Collectors Universe, Inc. (NASDAQ:CLCT)
F1Q2011 Earnings Call Transcript
November 4, 2010 4:30 pm ET
Michael McConnell, CEO
Joe Wallace, CFO
George Marima [ph]
Good afternoon everyone, and thank you for joining us to discuss Collectors Universe financial results for the first quarter ended September 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, then open up the call 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 and 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 Michael McConnell. Michael?
Thank you and welcome everyone to today's conference call. I will touch briefly on the quarter's financial performance and provide an update on several key initiatives at the company. I'll then turn the call over to our Chief Financial Officer, Joe Wallace, who will provide a more detailed overview of our financial results. At the conclusion of Joe's remarks, we will open the call for questions.
The company produced solid financial results for the first quarter of fiscal year 2011. Revenues grew by 5% driven primarily by an 8% increase in coin service revenues. Notably, coin units graded increased by approximately 25% compared to the same period last year. Within this unit increase at PCGS, bulk was up 35% and vintage was also up by 7%. We were particularly pleased about the continued steady increase in vintage, given it is a more consistent component of our business.
As many of you know, the bulk or modern business is inherently lumpy. Overall, our operations team did a fantastic job moving submissions through our system. A decline in average service fee, driven primarily by a mix shift to more bulk modern coins by unit, limited our gross profit improvement to a little over 1% to 61% as compared to the prior year.
Operating income before stock-based comp improved by approximately 4% as compared to the prior year. The operating leverage in the business was lower than one would expect due to our conscious effort this year to invest prudently and modestly in our business for future growth. For example, selling and marketing expense increased by approximately $300,000 quarter-on-quarter driven largely by investment in two areas
First, the European grading initiative in Paris, and second, three shows put on by PCGS and PSA in the quarter.
We obviously are monitoring these dollars carefully to ensure they deliver incremental profit for the company over the mid to long-term. As you know, the Board also approved a further increase in our dividend in early October and remains committed to a strong and stable dividend policy as a way to provide value to our stockholders.
Finally, let me briefly comment on the tax provision. First, and importantly, our cash taxes paid remain minimal and provided business conditions remain at approximately current levels, we anticipate paying minimal cash taxes in fiscal 2011 and fiscal 2012.
When the allowance against the deferred tax asset was reversed in Q4 of fiscal 2010, going forward, we will record a book tax provision on the income statement, thus impacting reported EPS. However, the cash flow statement highlights the non-cash nature of this provision.
Joe will comment further on this element of today's financial results in his prepared remarks.
Going forward, our second quarter is typically our slowest quarter of the year. We are, however, encouraged by several programs resulting from production at the U.S. Mint expected to come online between now and the end of the year. Additionally, our team just returned from Paris and we had another solid show where we continued to develop important relationships with customers on the continent.
Lastly, we expect to launch a further enhancement to our coin secure products shortly and we see steady increases in our subscriptions to our CoinFacts service, which now approaches 4,500, well above our original forecast.
I'll now turn the call over to Joe.
Thank you. Thank you, Mike, and good afternoon, everyone. I will now give a brief overview of the financial results for the first quarter of fiscal 2011. For the current first quarter, the company reported net service revenues of $9.8 million, operating income of $1.8 million, and after-tax income from continuing operations of $1.1 million or $0.15 per diluted share. This compares to net service revenues of $9.3 million, operating income of $1.8 million, and after-tax income from continuing operations of $1.7 million or $0.22 per diluted share for the first quarter of fiscal of 2010.
The reduction of the after-tax income from continuing operations in the current three months ended September 30, 2010 compared to the three months ended September 30, 2009 relates to us recording for financial reporting purposes an income tax provision of $745,000 or 40% of pre-tax income in the current period compared to $127,000 or 7% of pre-tax income in the three months ended September 30, 2009.
As we discussed in our fourth quarter conference call at June 30, 2010, we released valuation allowances against deferred tax assets on the basis that it is more likely than not that we realize those assets in future periods. As a result, for financial reporting purposes under GAAP, we are required to record a tax provision based upon our estimated effective annual tax rate, which is 40%. The company continues to have net operating losses and other tax attributes available, which should offset or minimize its cash payment of taxes over the next one to two years depending upon our financial performance and actions to be taken.
The small loss from discontinued operations of $13,000 in the current first quarter and $53,000 in the prior first quarter, many relate to accretion expense for the New York facility obligations for our former jewelry businesses. The $457,000 or 5% increase in net service revenues in the current first quarter compared to the first quarter of the prior year was comprised of a 4% increase in grading and authentication fees and a 9% increase in other related services. The increase in grading fees related to coins with sports cards and autographs and stamps remaining substantially unchanged.
The increase in other related services included increased subscriptions and advertising revenues partially offset by a reduction in our Expos’ collectables convention business.
Our coin grading and related revenues from the first quarter increased by $441,000 or 8% over the prior first quarter and included a 25% increase in the number of units graded resulting in a 6% increase in grading fees.
In the quarter, modern coin units graded increased by 35% and revenue increased 14% reflecting a higher number and proportion of modern coins graded at a lower average service fee compared to the same period of fiscal 2010. As we have discussed in previous calls and filings, the level of modern coin revenues can be volatile due to specific customer activity or marketing programs in a given period.
