Collectors Universe, Inc. (NASDAQ:CLCT)
Q4 2014 Earnings Conference Call
August 28, 2014 04:30 PM ET
Robert Deuster - CEO
Joe Wallace - CFO
Adrian Day - Adrian Day Asset Management
Kent Hogshire - BlackRock
Good afternoon, everyone and thank you for joining us to discuss Collectors Universe's Financial Results for the Fourth Quarter and Year ended June 30, 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 now like to turn the call over to Robert Deuster. Please go ahead, sir?
Thank you and good afternoon and welcome to today’s fourth quarter and fiscal 2014 year end conference call. I will review our performance and some notable accomplishments and then give you some commentary on the outlook going forward into our 2015 fiscal Q1. I'm pleased to report to you that our service revenue was very strong last quarter, coming in at $16.5 million. That eclipsed the $13.7 million during the fourth quarter of 2013 and was an all time record for the Company during any quarterly result. This brought our total year service revenues to $60.5 million, another record, and up 25% from the $48.5 million level last year.
The strength in service revenues last year was driven by a number of factors. First the level of coin output from U.S. Mint was another record year and it included some very popular specialty coins, such as the Baseball Hall of Fame coin. This is was homerun, excuse the pun, and coupled with some innovative marketing by the U.S. Mint and PCGS a sell out in the collector community. We benefited strongly from this and so far as most of these coins are graded by a PCGS.
Overall last year, our bulk coin grading revenue also saw record levels as we continue to see a steady volume of business primarily from large coin dealers throughout the year. We also saw a continued desire by collectors to have their coins graded at show venues, especially the very popular private shows sponsored by PCGS.
Of course our entry into the Mainland Chinese market was a good start to widely developing our coin grading brand there. Overall our PCGS service revenue was 33% ahead of the fiscal 2013 pace. In addition to the strong performance of our coin segment, our PSA/DNA sports business also had another record performance for the year and continued the sequential string year of year-over-year quarterly growth, which now stands at 16 consecutive quarters.
PSA/DNA revenue was 13% ahead of last year’s level and that growth was fueled by increasing participation of collectors in this space that are using the expanding PSA presence on the web for collectable information, searching for items to add to their collection and valuations for their collections in the marketplace.
Service gross profit for the Company during the fourth quarter reached 64%, and 63% for the year, compared to the 62% level in 2013. While total company service revenues for the year were up 25% over the 2013 level, the gross profit dollars were up 26% reflecting strong pricing and internal efficiency gain. The profit contribution from our business units were up 34%, indicating excellent profit in SG&A leverage. Corporate G&A remains flat at 11% of revenue.
Overall for the year, operating profit before taxes was up 31% and net income up 28%. Fully diluted EPS from continuing operations for the year came in at $0.90, versus $0.71 from continuing operations in the prior year. Joe will give you a little more detail on the financials later, but I'm pleased with the progress all of our teams made toward our long-term growth and profit goals.
Now let me spend a little time describing some of the major accomplishments and events during last year, as our financial performance was driven by a combination of factors both internal and external to Collectors Universe. Regarding some of the external factors, it was clear that the sports and coin card -- sorry, the sports card and coin markets were healthy last year and that along with the very targeted marketing initiatives by Collectors Universe helped drive revenue gains in our primary grading businesses.
Output from the U.S. Mint for silver and gold issues were strong all year. With the price of gold moderate and fairly steady in value throughout the year, grading of gold coins for their numismatic value was attractive to dealers and this stabilized grading volume too.
Specialty issues such as the Baseball Hall of Fame coins sparked further interest form collectors and investors alike, since these types of issues were limited mintages. In order to differentiate our brand further, innovative marketing programs by PCGS stimulated additional dealer interest in grading issues. These issues when coupled with signature inserts, signed by the coil designers or baseball celebrities in the case of the Hall of Fame issues. Some of these same trends continued today in the U.S. coin market. As for the vintage or world coin market, our PCGS business expanded its brand to reach around the world and had a solid performance. Already well known for bringing higher reseller option prices for numismatic coins, PCGS promoted on-site grading at more show venues in U.S. and Europe last year.
We also increased our capability of express grading at our California facility of coins that are submitted in Paris or Hong Kong. And as previously reported, we opened our office in Shanghai, China last July thus formally promoting an already recognized brand for grading high value Chinese coins. The reception for us in the Mainland China market was great. With our view to the long-term, we are very pleased with our results in year one, which exceeded our initial expectations. All of these efforts were the drivers to the exceptional performance of PCGS last year and have expanded our share of the served market for modern and vintage coins.
