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TESSCO Technologies (NASDAQ:TESS)

Q3 2014 Earnings Call

January 23, 2014 5:00 PM ET

Executives

David Calusdian - IR, Sharon Merrill

Robert Barnhill, Jr. - President and CEO

Aric Spitulnik - CFO

Analysts

Steve Shaw - Sidoti

Tom Kerr - Singular Research

Operator

Good day ladies and gentlemen, and welcome to the Q3 2014 TESSCO Technologies Inc. Earnings Conference Call. My name is Whitney, and I will be your operator for today. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. David Calusdian with Sharon Merrill. Please proceed, sir.

David Calusdian

Good afternoon everyone and thank you for joining TESSCO Technologies' third quarter 2014 conference call. Joining me today are Robert Barnhill, TESSCO's Chairman and Chief Executive Officer; and Aric Spitulnik, the company's Chief Financial Officer.

Please note that management's discussions this morning will contain forward-looking statements about anticipated results and future prospects. Forward-looking statements involve a number of risks and uncertainties, and TESSCO's results may differ materially from those discussed today. Information containing factors that may cause such a difference can be found in TESSCO's public disclosure, including the company's most recent Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

With that introduction, I would like to turn the call over to Bob Barnhill, TESSCO's Chairman and CEO. Bob?

Robert Barnhill, Jr.

Thank you, David, and thanks everyone for joining us today. On today's call, I'd like to share a few comments on our performance during the quarter, our thoughts in the company's strategic direction and strategies; and highlights of our recent business activities. Aric will follow with a review of our results, and then we will open the call to questions.

Let me first give a quick review of our results; revenues were $145 million, operating margin increased to 4.9% from 4.3% last year; net income was $4.4 million or $0.53 per share and EBITDA was $1 per share. We are also pleased to announce a 11% increase in the quarterly dividend to $0.20 per share, and this increase demonstrates our strong financial position, increased cash generation, and the Board's confidence in our ability to execute on our strategic initiatives.

During the third quarter, we continued our total focus on serving the public, government and private wireless system operators and commercial resellers in retail, and providing these customers with the knowledge, the products and supply chain solutions required to support their wireless deployment.

We are making great progress in enhancing our strategies to gain new customers, monthly total source buyers and operator productivity and profitability. Our overall strategy is what we call high-touch, high-tech, and it's founded on five key areas. First, developing strong one-on-one personal relationships with our customers. Second, continuously enhancing our value proposition and offering. Third, providing the knowledge and products to configure specific end-to-end solutions to meet customer requirements.

For example, for more effectiveness, we are now building [up] our solutions development and our architect design teams to work closely with our relationship executives to interface with the customer.

The fourth area is expanding into new customer segments. To that end, we have created new customer acquisition and developing it, which will focus solely on acquiring new customers in new segments, which should drive significant growth opportunities for us. These segments by the way, include oil and gas, transportation, utilities, mining, manufacturing, service center, healthcare, hospitality, education, data centers, and other enterprise private network operators.

Lastly, the key strategy is the foundation of our new business development efforts is building and executing on an imarketing system -- what we call the imarketing system. This system drives new customer attraction, acquisition, knowledge, delivery, opportunity, development and productivity for not only the customer, but for TESSCO. I can't emphasize enough the importance of this system, to the goal of achieving sustainable profitable growth.

TESSCO.com is the foundation of the imarketing system. The customer's primary resource of knowledge and the ability to design and configure solutions, to make a purchase, direct delivery, and control their supply chain. A robust and growing database of prospects and customers and with profiles, roles, preferences and privileges integrate all of our go to market campaigns and customer service.

Then our one-to-one guidance system presents our business generation team with a roadmap for activity, opportunity pursuit, outstanding tasks and customer interchange conversation guidance.

Two new critical components, which are very exciting in TESSCO's imarketing system were launched this past quarter; the intelligent alternatives in advanced product recommendation engine. These advanced capabilities are built on the strength of big data and analytics, and deploy sophisticated algorithms to improve the customer experience, drive cross-sell and advance margins.

Presently, alternatives at the time of order entry, for presenting the alternatives at the time of order entry, prevents a lost sale on the desired items out of stock, and offering a relevant alternative. The recommendation engine presents a high probability complementary suggestion in real time. Typically, these capabilities are offered only by B2C companies and large cap companies, but TESSCO's technology and analytics capabilities have taken a substantial step towards reaching our total imarketing vision.

Looking on some of the products side; the successive [strength] in third quarter, our Ventev product development and manufacturing group achieved 19% growth. In December, in the wireless infrastructure unit of Ventev announced its new line of integrated outdoor wireless enclosure systems. These preconfigured plug and play, battery operated enclosures are ideal for utilities in the oil and gas industry, which require integrated systems to power and protect essential communication equipments in remote and often challenging environments.

