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Collectors Universe, Inc. (NASDAQ:CLCT)

F2Q11 Earnings Call

February 8, 2011 4:30 pm ET

Executives

Michael J. McConnell - Chief Executive Officer

Joseph Wallace - Chief Financial Officer

Analysts

Marcelle Herbst - Herbst Capital Management

Garrett King - Truffle Hound Capital

Operator

Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe Financial Results for the Second Quarter Ended December 31, 2010. With us today from management are Mike McConnell, Chief Executive Officer, and Joe Wallace, Chief Financial Officer. Management will provide a brief overview of the quarter and then open the call for 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 turn it over to Michael McConnell. Michael?

Michael J. McConnell

Thank you and everyone welcome to today’s conference call. Before turning this call over to Joe Wallace, our CFO, who will discuss the quarter’s financial results in more detail, I’d like the opportunity to review our results for the second quarter of fiscal year 2011. It was a solid quarter for what is typically our slowest time of the year.

Revenues grew by approximately 8%, 5% of which was driven by increase in average service fee, with PCGS, PSA PSA/DNA and CAE all contributing. Gross profit held at approximately 60%. As I indicated at the start of the year, we consciously made several investments in our cost this year and despite those investments operating income grew by 8% year-on-year.

Several specific comments that should be helpful to understand certain parts of our business. The Paris operation lost approximately $60,000 in the quarter and $130,000 year-to-date. These figures are consistent with our plan for the year and we forecast Paris to break even in the second half of this year, our fiscal year. We continue to be encouraged by the market acceptance of our products and services on the European continent.

On the cost side of the business, we held our monthly meeting this morning and my topic was healthcare costs. Our current quote from our healthcare insurer calls for a 17% increase or approximately $175,000 for the 12 months beginning March 1, 2011.

Going forward. We’ll handle this in our plan for next year, but this is a glimpse of the types of day-to-day realities faced by our employees as well as the company. Our CAE business continues to exceed expectations. Its revenues grew year-on-year by 20% and operating profit by nearly 42%. (Inaudible) and her team continued to add information and functionality to improve the experience for our customers. And these are being well received as both membership and listings continue to grow.

Our advertising business across all units continues to grow nicely. Revenues are up approximately 15% year-on-year and our goal over the next couple of years is to double ad dollars from current levels. Finally, your Board remains committed to the company’s dividend policy. The quarter’s dividend will be paid towards the end of the month.

Looking forward, as we head into the third quarter of fiscal year 2011, we are encouraged by the first five weeks. We have started this quarter very strongly and just had our highest grossing weekly revenue in the 25-year history of the company. That 25 year history, by the way, the anniversary was February 3. So we’ve been around for quite a long time.

The bulk business is very strong right now with a number of programs and products underway. And overall, our backlog is up approximately 24% as compared to last year at this time.

At this stage, I’ll then turn the call over to Joe and of course will be here at the conclusion of his remarks to answer any questions.

Joseph Wallace

Thank you, Mike, good afternoon everyone. I'll now give brief overview of the financial results for the second quarter of fiscal ‘11. For the current second quarter, the company reported net service revenues of $9.6 million. Operating income of $1.6 million and after-tax income from continuing operations of $1 million or $0.12 per diluted share. This compares to net service revenues of $8.9 million, operating income of $1.5 million and after-tax income from continuing operations of $1.7 million or $0.22 per diluted share for the second quarter of fiscal 2010.

For the first half of the year, the company's net service revenues were $19.4 million. Operating income was $3.4 million and after-tax income from continuing operations was $2.1 million or $0.27 per diluted share. This compares to net service revenues of $18.2 million, operating income of $3.3 million and after-tax income from continuing operations of $3.4 million or $0.45 per diluted share for the six months ended December 31, 2009.

The reduction in the after-tax income from continuing operations in the current three and six-month periods compared to the prior year three and six-month periods relates to us recording for financial reporting purposes, income tax provisions of $0.6 million and $1.4 million compared to net income tax benefits of 202,000 and 75,000 in the three and six-months ended December 31, 2009.