Our PSA/DNA sports business has experienced continued year-over-year growth for the past four years now, increasing revenue again last year by 13%. Already the dominant brand in the sports card and memorabilia area, the growth in this business is fueled by PSA’s passionate emphasis on the needs of collectors there. PSA opened up free access to its expanding card facts database and coupled with this, an effort to get more collectors to register their collections on our online set registry. To date, there are nearly a 100,000 collections registered.
This effort brings two important tools to collectors in this space. One is the almost insatiable desire for information on cards, autographs and sports memorabilia and secondly the need for a convenient online method to find additional items to build collections and enhance their value. Information about the quality and rarity of items is found in PSA’s extensive card facts and price guide databases which sets a market standard for establishing value and build awareness and interest for collectors in the vast selection of collection category. The set registry is really the place where many of these collections come to life for the hobbyist community.
Ranking, competing and sharing information on collections and automatic linkages to marketplaces for buying listing items such as on eBay or our own Collectors’ Corner have made building collections easy and profitable. While our PSA business is centered primarily around the baseball sport, it has an expertise in all sports where cards and memorabilia have been produced over the years. Even in emerging hobby areas like entertainment, such as film and games, PSA is becoming the brand of choice for the hobbyist to collect memorabilia associated with such classic films or TV programs like Star Wars or Walking Dead for example.
All of this is evidenced by the collectibles shown at events, such as the huge Comic-Con show in San Diego, which is a very popular media event held every year. This year highlighted a number of transactions or discoveries that captivated the collector marketplace, as well as the media, especially in the coin area. For example the most valuable coin in the numismatic world was sold at auction last year and it was a 1794 U.S. silver dollar, reputed to be the first coin struck by the new U.S. mint back then and its value today is $10 million. And then the discovery of what has become known as a Saddle Ridge Hoard, hundreds of gold U.S. coins found on a private property in Northern California.
PCGS graded this trove of coins, which now have an estimated market value of about $10 million as well. These are just a few of the many valuable collectors that were graded by PCGS and subsequently were auctioned at high values in the market.
Lastly, in the past year we have reached a huge milestone and accomplishment in Collectors Universe’s history, the grading of 50 million items since the founding of the Company in 1986. All of these items are out in the marketplace or are in individual collections. Needless to say, we're not going to stop there and we’re now looking forward to the next 50 million.
Now let me turn it over to Joe for a review of our financials. Joe?
Thank you, Rob. Good afternoon everyone. I will now give a brief overview of the financials of the fourth quarter and fiscal 2014. For the quarter, the Company earned record service revenues of $16.5 million, which comprised our grading authentication related service revenues, operating income of $3.8 million and after tax income from continuing operation $2.4 million or $0.29 per diluted share. This compares to service revenues of $13.7 million, operating income of $3.3 million and after tax income from continuing operations of $2 million or $0.25 per diluted share for the fourth quarter of 2013.
For the year, the Company’s net service revenues were a record $16.5 million, operating income was a record $12.5 million and after tax income from continuing operation was $7.4 million or $0.90 per diluted share. This compares net service revenues of $48.5 million, operating income of $9.5 million and after tax income from continuing operations of $5.8 million or $0.71 per diluted share for fiscal year 2013.
As noted in our press release, operating as adjusted to exclude non-cash stock based compensation expense of $0.6 million and $1.9 million for the fourth quarter and fiscal 2014 respectively would have been $4.4 million and $14.4 million. Compared to fiscal ’13, the adjusted operating income after excluding non-cash stock based compensation of $0.2 million and $0.8 million for the fourth quarter and fiscal ‘13, would have been $3.5 million and $10.3 million respectively.
We will continue to make reference to the level of non-cash stock-based compensation in future quarters and its impact on our operating results as there can be variability in the level of expense recognized depending upon our assessment of each quarter end on reaching additional milestones under our long-term incentive plan.
Coin service revenues increased by 2.5 million or 27% for the quarter and $10.4 million or 33% for the year, reflecting continued momentum in the coin market that began in the second half of 2013 and continues throughout 2014. In addition, in the fourth quarter, we benefited from $1.4 million of revenues generated from the Baseball Hall of Fame coins that were released by the U.S. Mint in April 2014. We earned higher average service fees and the number of coins authenticated and graded grew by 12% in the quarter and 18% for the year.
Our cards and autograph revenues increased by $0.3 million or 9% for the fourth quarter and $1.6 million or 13% for the year. The fourth quarter revenue increase represents the 16th straight quarter-on-quarter increase in our card and autographs business.
The favorable market conditions in the coin market that drove the revenue increases for the year appear to be continuing into our first quarter of fiscal ’15. However, our revenues in the first quarter of fiscal ’14 were a first quarter record for the business. So it is uncertain what level of revenue growth we can expect in this year’s first quarter. At fiscal 2014, our coin business represents 69% of our revenues and reflects the dependency and continued importance of our coin business to our overall financial performance.
