Collectors Universe, Inc. (NASDAQ:CLCT)
Q4 2011 Earnings Conference Call
August 26, 2011 4:15 pm ET
Michael J. McConnell – Chief Executive Officer & Director
Joseph J. Wallace – Chief Financial Officer
Good afternoon everyone and thank you for joining us to discuss Collectors Universe Financial Results for the Fourth Quarter ended June 30, 2011. 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 forecasted in this call due to a number of risks and uncertainties. Certain of these risks and uncertainties, in addition to the 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?
Michael J. McConnell
Thank you, and good afternoon and thank you for all of you attending our conference call today. A little over two years ago the management and board developed a strategy in operating plan that we believe would restore value for our shareholders. That plan focused on three key elements. The first was to focus on our core business and pursue top line growth through internal, prudent from a cost perspective growth initiatives. The second was to improve the operating efficiency of our operations. And the third was to deal aggressively and proactively with our non-core businesses and legacy assets and liabilities. Thus far that plan is working well.
The following figures exclude all the discontinued operations. Over the last two years, revenue of [our] company has grown by 24% within a difficult macroeconomic environment. Unit volumes have increased by 19% over the same period. Web-based advertising has grown from $900,000 for the year ended 2009 to $1.4 million for the year just ended, a 61% increase. CoinFacts is approaching 5,000 subscribers and generates revenue over $500,000 from a standing start in July of 2009.
Our online marketplaces have grown membership revenue by 34% over the two year period. We’ve opened office in Paris last year and expected to generate almost $1 million of revenue in the coming year and reach breakeven. Admittedly that is later than we originally forecast.
We introduced a new technology called CoinSecure and it generated $300,000 of revenue in the year just ended. Our PSA/DNA operation just recently moved into its East Coast offices and we expect that new operation to contribute nicely to that division’s results in the coming year.
Looking ahead, we are increasingly excited about our opportunities across the pacific and we’ll carefully consider the most economic way to expand into that area of the world. This top line growth has occurred, while keeping a sharp eye on costs and operating efficiencies.
Gross margins have expanded from 54% to 62%. Importantly, operating margins have increased to 24% from approximately 7% over the same period. This has occurred, while we continue to invest through the income statement in our various growth initiatives. For example, in the fiscal year just ended June 30, we invested approximately $0.5 million against which little profit was realized in the current period.
Additionally, we have managed the capital base of the firm to drive returns for the owners. Return on invested capital has increased from 3% to 19% on a book basis, which assumes we are a full cash tax payer. As each of you know, we have not paid cash taxes in the current year and remain and continue to have deferred tax assets to utilize in the coming year. Even after returning approximately $25 million to shareholders over the last two years, the balance sheet remains very conservative with no gearing and a healthy cash balance.
Finally, we have cleaned up the past and today’s non-cash impairment charge related to the Expos operation represents the last significant legacy item faced by this business. Joe will speak more to the specific of Expos, but let me say the business is healthy, just not worth its historical carrying value.
Put some numbers around it. Revenue and profit over the last two years have declined by 14% and 28% respectively. Despite this decline the operating margin for Expos remains mid-teens and it requires little capital expenditure or working capital. And importantly as we move into fiscal 2012, the management is working hard to develop plans for Expos that will optimize its return for our shareholders. The trend is entirely unsatisfactory and we will address it.
Looking ahead, the year has started strongly. Revenue is pacing nicely ahead of last year’s first quarter through the middle of August and current backlog is up over 50% as compared to last year. The most important initiative however on my mind right now is our recruitment of a senior type Chief Digital Officer.
While we are all very proud of the work by the existing management team in driving our web-based activities to the levels I discussed earlier, there is a sense that further upside is available to us in the coming years. If any of our listeners have suggestions or know someone who could help us, please pass their name along to me and I’ll route it through Heidrick & Struggles, who is helping us with the search. I believe this is a terrific opportunity for the right person to join our unique company.
With that, thanks to all our shareholders over the last two years as we patiently and deliberately executed our plan. I’ll turn the call over to Joe to walk you through the specific numbers for the quarter.
Joseph J. Wallace
Thank you, Mike and good afternoon everyone. I’ll now give a brief overview of the financial results for the fourth quarter and fiscal 2011. For the fourth quarter, the company reported service revenues, which comprise our grading, authentication and related services of $12.2 million, operating income of $1.6 million, and after-tax income from continuing operations of $1 million or $0.13 per diluted share. This compares to service revenues of $10.7 million, operating income of $2.6 million and after-tax income from continuing operations of $11 million or $1.43 per diluted share for the fourth quarter of fiscal ‘10.
For fiscal 2011, the company’s revenues were $43.8 million, operating income was $8.3 million and after-tax income from continuing operations was $5 million or $0.65 per diluted share. This compares to service revenues of $39.7 million, operating income of $8.4 million and after tax income from continuing operations of $16.8 million or $2.20 per diluted share for fiscal 2010.
The operating results for the fourth quarter and fiscal ‘11 include a non-cash impairment charge of $1.4 million related to our Expos business. Excluding the impairment charge, operating income would have been $3 million for the fourth quarter and $9.7 million for fiscal 2011 and represent increases of 15% for the quarter and 16% for the year compared to prior year periods.
