Michael McConnell – CEO
Joe Wallace – CFO
George Marina [ph]
Marcel Herbst [ph]
Collectors Universe Inc. (CLCT) F4Q2010 Earnings Call Transcript September 8, 2010 4:30 PM ET
Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe financial results for the fourth quarter ended June 30, 2010. 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 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 forecasts 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 & 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 Mr. Michael McConnell. Please go ahead.
Thank you. Welcome to today's conference call. Before turning the call over to Joe Wallace, our CFO, who will discuss the financial results in more detail, I would like the opportunity to review the progress our company has made in fiscal 2010. A year ago I detailed several key areas of focus or our company. The first was to instill a sharp attention to efficiency and cost control in our core authentication and grading businesses.
Despite the weak macroeconomic environment, revenue grew for the year by approximately 11%, and we achieved a gross margin of 60.8% and an operating margin of 23.5%. These exclude stock-based compensation expense. The operating margin was a record for the company. In 2005 we achieved 23%.
Our entire team contributed to these financial results, and I sincerely thank them for their commitment, wisdom, hard work and creativity. Understanding who we are, what we do well, and being accountable to our plans have led to a renewed confidence in ourselves and formed a solid foundation to the business going forward.
We also completed the exit from the diamond and gemstone businesses. The excess office space in Midtown Manhattan was sublet resulting in a substantial reduction in both Collectors Universe liability as well as risk. This chapter is behind us. However, we will not forget the important lessons learned, and I believe our current strategy and implementation of growth initiatives demonstrate our commitment to prudent stewardship of your company.
Finally, to address our capital structure, last July we completed a Dutch tender for approximately 19% of the shares outstanding at a price of $5. Subsequently we initiated and then increased the quarterly dividend. Return on capital – return on invested capital from our continued operations now approaches 40%.
In summary, our back to basics plan is working well.
Looking forward to fiscal year 2011, we are encouraged by the ongoing development of various growth initiatives. Before discussing those specifically, let me highlight that we will continue to maintain our focus on efficiency and costs.
Moreover, we will seek growth opportunities within our core business and with an acute attention to incremental investment and returns on invested capital. We are looking to hit singles and doubles rather than home runs.
Specifically, the following products and services were introduced to our markets and customers during this past year. CoinFact is a little over one year old now, has exceeded our expectations and has over 3,750 monthly subscribers at 9.95 per month and continues to add new subscribers at a steady pace.
While not ready for launch yet, we continue to invest in the development of CardFacts and believe it has the potential to be as successful as CoinFacts.
Coin Secure and Plus grading were introduced in April. Sequential revenue since launch has been approximately 24%, and we anticipate achieving a pricing premium of approximately 35% over our existing service levels over time.
The marketplace is beginning to recognize the value of the secured designation and prices realized data. Importantly, the financial characteristics of this initiative had been favorable with an estimated payback on incremental capital invested of less than one year.
Our internet activities continue to perform well. CCE today has 551 members with a total revenue of approximately 1.7 million, an increase of 12% on the prior year. Recently we launched an upgraded site that has been well received by our customers and we continue to add attractive features such as quick price.
We anticipate this area of our business will continue to generate solid growth at very, very high profit margins.
PSA, PSA/DNA launched in June two new innovative products targeted at photo and autograph markets. Early indications are promising. The capital costs for this initiative were negligible and highlights how we can extend our services in extremely profitable ways.
Just as an aside on an overall basis while PSA revenue has declined, PSA/DNA revenue increased by 16%.
Finally, our expansion of world Coin Grading through the opening of an office in Paris is exceeding our base case expectations. We are all encouraged by the reception of our products and services in the European market and my sense is we may have under estimated the potential in Europe. Although early days, we are cautiously optimistic and I look forward to reporting back to you in more detail on our next call.
Collectively these and others in development are consistent with our strategy to protect our core businesses and extend pragmatically. That is, we'll grow within our core markets, we'll build on our core competence, we'll always looks for low capital requirements and healthy profit margins.
Now more specifically we have invested in fiscal year 2010 approximately 650,000 incremental dollars in the initiatives in areas I just described. And taken together we currently estimate an overall payback of less than one year on these initiatives and that incremental investment.