As discussed previously at June 30, 2010, we released valuation allowances against deferred tax assets on the basis that it is more likely than not that we will realize those assets in future periods. As a result, for financial reporting purposes under GAAP, we are required to record tax provisions based upon our estimated effective annual tax rate of approximately 41%. The company continues to have net operating losses and other tax attributes available that should offset our minimized cash payment of taxes into fiscal 2012 depending upon financial performance and actions to be taken.

The small losses from discontinued operations of 22,000 and 35,000 in the current second quarter and six-month periods mainly relate to accretion expense for the New York facility obligations for our former jewelry businesses.

Revenues increased by $0.7 million or 8% in the second quarter, a $1.2 million or 6% for the six months compared to the same period the prior year. The increase is comprised of 4% integrating authentication fees in both the second quarter and six-month periods, and increases of 31% and 18% and other related service and product sales for the current three and six-month periods.

The increases in grading fees mainly related to coin increase of 5% and 6% in the three and six-month periods. The sports cards and autographs and stamps remaining substantially unchanged.

The coin increases reflect the mix of service and customer programs in the three and six-month periods. In addition, although still relatively small, we have begun to generate coin grading and authentication revenues in Paris, France.

As we’ve discussed in previous calls and files, 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 11% in the first half of the year compared to 46% in the fourth quarter of fiscal 2010 and 60% for fiscal year 2010. It is uncertain, at this time, continued level of growth if any can be achieved in modern coin revenues in future quarters.

The increases in other related services and product sales included increased subscriptions and advertising revenues partially offset by a reduction in our Expos collectibles convention business. In addition, in the three and six months ended December 31, 2010, the company recognized product revenues of $212,000 and $280,000 compared to $22,000 for the six months ended December 31, 2009.

Due to the continued strong performance of our coin business relative to our other businesses, coins represent approximately 63% of total revenues, which demonstrates the importance of the coin business to our overall financial results.

The gross profit margins excluding product revenues in the current three and six-month periods were 59% and 60% compared with 59% for both the three and six months ended December 31, 2009.

Operating expense in the current second quarter and six months were $4.2 million and $8.3 million respectively or 43% of revenues in both periods, compared to the $3.8 million or 43% of revenues and $7.5 million or 42% of revenues for the second quarter and six months ended December 31, 2009.

The dollar increase in sales and marketing expenses reflects increased tradeshow cost including Paris, France shows, business development, incentive compensation, general marketing cost increases.

The G&A dollar increases relate to outside consulting costs or a more advanced technology system to identify counterfeit or altered coins that are sometimes submitted to us for authentication and grading, increase payroll cost to support the growth of the business outside legal costs and increased non-cash stock-based compensation costs.

The resulting operating income from continuing operations was $1.6 million and $3.4 million for the current three and six-month periods, compared to $1.5 million and $3.3 million for the same three and six-month periods of the prior year.

Turning to our balance sheet, at December 31, 2010, cash and cash equivalents totaled $19 million compared to $20.3 million at June 30, 2010. Net cash used of $1.3 million in the six months primarily comprised of cash generated from continuing operations of $3.3 million, proceeds received from the exercise of stock options of $0.9 million, offset by the payment of dividends to stockholders of $4.9 million and cash payments of $0.7 million used in discontinued operations and for capital expenditures.

At December 31, 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 in this program since the fourth quarter of fiscal 2008. On January 25, 2011, the company announced its quarterly cash dividend of $32.5 per share to be paid on February 25, 2011 to stockholders of record on February 14, 2011.

With that, I’d like to thank you for your attention. Operator, we are now ready to take questions from the audience.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Marcelle Herbst with Herbst Capital Management. Please go ahead.

Marcelle Herbst - Herbst Capital Management

Congratulations to a solid execution in the quarter.

Michael J. McConnell

Thank you.

Marcelle Herbst - Herbst Capital Management

How many subscribers did you add to your newsletter in the quarter?