Ventev also secured an agreement with a major airline carrier to support the buildout of its tarmac Wi-Fi network. Also, Ventev won a contract to provide a major automobile manufacturer, with high density antennas for its factory-wide Wi-Fi network, to track inventory and provide data to maintenance and line workers, who are utilizing tablets to track their work orders. It also made progress with the new (inaudible) bubble enclosures for healthcare and medical applications.

Then on the mobile accessory unit side of Ventev, we continued to gain market share, particularly in the dealer and regional retail channels, as well as some successful placements in mass consumer electronics. Earlier this month, Ventev launched three unique mobile device chargers, at Pepcom's Digital Experience, in conjunction with the Consumer Electronics Show in Las Vegas. These announcements include a combination of wall/car charger for (inaudible) utility. A combination of battery and wall charger that can charge two devices at once; a dual port car charger, specifically for the high power needs of the next-gen tablets.

We also signed two new international distributor partners to take Ventev beyond the United States. And lastly, our ventev.com B2C site is reaching the beta test completion, and will be aggressively promoted shortly to drive consumer direct sales.

Overall, we are very pleased with the progress we made thus far during this transitional year. The convergence of wireless and the internet is creating new opportunities and challenges for the system operators, and we, TESSCO, are providing the solutions to help our customers make wireless work.

As we look ahead to the fourth quarter, we believe TESSCO will make further gains in enhancing our strategy and execution. This should place us in a solid position for new growth in next fiscal year.

And with that, I will turn it over to Aric, for a review of the financials. Aric?

Aric Spitulnik

Thanks Bob. Looking at the first quarter results, revenue for the quarter were $145 million, compared with $147 million in Q2 and $204 million a year ago. Total revenues, which excludes the transition from the 3PL relationship was essentially unchanged from a year-ago quarter, and down only about 1% in the second quarter.

Revenues from our public carrier customers increased 15% from a year ago, as a result of the ongoing aggressive spending, to enhance their systems and meet the surging demand for wireless broadband coverage and capacity. That market continues to be strong, and we have also been successful in expanding our market share, through deliberate focus on selling (inaudible) solutions.

We did see some growth further earlier than we expected in the third quarter, and we have the (inaudible) ramp up in the fourth quarter. We have many great opportunities ready to get underway, it's just a matter of the timing.

Also as Bob mentioned, Ventev sales were up 19% from a year ago, on strong sales and booking infrastructure, and mobile accessories side of the business. Core gross profit was up about 2%, and gross margins increased 40 basis points in the ongoing business. The 19% growth of the Ventev business provided a partial lift to gross margin, as for the efficiencies and our logistics processes. Meanwhile, the transition out of the 3PL business resulted in an increase in overall gross margins from 19.1% to 24.9%.

SG&A was down about $1.3 million or 4% in the third quarter of 2013; again, as a result of the 3PL business and some of the marketing expenses that are no longer associated with that business, as well as due to lower expenses around such areas as bad debt expense and bonus expenses. Overall loss of about $59 million in revenue from the transition of the 3PL relationship, resulted in decline in operating income of just $1.6 million.

On a percentage basis, operating margins were raised to 4.9%, from 4.3%. Net income as a percent of revenue grew at 3.1% from 2.6% in the same quarter a year ago. Both of these increases were largely due to the transition of the 3PL business.

Earnings per share totaled $0.53 this quarter, compared to $0.65 in last year's third quarter, again, the decrease related to the 3PL business.

So back to the markets; the public carrier space I discussed earlier continued to produce good results. We are continuing to see activity and we also believe, are winning market share.

Of way as an example, in just over one year, we have doubled the number of large public carrier customers we serve. We now have about 25 customers generating at least $1 million in revenue, in annual revenue. Revenues and gross profits in that market, both grew about 15% year-over-year.

Our value proposition, logistics expertise and inventory management continue to land very well new contractors, program managers and integrators, working on these large [deals]. In the commercial dealer and reseller market, revenue and gross profit were essentially flat. Moreover, for the year, we were tracking a 5% increase.

In the private and government system operator market, revenue declined less than 1%, while gross profits declined 3%. The temporary government shutdown have an impact on our sales during the quarter. In fact, some projects that we were expected to participate in, still remain delayed.

The maritime market revenues and gross profits decreased 11% and 3% respectively. As I mentioned last quarter, the carriers that made changes in their business model, that have impacted indirect sales, and direct sales for the carrier and independent agents.

