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Collectors Universe, Inc (NASDAQ:CLCT)

Q3 2014 Earnings Conference Call

May 7, 2014 4:30 p.m. ET

Executives

Robert Deuster – CEO

Joe Wallace – CFO

Operator

Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe's Financial Results for the Third Quarter ended March 31, 2014. 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 like to turn the call over to Robert Deuster. Robert?

Robert Deuster

Thank you and good afternoon and welcome to our third quarter call. Business activity at Collectors Universe’s business units has again been strong this last quarter, and we continue to see robust market conditions in our primary US markets as well as expanding opportunities for growth overseas.

I'm pleased to report another excellent quarter highlighting record topline revenue growth for our primary grading businesses, strong operating profit performance and further progress on growing our international presence. We reported $16.3 million in service revenue during the quarter, up $1.8 million from last year and $2.8 million sequentially.

Q3 remains our strongest quarter of the year and the contribution from international is now 5% for the quarter and 7% year-to-date versus 2% a year ago. Much of the sequential growth and year-over-year growth was in our coin business which grew 36% year-to-date, now representing 69% of total revenue, up from 63% in last year's comparable period.

Our sports card and autograph business grew 14% year-to-date and is now 24% of total service revenue. All of this growth year-to-date means we authenticated and graded nearly 400,000 additional items in these first three quarters of fiscal 2014 versus the 2013 time period. Our experience in increased coin service fees was consistent across all segments of our business, primarily driven by strong modern coin grading activity, including special marketing programs for dealers that add value to their sales prospects, stronger submission and grading at US and international show venues, as well as fully operational express grading services from Europe and Asia.

Today we're grading record numbers of sports card and our autograph business has been growing steadily. So with increased volume of items graded greater and a strong pricing mix, we were able to sustain a solid service gross profit margin of 63% versus 64% last year during the quarter. This was also done while fully staffing our start-up grading activities in Shanghai.

Year-to-date our service gross profit increased nearly 120 basis points to 62.4% over the previous year. To round up the high-level financial summary, our operating profit for the quarter was $3.7 million versus $3.9 million last year but this year's period included $350,000 of additional stock-based compensation expense when compared to last year.

Net income for the quarter was $2.1 million and $5 million year-to-date. I will let Joe fill in more of the details on our financials a little later in the call.

As previously mentioned, we achieved another quarterly revenue record last quarter primarily on the strength of our coin business which is up 16% this quarter and 36% year-to-date over last year. There are several dimensions as to why the steady growth has persisted over the last 6 quarters or so.

First is the US coin market is especially good with strong new coin issues from mint coupled with many specialty varieties which are attractive to collectors and the general public as well. This has the fueling our modern coin grading performance of late and as it appears to be continuing -- and it appears to be continuing excuse me at least for the near term.

While there is no direct correlation between the price of gold or silver and the demand for graded gold and silver coin, these current lower commodity prices seem to leave sufficient room and incentive for the larger dealers of mint issues to purchase more coins to grade and the best of those coins attract the higher market price for the graded versus bullion coin.

This coupled with the specialty issues like the 2014 American proof Eagle issue in January and the more recent National Baseball Hall of Fame commemorative issue coins have been a hit with collectors and have kept the mint and their dealers very busy meeting demand.

And of course, our PCGS business benefits from this high demand as the primary grading company for these types of coins. From the US’ mint – US mint perspective they just reported their results so far in 2014 and the sales of American Silver Eagles has eclipsed 18 million units through April 29. That's the quickest pace ever for this time period.

Many of these coins in gold and silver form are finding their way into IRA and other investment accounts as alternative investments to the stock market or cash. The overall coin market sentiment has also been positively reinforced by high-profile collector activity in the aftermarket, which reflects the demand for the more scarce varieties of coins.

This last quarter saw the public disclosure of what was called the Saddle Ridge Hoard. It was a find of gold coins on private property up in Northern California last year. The landowners who found it stumbled across this 1800 vintage collection of US gold coins, that when authenticated and graded by PCGS recently have estimated value of $10 million. This type the discovery of unique coins and all of the media surrounding the find captivates the public interest around the world and builds further awareness of this numismatic value that's possible with these coins.

Looking beyond the US shores, our coin grading business development activities continue in Europe and Asia. With very active express grading programs underway in Paris and Hong Kong, we're building a steady flow of coins submitted in country have graded in the US at our California operation. Essential to meet collectors’ expectations for rapid turnaround on grading no matter where they are in the world, this program has been a 2014 success.

Submitted coins are mostly of the vintage type with the greater amount of these PCGS graded coins been proliferating the local country market that builds our brand and we will see larger submissions as time goes on, especially at in country grading events. These grading shows and express grading services are important and complementary in promoting our growth offshore.