The risk adjusted return on these investments is very, very good and should deliver excellent value for our shareholders. As importantly, strategically these initiatives further strengthen our relationship with customers and our position in the marketplace.
Cash generation from operations remains strong and given our current business strategy and consequence subsequent capital needs the board remains dividend for the company’s shareholders
In summary your company is in good financial and operational condition, and is pursuing a low risk, high return strategy that protects the core business while extending pragmatically.
Thank you. And at this time I will turn the call over to Joe.
Thank you, Mike, and good afternoon, everyone. I will now give a brief overview of the financial results for the fourth quarter and fiscal 2010. For the current fourth quarter the company reported net service revenues of 10.8 million, operating income of 2.6 million, and after tax income from continuing operations of 11 million or $1.43 per diluted share.
This compares to net service revenues of 9.8 million, operating income of 1.2 million, and after tax income from continuing operations of 1.4 million or $0.15 per diluted share for the fourth quarter of fiscal 2009. For the full year the company's net service revenues were 39.8 million.
Operating income was 8.4 million and after tax income from continuing operations was 16.8 million or $2.20 per diluted share.
This compares to net service revenues of 35.9 million, operating income of 2.1 million and after tax income from continuing operations of 1.2 million or $0.13 per diluted share for the year ended June 30, 2009.
The income tax benefits of 8.3 million in the current fourth quarter and for the year reflects the release of non-cash valuation allowances against deferred tax assets at June 30, 2010. On the basis that it is more likely than not that we will realize those assets in future periods due to the improved performance in the business throughout 2010 and the expectation of continued profitability.
The future periods we expect our effective tax rate for financial reporting purposes to be about 40% which means we would book a tax provision at 40% against pretax income.
The company continues to have net operating losses and other tax attributes available which should offset our minimized tax payment of the cash payment of taxes over the next one to two years depending upon our financial performance and actions to be taken.
The income from discontinued operations of 522,000 or $0.07 per diluted share in the current fourth quarter mainly relates to the re-evaluation of the loss accruals by the company for its New York lease obligations as a result of the May 2010 sublease of one of the spaces to a third party and the cancelation of the lease for the second space with only a financial obligation remaining.
Net income for the current fourth quarter and fiscal 2010 was 11.5 million or $1.50 per diluted share and 16.7 million or $2.19 per diluted share respectively.
This compares to net income for the fourth quarter of 87,000 or $0.01 per diluted share and a net loss of 16.9 million or $1.85 for the fiscal year 2009. The $1 million or 11% increase in net service revenue in the current fourth quarter compared to the fourth quarter of the prior year was comprised of a 15% increase in grading and authentication fees and a 5% decline in other related services.
For the year, the 3.8 million or 11% increase in net service revenues was comprised of an increase of 14% in grading and authentication fees with other related services down 2% related to lower product sales.
Our coin revenues in the current fourth quarter increased by 1.2 million and for the year increased by 4.8 million. The strong coin performance was driven by increased revenues (inaudible) for the grading authentication of modern coins which increased by 0.9 million or 46% in the quarter and 3.7 million or 60% for the year.
Also contributing to the increase in our coin revenues in the fourth quarter of fiscal year 2010 were revenues earned from the grading authentication of vintage coins which increased by about 0.3 million or 12% for the quarter but were substantially unchanged for the year and revenues from coin shows which increased by $0.8 million or 23% for the year primarily due to an increase in the number of shows attended but were about the same quarter on quarter.
Other coin related revenues increases related to new CoinFact subscription revenues and increased advertising revenues.
Our other grading authentication businesses were impacted by the current economic recession and credit crisis.
Revenues from our trading cards and autograph businesses decreased by 1% in the current fourth quarter and 4% for the year compared to the same period of the prior year.
In addition, the volume of stamp submissions continued to decline by 26% both for the fourth quarter and for the year compared to the prior year periods.
Although the growth in the level of modern coin submissions provides substantially all of the additional revenues for fiscal 2010, the level of modern coin revenues can be volatile due to customer specific activity or marketing programs in a given period.
We continue to see a strong performance of modern coin revenues although the increase in those revenues decreased to 46% in the fourth quarter compared to 67% for the first nine months of the year.