Michael J. McConnell

We are approaching 4,650 subscribers, a drop under.

Marcelle Herbst - Herbst Capital Management

Excellent. And how close are you to launching car-tax?

Michael J. McConnell

I believe this will happen in the next three months.

Marcelle Herbst - Herbst Capital Management

Okay.

Michael J. McConnell

It won't be as advanced as coin facts in terms of the breadth of information on the site.

Marcelle Herbst - Herbst Capital Management

Yeah.

Michael J. McConnell

But that's just the nature of that business here, I’m not having as much history, but within the next three months.

Marcelle Herbst - Herbst Capital Management

Okay. Good. And regarding your Internet business, how many members does CCE currently have?

Joseph Wallace

We are approaching, I think, it’s 460.

Marcelle Herbst - Herbst Capital Management

460.

Joseph Wallace

And there is two different gradations, actually three different gradations of price point.

Marcelle Herbst - Herbst Capital Management

Okay. What's the average price on those 460, if you average it out?

Joseph Wallace

Can you call me back? I don't have the number at my fingertips, Marcelle.

Marcelle Herbst - Herbst Capital Management

Okay. Sounds good. And do you see what that business, you seem to have quite some momentum. Do you see this growing further this year?

Michael J. McConnell

Yes. We do, we are consciously investing in new features and information.

Joseph Wallace

Now, there is a competitor in the marketplace that was launched in the last six months. We’ve grown despite that. How much it will grow, Marcelle, I don’t know, but we’re working at it everyday to make it more attractive to existing customers and to new customers.

Marcelle Herbst - Herbst Capital Management

Okay. Also, I wanted to quickly touch on that lawsuit that you're pursuing, can you give an update on that?

Michael J. McConnell

The coin doctoring lawsuit?

Marcelle Herbst - Herbst Capital Management

Yes.

Michael J. McConnell

I don't have any update. It's sitting in the court system right now with the next date being sometime at the end of February, I think. Yeah, the next date the court hears something and it moves forward or doesn't move forward in a certain way.

Marcelle Herbst - Herbst Capital Management

Okay.

Michael J. McConnell

But we’re not spending a lot of dollars, let's put it that way.

Marcelle Herbst - Herbst Capital Management

All right. That's good to hear. Quick question also on your Secure Plus, just what has that done for you so far and did it meet your initial expectation?

Michael J. McConnell

It did not meet our initial expectations, but it's already paid for itself. And it's a nice additional feature or service for what we provide to customers.

Marcelle Herbst - Herbst Capital Management

Okay. Another maybe more of a qualitative question, can you review a little bit for us your strategic goals for 2011 and how you're tracking so far in receiving them?

Joseph Wallace

Yes, sure. Well, there's two goals. One is financial and then the other is always the softer sides of the business, right, like launching a card fax where it's financially sort of neutral at best. We are on track in all regards. The year started honestly a little slow for us, a lot of that is driven by our forecasting when the bulk programs will come through the system, which we don't control. The various admins and their distributors control that. But we are on – you guys don't know what our plan is for the year, but we are on our operating plan through the first six months and as I've indicated we’ve started Q3 very strongly. And so I am reasonably confident that we are going to achieve the financial metrics of our operating plan for fiscal year 2011 granted there's six more months, five more months of runway ahead of us, but we are feeling okay.

In terms of the softer side of things, we are heading on all measures in terms of launching new products and services. Most of that happens in CAE, card fax is the other one we put out there. And so we are also on track to get those new initiatives launched, I guess the other one is in Paris. We have a show there every six, seven weeks and they are proceeding according to plan. And we are refining sort of our cost structure et cetera of how we hold those shows in Paris. So I believe we are on track to hit both our specific financial objectives as well as our more strategic objectives for the year.

Marcelle Herbst - Herbst Capital Management

You just mentioned Paris and I was wondering strategically how should we think about this? Is this something that if it grows enough, you want to staff this permanently or what do you have in mind with them?