As discussed previously in our filings, we do not consider product sale to be an integral part of our ongoing revenue generating activities. For fiscal 2011, our estimated effective annual tax rate was 40%. In the fourth quarter of fiscal 2010, we released valuation allowance against deferred tax assets on the basis that it was more likely than not that we will realize those assets in future periods. The company continues to have net operating loss and other tax attributes available that should offset the cash payment of tax for a part of 2012, depending upon our financial performance and actions to be taken.
The small income from discontinued operations in the current year periods relates to the sale of Gemprint and the remaining diamond assets in the fourth quarter, net of accretion expense for the New York facility obligations for our former jewelry businesses.
Our service revenues increased by $1.4 million or 13% for the quarter and $4.2 million or 10% for the year and comprised increases of $1.1 million for the quarter and $3.3 million for the year in grading and authentication fees and $0.3 million for the quarter and $0.9 million for the year in other related services. The increased grading and authentication fees were driven by increased coin fees of $1.1 million or 17% in the fourth quarter and $3.1 million or 13% for the year.
In addition, our PSA/DNA autograph authentication and grading fees increased by $0.2 million or 29% in the fourth quarter and $0.7 million or 28% for the year. These increases were partially offset by decreases in our sports cards and stamp grading fees in the fourth quarter and fiscal 2011.
The coin fee increases of 17% for the quarter and 13% for the year were driven by increases in modern and world fees. Modern fees increased by $0.7 million or 25% in the quarter, and $1.9 million or 21% for the year, reflecting marketing programs by the U.S. Mint and our customers and dealers. World coin fees grew by approximately $0.5 million or 152% in the fourth quarter and $1.3 million or 128% for the year, reflecting increased submission of world coins including grading at our Paris, France facility.
As discussed in our filings, the level of modern coin and trade show revenues can be volatile and is therefore uncertain of what level of growth of those revenues if any will be achieved in future quarters.
In addition, the increase in our world fees reflects increased submissions of world coins from overseas particularly Asia, and authentication and grading at our Paris, France facility. It is uncertain whether the increased fees earned from the authentication grading of world coins can continue to grow at the levels achieved for fiscal ‘011, or whether we can expect continued future growth. However, management plans continue to focus attention on world coins as a growth opportunity.
The increases in other related service of $0.3 million for the quarter and $0.9 million for the year, include increased web-based subscriptions, advertising and Collector Club revenues, partially offset by a reduction in the revenues of our Expos, collectables convention business and our CFC business, which we have wound down.
Due to the continued strong performance of our coin business relative to our other businesses, coin service revenues represents 66% of total revenues, which demonstrates the continued importance of the coin business to our overall financial results. The service gross profit margins were 62% for both the fourth quarter and fiscal 2011, compared to 63% and 61% in the fourth quarter of fiscal 2010.
The dollar increases in the selling and marketing expenses in the quarter and for the year reflects increased trade show costs for the France shows and the ongoing costs related to our France office, business development, incentive compensation and general and marketing cost increases.
The G&A dollar increases were for outside consulting costs for a more advanced technology system to identify counterfeit or altered coins, increased payroll costs to support the growth of the business, outside legal services and increased non-cash stock-based compensation, partially offset by lower software amortization and depreciation costs.
With respect to Expos, which represents 4% of total revenues in fiscal 2011, we reviewed our expectations for that business in future periods. In fiscal 2011, a downward trend of revenues continued to spike our earlier expectations of revenues would stabilize and grow in future years. Due to the continued difficulties experienced in maintaining customer participation of the shows, we expect continued attrition in future periods.
This overall downward trend of revenues combined with the follow-on effect on specific customer revenue assumptions in the outer years of the forecast period, the impact on the terminal value of the Expos business to a declining revenue base and increase in the discount rates applicable to Expos from 17% to 19%, led us to conclude that the Expos business was impaired at June 30, 2011. We therefore recognize a non-cash charge of $1.4 million in the fourth quarter of fiscal 2011.
As discussed in our press release, the Expos business continues to be profitable and cash flow positive and will continue to be part of our future service offerings. Excluding the Expos impairment charge, our operating margins were 24% and 22% of revenues in the fourth quarter of fiscal 2011, compared with 24% and 21% for the same periods of fiscal 2010.
Turning to our balance sheet, at June 30, 2011, cash and cash equivalents totaled $21.9 million, compared with $20.3 million at June 30, 2010. Net cash generated of $1.6 million for the year comprised of cash generated from continuing operations of $11.3 million, proceeds received from the exercise of stock options of $1.1 million, net of payments of $9.9 million of dividends to stockholders, $0.4 million used in discontinued operations, and $0.5 million for capital expenditures.
At June 30, 2011, 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 fiscal 2008. On August 1, 2011, the company announced its quarterly cash dividend of $0.325 per share, to be paid today August 26 to stockholders of record on August 12.
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). At the moment, I’m showing no questions. (Operator Instructions). Gentlemen, I’m showing no questions from the phone lines.
Michael J. McConnell
Okay. Then I’ll wrap up. Everyone, thank you for attending the call and for those of you who couldn’t, we apologize for the Friday call. There were just a sort of series of things that happened that this was where we ended up and we certainly won’t hold the call on Fridays in the future. Each of you knows how to get in touch with either me or Joe. Should you have any questions after reviewing our filings and this conference call, so please feel free to reach out to us and again, thank you for your support over the last couple of years and we look forward to the future.
Ladies and gentlemen, thank you for joining today’s conference. This does conclude the program and you may now disconnect.
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