In addition, having achieved a very strong 60% increase in modern coin revenues in fiscal 2010, it is uncertain what level of growth if any can be achieved in fiscal 2011. Due to the strong performance of our coin grading authentication business, relative to our other businesses in fiscal 2010, our coin business represented approximately 65% of total revenues compared to 57% of total revenues in fiscal 2009 thereby increasing the importance of our coin grading and authentication business to our overall financial performance.
The gross profit margin of service revenues increased to 63% and 61% for the current fourth quarter and fiscal year compared with 58% and 54% for 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 coin revenues in the absence of direct stock-based compensation costs helped increase the overall gross profit margin.
Operating expense in the current fourth quarter were 4.2 million or 39% of revenues and 15.8 million or 40% of revenues in fiscal 2010 compared with 4.4 million or 45% of revenues and 17.4 million or 49% of revenues for the same periods of fiscal 2009. The prior fourth quarter and year included an impairment charge of 649,000 related to a software project.
The resulting operating income from continuing operations was 2.6 million or 24% of revenues in the current fourth quarter and 8.4 million or 21% of revenues for the year compared to operating income of 1.2 million or 13% of revenues and 2.1 million or 6% of revenues for the fourth quarter and fiscal 2009. As noted in our earnings release, the operating income for the year was a record level of operating income for the company.
Turning to our balance sheet, at June 30, 2010, cash and cash equivalents totaled 20.3 million compared to 23.9 million at June 30, 2009. Net cash used of 3.6 million for the year primarily comprised of cash generated from continuing operations of 10.5 million and the collection of a CFC note receivable of 2.4 million offset by the repurchase of shares in the Dutch Auction Tender offer for cash of 8.9 million, the payment of dividends to stockholders of 5.9 million, and cash of 1.3 million used in discontinued operations and net capital expenditures of 0.4 million.
As previously disclosed, in July 2009, we completed a modified Dutch Auction Tender (inaudible) purchase 1.7 million shares for a total cost of $8.9 million cash. At June 30, 2010, the company continued 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 2008. In the fourth quarter the company announced an increase in its quarterly cash dividend from $0.25 per share per quarter to $0.30 per share per quarter and pay the quarterly cash dividends under this policy in both the fourth quarter of fiscal 2010 and the first quarter of fiscal 2011.
With that, I would like to thank you for your attention. Operator, we are now ready to take questions from the audience.
Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of George Marina [ph]. Please go ahead.
Good afternoon, Mike. Good quarter.
On the coin business, if I heard this right the modern coin business was about 46% in Q4 versus 67 in Q3. Did I hear that right?
60 for the year.
60 for the year, right, okay. And it looks like the coin units sequentially dropped just a hair by about 11,000 units. Is that mostly due to the drop off in the modern coin business but you picked up some more in the older coins?
That's basically it, but although the mix of business can sometimes have an impact on the actual number of coins graded but generally that's correct.
The modern coin are included in this number, I presume, right?
Yes. You're talking sequentially, right?
And on the modern coin business do you have any more color on the current pipeline momentum?
Yeah. It is a little slower than we would like, but part of that is driven by what becomes out of the mix, and they actually accelerated a program that typically happens in this quarter to May of last quarter, and so we're sort of tracking for even to last year to slightly up, but it really can change almost on a week to week basis, but it is a little slower than we would have liked, but some of it is for understandable reasons.
The other thing I would tell you is we have got – and this is a general comment in the coin side of the business, we have a very, very healthy backlog. I mean, up 70, 80% in terms of units, slightly higher – lower in terms of revenue, and we – believe it or not we had a bunch of people take a lot of extra vacation this summer.
We lost one of our graders in early August, and then with the addition of the plus grading we're working out sort of the verification process internally to that. We slowed things down a little bit. It is a long way of saying we've got a very, very healthy backlog and I have not incorporated that in my response to you.
Okay. Nice job on the margins with all of this. I see you controlled the margins nicely in the quarter just despite that. Did you have any comments on this outstanding lawsuit with counterfeiters?
Really, nothing further than is out there. I mean, I think it is pretty basic. Coin doctoring is bad for the industry and it is bad for our business. People enter into an implied contract with us when they submit coins.
We've had to pay off as you see in our warranty claim, you know I think it is almost I think $7 million now since inception of the company, and a bunch of circumstances presented themselves where we think we have an opportunity to make a significant impact to the doctoring or at least as it relates to our business and hopefully more broadly as it relates to the market, so I don't have anything further than to report other than to say it is not a small issue to our company, and we're taking it very, very seriously.
