business. Okay? Now, what are the characteristics of that business? High volumes, low average selling prices but pretty darned profitable particularly when you are using the last sort of – call it 5 to 10% of greater capacity, which is our fixed cost, right?

Adam Whitten

Right.

Michael McConnell

And that is lumpy business. It is deal driven. We've got people, I think, moving to hard assets at least what we can glean from the types of things that they are buying from their customers that we provide the service to. And so all I can really sort of say to you is – I wouldn't extrapolate that. I can't give you a formula for what it means because I don't know what deal Miles and his team is going to have with some of these folks a year from now.

The good news is that the cost structure conflux almost regardless of what happens in that area. There will always be an element of that bulk business. We just happen to – Miles and his team just knocked the cover off the ball this quarter. And so – I'm not meaning to give you a non answer. But I can't predict a year from now what that's going to look like.

Adam Whitten

Also I guess my other question is the PCGS boards, specifically some postings from David Hall regarded kind of said that he was very excited about some upcoming announcements that he called the “big one". What is the likelihood that there will be a meaningful impact in this current fiscal year from the – kind of big one or these events that are supposed to kind of new developments in the company's business?

Michael McConnell

First, let me congratulate you for trolling about the website. And look it is we believe it to be something that is meaningful and I referred at the end of my comments that hopefully next quarter to be in a position to tell you what that is. What I'm – I'm not going to be specific, Adam, because we are not sure, because of the newness of this initiative – what impact it will have. I am very confident that it will be positive, but I'm reluctant to tell you in the near-term whether it will be largely positive or modestly positive. Net, net it is good for the shareholders of this company over the long-term, I believe. And I think you are just going to have to wait until that news comes out.

Adam Whitten

Okay. Great. Last question, last question. So you were able to increase your cash balance sequential quarter-over-quarter to the extent that you're covering your dividend with the cash flow. How should we think about the additional kind of excess cash that is sitting on the balance sheet? You guys spoke to taking growth opportunities that are incrementally shareholder positive without a lot of incremental capital deployed. Now, do we see another tender offer or buyback or should the cash be on the balance sheet so that we just stay with the business? How should we think about the excess cash on the balance sheet going forward?

Michael McConnell

Yeah. It's a very fair question and I'll answer it in two ways. The first is, I think you should be comforted by the fact that we are going to husband to that capital and not do anything silly with it. And I have been very consistent for almost a year now with that dynamic. Obviously, this is a matter that the board is going to review at every board meeting and we will continue to do that. As I said, we now have got three quarters under our belt, of profitability. If I were a board member, I'm beginning to get very confident that the foundation to this company is not only solid, but I know where it is. Right?

Within a reasonable band, I think you should take comfort from the fact that in the last seven or eight months, we've returned a little over $12 million of capital through a Dutch tender and a reinstatement of a dividend. So there is an indication of our responsiveness to excess capital. And so, I think I mean, the only thing I can say is that the board will continue to monitor this cash balance. And you are correct in saying in the current articulated strategy one could conclude that there is too much capital on the balance sheet.

Adam Whitten

Great. Great. Great. Well, you guys are doing great. Appreciate the answers. Nothing else for me.

Michael McConnell

Thank you.

Operator

Thank you. Our next question comes from the line of Vadim Perelman [ph] with Baker Street Capital Management. Please go ahead. And Vadim Perelman, your line is open.

Vadim Perelman – Baker Street Capital Management

My questions have been answered. Thank you.

Operator

(Operator instructions) And our next question comes from the line of Adrian Day with Adrian Day Asset Management. Please go ahead.

Adrian Day – Adrian Day Asset Management

Yeah. Just two questions if I may. First on the CoinFacts, so (inaudible) business. I'm just wondering what do you see as the – I know it's a difficult question, but what do you see as sort of a multi-year potential of that business? Over three to five years. What could it be? And then the second thing is have you finished with all of the write-downs from discontinued or are there more for this year?

Michael McConnell

I'll let Joe answer the second one and he could talk about that less fund issue and then I will talk about CoinFacts. Go ahead.

Joe Wallace

Yeah. In relation to discontinued operations for the most part, as you've seen in Q4 and in Q2 the write-downs we've taken are specifically around the leases in New York, so all other aspects of those businesses have been written down. In terms of the leases, we need to monitor the progress on the leases and do our best in terms of estimating market rates for the lease commitments and sublease rates we can earn.

I feel that we are getting pretty close to being in a position where we've maxed out on the write-downs, but obviously the economic climate in New York in particular and in general, is difficult out there. So at this point, we are going to continue to monitor the rental rates and the market rates for those spaces. And we will continue to take that into account on a quarterly basis. But I think we are getting pretty near the write-downs.

Michael McConnell

Yea, Adrian. What we're basically estimating is, how long it's going to take the sublease the space and at what rate?

Adrian Day – Adrian Day Asset Management

Okay.