Michael J. McConnell

Yeah, I do not believe we need to staff it permanently. There are a host sort of issues with doing such in France, where I think we will and we cannot pursue that type of business model. I’d look at it as similar to us conducting a show in Baltimore, Boston, Dallas, LA and Paris has now just on that list.

Sure, the flights cost a little bit more and I think the wear and tear on our graders is a bit more and we are taking steps to address those realities. For example, we have a couple of folks that we’ve known over the years in Europe who are helping us grade coins. When we come over there for a show and they need to come from a two-hour train ride rather than a 10 hour flight. So that's helpful.

So I view the business model remaining much like it is today. And we’re pretty encouraged by the reception that we are getting from the participants in the market. I see this as an extremely nice flagpole on the European continent that is only going to grow and create more value for our stakeholders.

Marcelle Herbst - Herbst Capital Management

Yeah. Is that European potential, is large enough for this to ever become like a significant revenue contributor or would you consider it more like a nice add-on on the side, but not like a serious addition?

Michael J. McConnell

The answer is we don’t know. We entered it, I mean as you see, I told you numbers that we’ve lost in the first two quarters, I don't consider that significant at all to explore a market like Europe. I hope it grows into a significant contributor, but we just don't know right now.

Marcelle Herbst - Herbst Capital Management

Okay. And you also mentioned you have very strong momentum going into Q3. I was just wondering what's driving that right now?

Joseph Wallace

It’s being driven primarily by our bulk business and a variety of products and services that we are offering and processing in that area.

Marcelle Herbst - Herbst Capital Management

Okay, thank you.

Michael J. McConnell

You’re welcome.

Operator

Thank you. Our next question comes from Garrett King with Truffle Hound Capital. Please go ahead.

Garrett King - Truffle Hound Capital

Hi guys.

Michael J. McConnell

Hi, what's the name of your firm?

Garrett King - Truffle Hound Capital

Truffle Hound Capital.

Michael J. McConnell

Truffle Hound. That’s creative.

Garrett King - Truffle Hound Capital

Thank you.

Michael J. McConnell

Go ahead.

Garrett King - Truffle Hound Capital

Did I hear correctly that the company recently has highest weekly revenue in its history?

Joseph Wallace

That is correct.

Garrett King - Truffle Hound Capital

That's good to hear. And does the company have any NOLs remaining in the valuation allowance that haven't been released to this point or has the valuation allowance been entirely released?

Joseph Wallace

The valuation allowance has been entirely released. Yeah, within our deferred tax assets, we do have some NOLs, which we disclosed in the 10-K, which is about $5.4 million. We’ve also got a couple of other tax planning attributes that we can work on in terms of ensuring we minimize tax payments.

Garrett King - Truffle Hound Capital

All right, that's all I was looking for. Thank you.

Michael J. McConnell

Thank you. You bet.

Operator

(Operator Instructions) Our next question comes from (inaudible) with Neuberger Berman. Please go ahead.

Unidentified Analyst

I have a quick question on your financial policy, I'm not that familiar with your company, but you have a commitment to a fairly strong dividend pay out. Can you walk me through what your financial goals would be and the sustainability of that dividend?

Michael J. McConnell

Yeah, sure. I’ve covered this in the past, but it's pretty simple. We’re looking to grow into our dividend, so that we pay it out of the cash earnings of the company. Now as Joe has indicated, we are not going to likely pay substantial cash taxes for this year and next fiscal year 2012. We obviously have a substantial cash balance on the books, but the overriding objective and I think that sort of prudent, is that you want to earn your dividend and that's our goal.

Unidentified Analyst

Thank you, sir.

Michael J. McConnell

You’re welcome.

Operator

(Operator Instructions) I’m showing no further questions at this time, I’ll turn the call back to management for any closing remarks.

Michael J. McConnell

Thank you everybody for joining the call. As usual, if questions come up after you’ve read the Q and thought about the call, please give Joe or me a call and we are happy to try to answer your questions for you. And we look forward to reporting to you again in a couple of months time.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. If you like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and entering the access code 4409864. We thank you for your participation and you may now disconnect.

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