Modern coin revenues increased 14% in the first quarter compared to 46% in the fourth quarter of fiscal 2010 and 60% in fiscal year ended June 30, 2010. Therefore it is uncertain what continued level of growth if any can be achieved in fiscal year 2011.
Due to the strong performance of our coin business, relative to our other businesses, coins represented approximately 61% of total revenues, which demonstrates the importance of the coin business to our overall financial results. The gross profit margin on service revenues increased to 61% in the current first quarter from 60% in the same quarter last year and at 61% – excuse me – was consistent with the gross profit margin earned in fiscal year 2010.
Operating expenses in the current first quarter were $4.1 million or 42% of revenues compared with $3.8 million or 40% of revenues for the same period of fiscal 2010. The dollar increase in operating expenses mainly related to sales and marketing expense and reflected increased trade show and business development costs. The increased trade show costs included grading in Paris, France as we expand into Europe and attending or staging other key customer events, resulting operating income in continuing operations of $1.8 million in both the first quarter of this year and last year.
Turning to our balance sheet, on September 30, 2010, cash and cash equivalents totaled $19.3 million compared with $20.3 million at June 30, 2010. Net cash used of $1 million in the quarter primarily comprised of cash generated from continuing operations of $1.3 million, which is net of the payment of about $0.7 million for annual incentive compensation payments, offset by the payment of dividends to stockholders of $2.2 million, and cash of $0.1 million used in discontinued operations.
At September 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 repurchases under this program since the fourth quarter 2008. On October 6, 2010, the company announced an increase in its quarterly cash dividend from $0.30 per share per quarter to $0.325 per share per quarter. And we will pay the first quarterly cash dividend under this policy on November 19, 2010, to stockholders of record on November 5, 2010.
With that, I'd like to thank you for your attention. Operator, we are now ready to take questions from the audience.
Thank you. (Operator instructions). We have a question from the line of
George Marima [ph].
Hi guys. Thank you for taking my call.
No problem. Good afternoon.
Hi. Got a few questions for you. In the press release, you talked about the optimism about the bulk submissions and used the word potential. Are these with current existing customers’ follow-on programs or with new customers?
Yeah, they are with existing customers and they're not necessarily follow-on programs in the sense that these are sort of one-off programs. The Mint prints something and they choose to continue to work with us or not. It's not necessarily a follow-on, if you know what I'm saying.
Yeah. I got you.
They are existing customers.
Okay. And then for 2011, do you have the ability to see or have any vision into the releases of modern coins and what sort of trajectory that may look like given that the price of gold is doing what it's doing and do you have any color on 2011 yet?
Yeah, minimal. I mean, the Mint sort of isn't interested in providing us a little company here in California, tremendous visibility. But as I said in sort of the remarks there, there are a number of things that we do know, but it is limited visibility, limited, when I say the next 60 to 90 days of programs that could come to us with potential customers, but it's not longer than that.
Okay. And you said that the vintage coin business was up about 7% this quarter. Are the drivers of that more economic or the price of gold or more interest in the hobby or anything you can share about that?
Well, I think it's all of the above, not to be vague with you, and Joe, feel free to chime in. We obviously held more shows, one more show this year in Vegas, so that helps. And those shows are profitable in their own right, okay. Obviously the price of gold helps. I can't sit here and tell you I think there's a greater secular interest in coins per se, it's a mix of all of these things.
Okay. Well, I would imagine as the price of gold moves higher, more and more coins that may have been not worth submitting in the past may become worth submitting because of the values.
Absolutely. Absolutely, that's true.
Yes. Do you find there's more turnover in the coins when prices move like this or is it pretty steady in terms of people buying and selling back and forth?
Honestly, I don't know.
Don't know, okay. And to what effect are submissions being driven by some of your new initiatives with the new programs you have with the coins like the Secure Plus, etcetera?
Yeah, that's obviously helpful and additive to us. So – and we continue – obviously, our effort in world coins over in Paris is additive to it. And so what we're trying to do is continue to put sort of new things, I mentioned an enhancement to the coins secure service that's going to come out of here shortly. And I think that's just good business to continue to sort of enhance the products and services, and in the case of Europe distribution outlets that we have for our businesses. So, yes, it is driven by that.
And in the last conference call, you stated that you would share with us a little more information about the European expansion, and you talked about you had some increased costs due to Paris. Are these investment costs? Is this more expense related to shows or are you doing some actual infrastructure there or is there any more color you can give us on Europe going forward?
Yeah, sure. There are very few, if any, capital costs that we're aware of right now and those were minimal. So the costs that we're talking about are essentially show-type costs, sending people to Paris, France to grade coins.
Do you plan to have any kind of permanent presence there in the future?
That is not contemplated at present.
Okay. Okay, that's it for now. Thank you.
You're very welcome.
Thank you. (Operator instructions). And there are no further questions in the queue. Please proceed.
Everybody, thank you very much for dialing in today's call. As usual, if anybody has any questions after reviewing the Q or the release, please feel free to call either Joe or myself and we'll do our best to answer your question, and we look forward to you being with us on our next call in a couple months time. Thank you very much everybody.
Ladies and gentlemen, if you would like to listen to a replay of today's discussion, please dial 303-590-3030 or 800-406-7325 with the access code 4382799. This concludes the first quarter 2011 earnings release from Collectors Universe. Have a wonderful day.
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