We have seen the carriers become more competitive in trying to win the indirect [Asian] business. While our value proposition is still being well received and we have undertaken steps to enhance our connection to these customers. We have also been more active in pursuing opportunities in the mass consumer electronics and similar channels. While we have won some nice new business in these sectors, it will take some time to build up our presence there.

Turning to our balance sheet, as compared to the second quarter, inventory declined almost $4 million to $62 million this quarter. Given the slowdown in the public carrier growth, we took a (inaudible) time of the year, as well as the one of the holiday resell season, we were able to reduce the overall inventory. Cash collections remain stronger in the quarter, and our cash increased $5 million, totaling more than $8 million.

Overall, we generated $7 million of cash from operations during the quarter. As Bob mentioned, we also set our dividend of $0.20 per share, with a record date of February 5th, and our payment date of February 19. The $0.20 represents an 11% or $0.02 increase from the previous quarter.

Based on the study results we achieved this quarter, we are also affirming our fiscal 2013 EPS guidance in the range of $1.90 to $2.10. As we said in the press release, the top end of this guidance range assumes a faster than currently expected commencement of carrier growth, and a faster than expected benefit of our investments in our business generation engine.

In closing, we have made solid progress in the core business this quarter. We continue to target new customers and new markets, and we successfully transitioned away from the major 3PL relationship.

Thank you for your support of TESSCO. Operator, we will now open the call for some questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Steve Shaw with Sidoti. Please proceed.

Steve Shaw - Sidoti

Hi Bob. Hi Eric. How are you guys doing?

Robert Barnhill, Jr.

Hey Steve.

Aric Spitulnik

Great.

Steve Shaw - Sidoti

Aric can you repeat, you guys doubled large public carriers to, what number was that?

Aric Spitulnik

We have 25 today that are on phase to do more than $1 million in revenue. That's about double where we were by a year ago.

Steve Shaw - Sidoti

Okay. Then can you guys just give an update on the train industry and the Positive Train Control and demand for that product.

Robert Barnhill, Jr.

The band and the need is high. The deployment rate still remains at the pace, we see some tests. But the railroads are not committing at this particular point. You would have hoped that, some of the tragedies we have had, one in New York in particular would start to drive it more. But we are not seeing that as yet. But there is a promise for the future.

Also the products that we developed and the relationships we built are helping us in other areas, not just the Positive Train Control area.

Steve Shaw - Sidoti

Okay.

Operator

Your next question comes from the line of Tom Kerr with Singular Research. Please proceed.

Tom Kerr - Singular Research

Hi guys, how are you doing?

Robert Barnhill, Jr.

Hey Tom. Good.

Tom Kerr - Singular Research

Could you go over again, a 7% decline in the retail and on the dealer space, I wasn't following that. Was that a temporary type deal or a new strategy shift that's going to keep going at, I didn't quite understand that.

Robert Barnhill, Jr.

I think, the carriers have implemented a -- from a corporate point of view, a direct factory of acquisition strategy. Then, they are going back to offering their independent channel, the opportunity to buy products directly from the central carrier operation. And so, that's having an impact on some of the business that we and others have gotten from the independent channel. Recognizing though that the carrier offering is a narrower offering than the products we can provide, and also our value proposition of being able to help the stores with the products they offer from a choice of brands, and then our ability to assist them in selling through and then also to make sure that they have product on-hand, due to our speed of delivery, is going to help us pass that -- the competition with the carrier direct, but its still going to have an impact, and it's one of the areas that we are really expanding into other areas, book stores, other types of retail outlets to replace some of that business.

We will probably, as the industry continues to grow, the opportunity to maintain the volume and grow the volume is there, but the market share of the independent dealers will be less.

Tom Kerr - Singular Research

Okay. I think that helps. I think I got it. All right, that's all I had.

Robert Barnhill, Jr.

Okay. Thanks.

Operator

[Operator Instructions].

Robert Barnhill, Jr.

Anything else, operator?

Operator

There are no further questions on the queue.

Robert Barnhill, Jr.

All right. Then let me just wrap up then, as far as I -- I really want to thank you all for being with us today. As you can see, TESSCO is well positioned financially, operationally and strategically to seize on the opportunities in our rapidly expanding markets. We are making great progress, as we strive to increase new customers, monthly buyers and operational productivity and profitability. We are investing in customer acquisition and the technology to support our aggressive business development goals. We are seeking increased adoption of our Ventev products, and based on market share amongst our carrier and (inaudible) customers and expect to continue to stay in that segment and fiscal year 2015.

As we look to the future, it's a very exciting time for us. The convergence of wireless and internet is creating new opportunities, and we are energized to pursue them, to build sustainable profitable growth. I thank you again for your support, and for being on the call. Have a great evening, and I look forward to talking to you again on our fourth quarter call. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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