Our services gross profit margin was 64% and 63% in the fourth quarter and fiscal 2014, compared to 63% and 62% in the fourth quarter and fiscal 2013. Over the last three fiscal years, our quarterly gross profit margin has varied between 59% and 64%.
Selling and marketing expenses represent a 14.1% and 15% of revenues in the fourth quarter and fiscal ’14 compared to 13.5% and 15.1% of revenues respectively in the same periods of the prior year. The dollar increases reflect costs incurred for our Shanghai operation in its full year of operation, business development incentive costs and higher trade show costs.
G&A expenses represent 26.3% and 27% of revenues for the fourth quarter and fiscal ’14, compared to 25.9% and 26.7% of revenues for the same respective periods of fiscal 2013. The dollar increases reflect costs incurred for Shanghai operation, higher non-cash stock-based compensation costs, higher personnel costs, recruitment and incentive costs.
The resulting operating income was $3.8 million or 23% of revenues for the quarter and $12.5 million or 20.6% of revenues for the year, compared to $3.3 million or 24% of revenues in the fourth quarter of fiscal ’13, and $9.5 million or 19.3% of revenues in fiscal year ’13.
Turning to our balance sheet, the Company’s cash position was $19.9 million at June 30, 2014, compared to $18.7 million at June 30, 2013. Net cash generated of $1.2 million for the year, comprised cash generated from continuing operations of $12.7 million and proceeds received from exercise of stock options of 1.4 million, offset by dividends paid to stockholders of $10.7 million, $1.4 million used for capital expenditures, $0.6 million used in our discontinued operations and $0.2 million used for repurchase of common stock to satisfy tax withholdings. Cash increased by $2.2 million in the fourth quarter from the $17.7 million at March 31, 2014. The $12.7 million of cash generated by continuing operations represent an increase of 33% for the prior year.
At June 30, 2014, 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 its prognosis to fourth quarter fiscal 2008 [ph]. On July 28, 2014, the Company announced its quarterly cash dividend of $0.325 per share to be paid tomorrow at August 29th to stockholders of record on August 15. In summary, fiscal ’14 was a very strong breakout year for the business.
With that, I would like to thank you for your attention. Bob?
Thanks, Joe. Before we conclude, I would like to make a few comments on our outlook in this fiscal year. We’ve entered fiscal 2015 with a robust U.S. coin market, and a strong backlog of submitted collectibles to be graded. The modern coin market remains very active and if that continues into the fall, we should again see continued year-over-year growth in our U.S. coin business. The addition of the Shanghai operation last year and stable growth at our Paris and Hong Kong units will expand our presence from the international market and further help to balance the dependency we have had only on the U.S. market. We also anticipate steady growth this year in our sports cards and autograph business. Of course all of our expectations are governed by a number of factors not in our control such as the price of precious metals and the overall state of the economic climate in not just the U.S. but Europe and now China.
In spite of that we continue to believe that our investments in bringing the most extensive collectibles information network to collectors and providing superior authentication and grading capabilities will help them realize maximum value for their collectors. And this is the long-term winning strategy we are committed to and it will benefit our investors as well.
Thank you for joining us today and I look forward to speaking with you next quarter. Now, I would like to open it up for any questions you might have.
Thank you. (Operator Instructions). We do have one question in the queue this time. This will be from Adrian Day with Adrian Day Asset Management. Please go ahead.
Adrian Day - Adrian Day Asset Management
I was just looking at the dividend, which obviously has been very nice for many years. You are getting very, very close to earning the dividend. Once you start earning -- are you expecting to earn the dividend reasonably soon and if you start earning more than a dividend, are you thinking of increasing the dividend or you want to hold onto the cash, which I see no problem with by the way.
This is Bob Deuster. Clearly one of our goals is to cover the dividend of course and we are getting closer as you noted and if the market conditions stay strong and some of our strategies play out internationally, we hope to achieve that result fairly soon. As far as increasing the dividend, the Board always looks at how do we best make our investors hold on our strategy but we are expanding a little bit and we are using some of the cash profits we make for reinvesting in the Company. But this is not a very capital intensive business. So we will continually revaluate what our position is on the dividend and I'm sure the Board will make that clear as we go out to the next couple of years but our first call was to cover the dividend. And as you pointed out we are getting fairly close to that.
We actually do have another question in queue this will be from Kent Hogshire with BlackRock. Please go ahead.