On the expense side, I don't see any much of a blip in expenses. These legal expenses can be fairly well contained?
We treat that like all parts of our business. We try to manage our lawyers as well as we manage our accountants and manage ourselves internally, so, yes, I don't think you will see a big spike in costs. We certainly not planned for that but it doesn't mean we're not going to sort of move forward in a good way either.
There is a lot of good advice out there. I find most people don't manage their lawyers very well.
How do you feel about the feedback you're getting on your new I guess technology you can call it the coin sniffers and the plus grade and that sort of stuff?
Well, it is interesting. I mean, the coin dealer marketplace which is obviously a lot of our business, you're always going to get mixed views from folks when there is change. Some people like it a lot. Others don't like it. It is not surprising to us the feedback, some positive, some negative.
Okay. Are there any opportunities in various Asian markets?
We have not put that on the drawing board yet. Obviously there is a large economy at that side of the Pacific. We're really focused now on making Europe and Paris work for us and so there may be opportunities. We have spent very little time thinking about it.
On the European, Paris office, is there ongoing – do you just go there periodically and do like a show and grade then or do you have an ongoing on the spot grading every day there?
No. It is periodically. It is as you described. We treat it like another show. We just happen to have a formal lease obligation, and very low cost, but in a very, very good location, and obviously we have the expense of taking our personnel to Paris to conduct the grading onsite.
And just one more point of clarification on the modern coin business. If I understand you correctly, your backlog in pipeline of modern coins is still very strong and just more of a timing many month to month of what the submissions will be, is that –
Yeah, I think Joe alluded to it. I mean, it is a volatile business for us, and we're dependent upon sort of third parties more than we are in our regular business because obviously the US mint will print a whole bunch of coins at one time, so customer concentration for that segment is a little bit higher, but our backlog is strong.
I mean, our units, I am looking at it here. We have a weekly revenue meeting, so this is fresh as of two days ago, for our bulk grading business the backlog is more than twice what it was last year at this time, with a value of more than twice than it was last year at this time.
Now, look, you can only put so much sausage through the sausage maker in the last 17 days, right, but it is sitting there ready to be processed, and maybe I think we probably could have managed the confluence of these productivity issues better, meaning vacation, Paris office, we lost a grader, and the Secure Plus designation but as I say, I would rather have the backlog and we just need to work real hard to move it along than not.
Okay. Thank you.
Thank you. (Operator Instructions) And our next question is from the line of Marcel Herbst [ph]. Please go ahead.
Hello, good afternoon. Just a quick follow-up on Mr. Marina’s question on you spoke about the momentum in the modern coin business. I wanted to ask you what was in the last quarter the percentage of the modern coin business and also can you address like what kind of momentum you are seeing in your regular business?
Okay, so I don't have the number for the modern coin in front of me. I mean, the size of the modern coin submissions as a percent of revenue?
Overall revenue or just coin revenue?
It is probably about 35, 40% of our coin revenues.
Okay. And in regards to the current momentum that you're seeing for your regular business?
The vintage business has held up very, very nicely for us as the show business, so we're seeing solid momentum.
Excellent. Thank you.
Thank you. (Operator Instructions) One moment please, and I am showing no further questions at this time. Please continue.
Excuse me, yeah, just a slight correction on the –
Go ahead, Joe.
Yeah, I mean, just to clarify the modern revenues it is about 25%. About 25% of our coin revenues.
So Marcel, it is not 35%. It is 25% of coin-only revenue. That doesn't include PSA, PSA/DNA, and other revenue. Okay I apologize for that. It seemed a bit heavy to me when we put the number out there.
And gentlemen, I am showing no further questions at this time. Please continue.
With no further questions, thank you very much for attending the call today. As always, Joe and I are available to take any calls that people may have after they have had a chance to look through the file documents in the earning release and thank you very much.
Ladies and gentlemen, this concludes the Collectors Universe fourth quarter financial results conference call.
If you would like to listen to a replay of today’s conference please dial 1-800-406-7325 or 303-590-3030 with the access code 4359320. ATT would like to thank you for your participation. You may now disconnect.
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