We continue to focus substantial resources inside mainland China, which is much more of a closed market and our intent is on broadening our base and building the PCGS brand in this large captive market. Our first two quarters of operations, which is the first half of fiscal 2014 in Shanghai saw a brisk trading activity but it is moderated somewhat in the third quarter due primarily to the Chinese new year holiday period.

This type of seasonality will probably be evident for us for the next several years during our start-up phase. As many of you already know from news reports the Chinese economy this year is moderating somewhat from its hyper growth rates of the last few years. This has had a peripheral negative effect on the whole of the bullion and numismatic coin markets there. Personal income is lower and thus investment.

That in turn will also have an effect on our expectations for our growth in that market for 2014. However our business development efforts from the start have been designed to establish long-term dealer and collector relationships needed to realize a greater share of the graded coin market. Year-to-date we’re pleased to see we’re tracking slightly ahead of our preliminary start-up financial goals that were established for China last year.

Before I discuss our sports card and memorabilia business, I wanted to mention one more item about our Chinese initiative. Due to the global nature of the coin market we’re planning to make China a major focus at our next Long Beach Expo in June. In its own right, the Long Beach Expo is a major coin event featuring international coins that are displayed, graded, traded and sold at auction.

PCGS will be hosting a large contingent of Chinese collectors, dealers and numismatic experts from China who will be attending the event for the first time. Meeting the experts in grading Chinese coins will be featured events.

Now switching to sports. Our PSA/DNA business also had an excellent quarter reporting service revenue growth of 11% year-over-year and 14% year to date versus the prior year. This is now the 15th consecutive quarter over quarter service revenue growth performance for PSA. Much of the steady growth is a result of a conscious strategy by the PSA team to provide a myriad of sports card and memorabilia information to the mostly web connected collector audience.

Once the realm of mostly experienced and dedicated collectors, the PSA’s web information on sports collectibles, including the collector tools such that the author like set registry which by the way is where collectors can safely display their collections and vibe for recognition from them is increasingly directed at experience and also beginning collectors. This accessible knowledge base has reenergized the hobby in recent years and resulted in more card grading activity by a wider variety of collectors and dealers.

Aside from the increasing interest in the sports collectible hobby and the high-profile athletes that are featured in these cards and autographs within a particular sports popularity, this hobby is also becoming an alternative investment vehicle and attracting many more collectors willing to pay premium prices for the best and the rarest of the graded items to complete a collection or simply own the rarest of collectibles.

So as I usually do, I would like to give you some recent examples of sports collectibles but not this – we are not going to talk about cards this time, but other items that were offered to the market and sold at very high prices again to emphasize the point I just made.

For example, a little Gary did a 1931 signed passport which was graded PSA/DNA mint nine in excellent condition, sold in April just a month ago at auction for $262,900. A 1996 Derek Jeter World Series signed bat [ph] which was graded PSA/DNA GU10 also in good condition sold in February of this year at auction for $155,350 and lastly a 1927 World Series Game Four Yankees clinch bowl tickets sold at a record price in February of this year at auction for $41,825. Truly remarkable prices.

So our PSA business is trying to serve the broad range of collectors at both ends of the value spectrum by providing the authentication and grading expertise that they value and need. There are many facets to the initiatives we have currently underway to further improve our product positioning, brand image and ability to grow by expanding operations profitably in line with market demand and strategic opportunities. I believe it is prudent to work as diligently as possible now when demand levels are high and bring on improvements in the company as we are being tested by growth to better gauge the effect of technology and logistics on our cost structure, providing balance for any longer-term market fluctuations as they may occur.

This is particularly important because of the nature of our business and its expert assessment of collectibles and that means humans touch every item in our – the critical path to service revenue. Many of you may recall earlier this year we reported that Collectors Universe reached an important milestone in its history. It graded its 50 millionth item on February 26.

As I report to you today we’re approaching 51 million items graded and we will certainly reach that level by the end of this quarter. My point here is to stress that we are processing increasing numbers of items now exceeding a million per quarter and our ability to handle that efficiently paces our growth.

In the last two years our emphasis in investment and how technology can help us make our expert graders more productive anywhere in the world, manage the immense amount of data we provide collectors for information on collectibles and simplify our operations by online processing system is a top priority for us. This is evident this fiscal year by the increased capital and people investment we've made in our enterprise IT environment.

My message here is we're planning for growth by reshaping how we do business. This year we are bringing on enhanced web-based transaction and information systems for our customers and start the journey to go paperless in operations.

Now let me turn it over to Joe.

Joe Wallace

Thank you, Bob and good afternoon everyone. I will now give a brief overview of the financial results for the third quarter of fiscal ’14. For the quarter the company earned record service revenues of 16.3 million which comprised our grading authentication related services revenues, operating income of 3.7 million, and after tax income from continuing operations of 2.1 million or $0.26 per share. This compares to service revenues of 14.5 million, operating income of 3.9 million and after tax income from continuing operations 2.4 million or $0.29 per diluted share in the third quarter fiscal ’13.

For the nine months, the company's net service revenues were 44 million, operating income was 8.7 million and an aftertax income from continuing operations was 5 million or $0.61 per diluted share. This compares to net service revenues of 35.3 million, operating income of 6.2 million and aftertax income from continuing operations of 3.8 million or $0.47 per diluted share for the nine months ended March 2013.

Coin service revenues increased by 1.6 million or 16% for the quarter and 8 million or 36% for the nine months reflecting continued momentum in the coin market that began in the second half of fiscal ’13. We earned higher average service fees and the number of coins authenticated and graded grew by 4% in the quarter and 20% in the nine months. As Bob indicated earlier, the coin increases for the 3 and 9 months included across-the-board increases in our authentication and grading fees in our coin market segments, including modern coin fees which increased by 10% and 36%, show fees which increased by 28% and 47%, vintage fees which increased by 11% and 25% and royal [ph] which increased by 64% and 74%, in each case in the three and nine month periods compared to the same periods of the prior year.

In addition, our cards and autographs revenues increased by 0.4 million or 11% for the quarter and 1.3 million or 40% for nine months. The third quarter revenue increase represented the 15th straight quarter on quarter increase in our cards and autographs business.

The favourable market conditions in the coin markets that drove the revenue increase in the first nine months of the year appear to be continuing into our fourth quarter fiscal year – sorry, our fourth fiscal quarter. However our third fiscal quarter is typically our strongest quarter of the year. In addition, our revenues in the fourth quarter of fiscal 2013 were a fourth quarter record for the business, so it is uncertain what level of growth we can expect in this year’s fourth quarter.

Our services gross profit margin was 63% and 62% in the third quarter nine months compared to 64% and 61% in the third quarter nine months of the prior year. Over the last three fiscal years our quarterly gross profit margin has varied between 59% and 64%.

Selling and marketing expenses represented 15.1% and 15.3% of revenues in the third quarter nine months of fiscal ‘14 compared with 15% on 15.7% of revenues in the same periods of the prior year. The dollar increases reflect cost incurred for our Shanghai operation, business development incentive cost and higher trade show costs.

G&A expenses represent 24.8% and 27.2% of revenues in the third quarter nine months of fiscal ’14 compared to 22.2% and 27.1% of revenues in the same respected periods of fiscal ’13. The dollar increases reflect cost incurred for our Shanghai operation, higher non-cash stock-based compensation costs and higher personnel salaries improvement and incentive costs. The resulting operating income was 3.7 million or 23% of revenues for the quarter and 8.7 million or 20% of revenues for the nine months important to 3.9 million or 27% of revenues in the third quarter fiscal ‘13 and 6.2 million or 70% of revenues in the nine months of fiscal ’13.

As discussed in the public filings the current year results reflect higher stock-based compensation of 350,000 and 773,000 for the 3 and 9 month periods associated with the company's long-term performance-based equity incentive program. Startup losses at our operations and lower revenues at our expo business due to the delay in the renewal of the customer contract.

Turning to our balance sheet, the company's cash position was $17.7 million at March 31, 2014 compared to 18.7 million at June 30, 2013. Net cash used of 1 million in the nine months comprised cash generated from continuing operations of 8.5 million and proceeds received from the exercise of stock options of 0.3 million offset by dividends paid to stockholders of 8 million, 1.2 million used for capital expenditures, 0.4 million used at discontinued operations and 0.2 million used for the repurchases of common stock.

Cash increased by 1.4 million in the third quarter from the 16.3 million at December 31, 2014. The 8.5 million of cash generated from continuing operations represented an increase of 32% over the prior nine months. At March 31 2014, the company continued to have 3.7 million remaining under its previously announced stock buyback program.

On April 30, 2014 the company announced its quarterly cash dividend of $0.32 per share to be paid on May 30, 2014 to stockholders of record on May 16, 2014.

With that, I would like to thank you for your attention. Bob?

Robert Deuster

So in summary, our experience so far this year has been a very positive one with many milestones we set out to accomplish already behind us. With a very positive outlook for the future in mind, we have much yet to achieve. But I want to thank the whole Collectors Universe’s team here for their efforts and dedication to get us this far in our journey. They are what make us a success and the premier brand in our markets.

Now with that, I’d like to turn it over for any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) And I am showing no questions in queue at this time.

Robert Deuster

Okay, great. Well thank you all for joining us this afternoon and we look forward to speaking with you again next quarter for our year-end summary. Thank you. Good afternoon.

Operator

Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today's conference please dial 303-590-3030 or 800-406-7325 and enter the access code 4682492. We like to thank you for your participation and you may now disconnect.

Question-and-Answer Session

[No Q&A Session for this event]

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