Kent Hogshire - BlackRock
A couple of questions. First of all, it looks like your coin grading service revenue was up $2.5 million year-over-year in the fourth quarter but it benefited from the $1.4 million revenue generation from the Baseball Hall of Fame coin. Are you all expecting similar types of sort of shall we say sort of one-off coin program benefits in the coming quarters or should we treat that as non-recurring? Because if it is non-recurring, it seems like your coin grading growth actually sort of decelerated. In other words you're still showing decent growth but it decelerated and would have only been up, rather than $2.5 million, only up $1.1 million year-over-year, only up single digits. So that’s my first question.
My second question is, can you all give us sort of update on the China business? I would have expected now sort of a year into the build out of that business that that would be contributing more materially and you guys would be sort of experiencing really a rapid growth there, given how underpenetrated that market is from a grading perspective?
Let me address your first question, which is on the baseball Hall of Fame type of coin issue. That program really took off in April. We obviously had a very strong marketing program to help facilitate the dealers being able to market those coins. It’s not over yet. It’s just the $1.4 million is what we realized during the quarter. So we expected to see continued baseball Hall of Fame grading revenues occur throughout the year or as long as the supply lasts. The U.S. mint seems to like the specialty issues. There is one that’s just out now with the Kennedy coin and while it isn’t as big as the baseball coin, their strategy seems to be to make some of these issues popular in the eyes of the collectors.
So we hope that we can continue to see this on a more recurring basis by coupling some clever marketing some help for dealers to market these coins. So I hope that answers your question. It’s not just a one-time event in the quarter, although it is hard to predict how much will reoccur in the future quarters because that’s a function of how well those claims end up being turned over by the dealers.
Secondly on China, we actually had fairly low expectations going into the first year and we exceeded those. We made an investment as you know in a facility in Shanghai and we started to build our dealer network and we did create a partnership with several coin dealers in the country. We are finding as we go through this first year that many of the growth initiatives that we're seeking, we will end up partnering as well as going direct because there different types of coin vintage versus modern in China.
It is our first year and we think that what was more important is to get our brand and our service levels established and we expect to grow at pretty healthy rates over the next few years. But we're in it for the long term. There's a lot of coins in China. Many of them are vintage in nature, but there's an awful lot of modern coins too. So we're balancing how we are applying our resources to really focus on the vintage market and then to try to break into the modern market in a more meaningful way. So we think it was a pretty good start and I think you will hear about it as time goes on. And we expect it to become a meaningful contributor on the profit side to the Company as well. As of right now it is not contributing profit wise.
Kent Hogshire - BlackRock
I just have one follow up question. You mentioned strong U.S. Mint volumes. I feel like the last time I checked the U.S. Mint website, that coin volume is certainly is measured by ounces of coins were down, sort of in spring are good, they are quite weak. So I'm just wondering how do I reconcile that.
Well I think you have to differentiate between what’s being minted as a bullion for just simply accumulating gold ounces versus the numismatic coins, which are the very well struck coins that can be graded by us, that are sold to collectors and other folks that want to buy those. So there is a -- it’s not all a function of how many coins they mint, it’s the type of coins they mint that are important to us.
Kent Hogshire - BlackRock
I'm just referencing and we're mostly talking about Eagles, right? Am I missing something?
Well there is silver eagles and then there is gold eagles and then they have the specialty coins and they’ve had a number of -- like the Baseball Hall of Fame coin is obviously not an Eagle. And when we look at our modern coin volume, which is what we report as revenue, that’s been up strongly, having all of those factors contribute to it. But there has been ups and downs in terms of absolute volume from the mint and on a year-over-year basis, while the ounces maybe down in one category, they were strong in others. I don’t have the absolute numbers in front of me right now, so I can’t reconcile what you're looking at but we tend to look at it as how many of the certain type of coin is being put out by the U.S. Mint and it is -- a lot of it is Eagles clearly.
Kent Hogshire - BlackRock
Last question. Anyone who follows the gold market is hearing a lot of about weak physical demand by the Chinese consumers for gold heading into sort of the summer months as indicated by weakness in the imports -- gold imports from Hong Kong to China et cetera. Can you comment on that or your various contacts you have and I understand you guys have a small snapshot. Are you all seeing weakness in the physical gold market in China?
Are you talking about the minted gold or the block -- the level of output from the Chinese mint in terms of issues of pendants for example, gold pendants is down somewhat. The demand for those coins is down somewhat because of the economy. Gold was used extensively in prior years as gifts in that country, and so we're seeing that taper off somewhat. The vintage or what I'll call the numismatic market is still pretty strong and there's a lot of those coins over there that are ungraded. That’s what we look at as our surf market that we are going after initially. The modern market is secondary for us over there.
(Operator Instructions). And currently nothing in the queue. At this time I will turn things back over to our hosts for any additional or closing remarks.
Well, thank you everyone for joining us this afternoon. We look forward to reporting next quarter how fiscal 2015 is going. Thank you very much.
And again that does conclude today’s conference call. Thank you for your participation.
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