Michael McConnell

Right. And we have accrued for that. As to what we think that is, it's a pretty fluid office market in Midtown. I mean there's – last I – when I talked to our real estate broker we've hired since July or September is 30 million square feet of space and while we got some nice space, it's not A plus office space.

Adrian Day – Adrian Day Asset Management

Got you.

Michael McConnell

It happened to be in a pretty unique building. So what we are really trying to do is estimate what rate we are going to lease this space at and how long is it going to take.

Adrian Day – Adrian Day Asset Management

Okay. And on the CoinFacts?

Michael McConnell

Yeah. CoinFacts, look I indicated our goal is to have 10,000 subscribers and I think in three to five years is an appropriate timetable and at 120 bucks a year that is a revenue of $1.2 million. We've added virtually no cost to the business to launch and maintain this i.e., the people were already on staff.

They may be spending their time doing different things obviously and so that's very nicely incremental to the business. You all can put what multiple you think ought to be on that type of business here but $1.2 million of subscription-based Internet revenue where we think, it is very difficult for a competitor to put forward the same quality in depth and breadth of information is a pretty valuable, durable, long-term revenue stream.

Adrian Day – Adrian Day Asset Management

Sure. Well, as a newsletter writer, I understand that.

Michael McConnell

Right. So you write. I mean, that's Nirvana in some respect for Internet type this is where people pay you for your content.

Adrian Day – Adrian Day Asset Management

Excellent. No, that is super. Thank you.

Michael McConnell

Yeah. And over time, one can expect to as we continue to, I'm sorry. One last comment to augment. I mean, if you have gone on to that website and there's so much more we can talk about. And as we increase the value to the subscribers, it's not unreasonable to want to get paid a little bit more for that over the longer term.

Adrian Day – Adrian Day Asset Management

Sure, sure. Thank you.

Michael McConnell

You’re welcome.

Operator

Thank you. Our next question comes from the line of Dan West [ph] with West Capital [ph]. Please go ahead.

Dan West – West Capital

Hi. Can you give us cash, actual cash tax rate for modeling purposes first and then can you talk about M&A in the space? I'm newer to the Company and the business and I'm wondering can you buy competitors? Is anyone knocking on your door et cetera?

Michael McConnell

I'll let Joe take the cash taxes and I'll take the M&A.

Joe Wallace

Yes. In terms of the cash taxes, in the short to medium term it should be around 5%. Obviously, we have got, as we indicated in our commentary, we've got some operating losses and some tax attributes that will help us in the short to medium term. So in terms of cash, 5%. But obviously, as we go further out that will turn into a more normalized tax rate of around 40% but that is a number of years out.

Dan West – West Capital

Okay.

Michael McConnell

Yeah. With respect to M&A, the short answer is no. I don't see anything attractive one way or the other there. And may be a brief stroll down history lane would be helpful. This business came public. It dominates its industry. It is a small cottage industry. It raised capital to expand its wings, not once but twice. Both of those initiatives ended up destroying substantial shareholder value. And I think this Board and certainly me are going to heed the lessons of that history and think very, very carefully about any type of M&A activity.

Certainly, in an outbound visit and we know these businesses well. David Hall founded this Company over 25 years or 23 years ago. And so we don't believe there's anything that would require substantial capital that we should or could do on the M&A front in our current, under our current strategy and leadership. There might be a small database that we pick up for a couple hundred thousand dollars but nothing of size.

Dan West – West Capital

So that said and given that I believe Mike's contract is up in a year or two, what is long?

Michael McConnell

Yeah. Mike is me. Go ahead.

Dan West – West Capital

I mean you. What is the long-term strategy here?

Michael McConnell

I think the strategy is independent of my sort of contract length. The long-term strategy should be I think it is, to provide a heck of a service to our customers so that they keep coming back to us. And you know we produce in that context an appropriate return for our shareholders, right? And that could be, I think I've been pretty circumspect.

This isn't going to be an enterprise software company that grows at 30%. We don't operate in that market. We operate in relatively mature markets that are going to grow plus or minus GDP, right? And we've got, fortunately got a cost structure where we can make a pretty healthy profit margin and a very healthy return on invested capital. And so I think in many respects, the challenge for us is to not stray from something that ought to work very, very well for shareholders over the coming years.

Dan West – West Capital

Sounds great. Thanks a lot.

Operator

(Operator instructions) Mr. McConnell, I show no further questions at this time. Please continue.

Michael McConnell

Let me thank everybody for joining us. We will continue to do our basic blocking and tackling. I look forward to being able to share several of the more exciting what I think are pretty exciting things in the context of this business going forward on our next conference call. But we thank you all for taking the time and if anybody has any questions after they've had a chance to review materials please feel free to give Joe or I a call directly.

Operator

Ladies and gentlemen, this concludes the Collectors Universe financial results for the second quarter. If you would like to listen to a replay of today's conference, you may do so by dialing 1-800-406-7325 or 303-590-3030 and entering the access code of 420-6099. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts