Michael McConnell – CEO
Joe Wallace – CFO
Collectors Universe, Inc. (CLCT) F1Q2012 Earnings Conference Call November 7, 2011 4:30 PM ET
Good afternoon, everyone and thank you for joining us to discuss Collectors Universe financial results for the first quarter ended September 30, 2011. With us today from management are, Michael McConnell Chief Executive Officer and JosephWallace, Chief Financial Officer. The management will provide a brief overview of the quarter and open 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 actual results in the future may differ possibly materially from those forecasts in the 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 conference over to Michael McConnell. Please go ahead.
Thank you and welcome, everyone to today’s conference call. I will touch briefly on the quarter’s results and then I’ll turn the call over to our Chief Financial Officer, Joe Wallace, who will provide a more detailed explanation of the quarter’s financials. At the conclusion of Joe’s remarks, we will open the call to questions. Your company produced solid financial results for the first quarter of fiscal year 2012.
Quarter on quarter revenue grew a healthy 23% and operating profit increased by approximately 36%. Our bulk/modern business and world coin submissions continue to lead the company and led the company’s growth in this quarter. A few items or areas of note. Number one, our Paris operation has started the year strongly. Our most recent show several weeks ago beat our budgeted revenues by approximately 50%.
The momentum among the European dealer community appears to be building and we will continue to report to you on our progress in this initiative. Number two, our integration of the Coinflation acquisition that was concluded in mid-September has gone well. You will note our commentary in the 10-Q and can extrapolate a run rate revenue of approximately $35,000 per month. Please understand it is early days and this revenue figure can be volatile often on a day-to-day basis, but the acquisition is currently meeting our expectations.
Moreover, we are beginning to pollinate our other web activities and presence with learnings from Alex [ph] to better fit our overall Collectors Universe digital activities. Number three, you will note our capital expenditure dollars are up in percentage terms considerably from the last several years.
There are two reasons for this. First, we are upgrading for the first time in a long time our basic hardware at the company; computers, computer screens, printers etcetera. Second, we are upgrading for the first time in nearly 10 years our core – significantly upgrading our core financial software package. This, of course, requires both hardware and external software resources.
This financial software package upgrade is scheduled to go live shortly and it was both necessary and at the same time, we expect it to improve our productivity, analytical tools and overall efficiency. This, of course, will not recur again for some time.
Fourth, you will note that G&A expense year on year is also up considerable. Approximately 50% of this increase relates to variable/incentive compensation that is directly related to the underlying growth in our business. The other 50% relate to items we largely consider one-time in nature and they’ve occurred in the areas of legal expense, Coinflation acquisition expense, primarily legal expenses there, expenses related to the search for Chief Digital Officer that I mentioned on our last call and expenses related to IT activities regarding the financial software package mentioned above.
Number five, I just wanted to give you statistics related our web properties, given that is an area of emphasis for us. Three quick numbers for you, in terms of web traffic, we have visits, run rate visits per month of approximately three million.
Our absolute unique visitors are approximately 1.15 million and our page views are approximate 13.5 million. This occurs over eight properties and PCGS, PSA, PCE, Collectors Corner, Coinflation, our various forums, PCGS, CoinFacts, and then CoinFacts subscription services itself [ph].
Looking forward, our backlog remains very strong. At present, it is up approximately 40%, compared to the same time in the prior year. Our balance sheet remains strong and we increased cash flow from operations by approximately 50% as compared to the first quarter of last year. Strategically, we remain excited about our international opportunities on both the European continent and increasingly in Asia.
We will continue to drive growth from our digital activities and the addition of a Chief Digital Officer will, we anticipate, accelerate this area in the latter half of the current fiscal year and then obviously into the future. The search is going well and we anticipate making a decision by the end of the calendar year. Moreover, PSA/DNA opened an East Coast store during the quarter and we are seeing a solid ramp to that location and we have very prudent and thoughtful in our cost of entry.
Most importantly, our core authentication and grading services continue to show solid growth and we continue to deliver these services efficiently. With that, I’ll 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 first quarter of fiscal 2012. For the first quarter, the company reported service revenues, which comprise our grading, authentication and related services of a $119 million, operating income of $2.5 million and after-tax income from continuing operations of $1.5 million or $0.19 per diluted share.
This compares to service revenues of $9.7 million, operating income of $1.8 million and after-tax income from continuing operations of $1.1 million or $0.14 per diluted share for the first quarter of fiscal ’11. As discussed previously and in our filings, we do not consider product sale to be an integral part of our ongoing revenue generating activities.
For the first quarter of fiscal ’12 and ’11, our estimated effect of annual tax rates were consistent at approximately 40%. The company continues to have net operating losses and other tax attributes available that will offset the cash payment to taxes for a part of 2012.
Our expectation is that we will have utilized all our federal net operating losses and other tax attributes sometime in the second half of fiscal 2012. Therefore, we will begin making estimated payments for federal tax purposes in the second quarter of fiscal 2012.
The small losses in discontinued operations in the first quarters of both fiscal ’12 and ’11 mainly relate accretion expense for the New York facility obligations of our former jewelry businesses.
Our service revenues increased by $2.2 million or 23% quarter on quarter and comprised increases of $1.9 million in authentication and grading fees and $0.3 million in other related services. The increased grading and authentication fees were driven by increased coin fees of $1.7 million or $22 and cards and autographs of $0.2 million or 8%. These increases were partially offset by decreases in our stamp trading fees of $31,000 in the quarter.
The 32% increase in our coin authentication and grading fees compared to a 7% increase in the number of coins authenticated and graded in the quarter related to an increase in the average service fees from modern and world coins due to the mix of services provided and some pricing initiatives on certain of our modern coin progress.
Our modern coins authentication and grading fees increased by approximately $780,000 or 42% in the first quarter, compared to the same quarter the prior year, reflecting marketing progress by the US mail and our [ph] dealers and customers. World coin grading and authentication fees grew by approximately $810,000 or 275% in this year’s first quarter, reflecting increased submissions of world coins, including building our Paris, France facility.
Show authentication and grading revenues increased by approximately $100,000 or 9% for the quarter, reflecting higher average grading fees earned per show in the quarter. Vintage coin grading and authentication fees increased by approximately $50,000 or 2% for the quarter. As discussed previously, the level of modern coins and trade show revenues can be volatile and therefore, it is uncertain what level of growth in those areas, if any, will be achieved in future quarters.
In addition, the increase in our authentication and grading fees earnings also reflect increased submissions of world coins from overseas, particularly Asia and authentication and grading at our Paris, France facility.
And it is uncertain if the increased fees earnings from world coins can continue at the levels achieved in the first quarter or whether we can expect continued future growth. However, the management plans to continue to focus attention on world coins as a growth opportunity. The increase in other related services of $0.3 million for the quarter included advertising revenues, web-based subscription and Collector Club membership revenues, partially offset by a reduction in the revenues of expos collectibles (inaudible) business.
Due to the continued strong performance of our coin business relevant to our other businesses coin service revenues represented 55% of total revenues, which demonstrates the importance of the coin business to our overall financial results.
The service gross profit margins were 62% for both first quarters. There can be still variability in the gross profit margin depending on the mix of revenues in any quarter and seasonality.
During fiscal year ended June 30, 2011, our quarterly gross profit margin vary between 59% and 62%; 59% in our second quarter which is typically our lowest quarter of the year due to the holidays in that period. In addition, our gross profit margin will typically increase as the number of coins graded and authenticated increases due to the fixed nature of certain of our direct costs.
Selling and marketing expense were $1.6 million or 14% of revenues for the quarter compared to $1.5 million or 16% of the revenues for the first quarter of 2011. The dollar increase of $0.1 million and selling and marketing expense in the quarter primarily related to the company’s coin authentication and grading business and was comprised of increased business development and incentive costs, due to the higher revenues, partially offset by a reduction in trade show costs due to the timing and mix of shows in this year’s first quarter.
G&A expense were $3.2 million for the quarter compared to $2.6 million for the first quarter of last year and represented 27% of revenues from both periods.
The $0.6 million quarter on quarter increase was comprised of; one, compensation and incentive costs of approximately $290,000 related to the improved financial performance of the business and increased personnel cost to support the growth of the business; two, outside legal and professional fees of approximately $150,000 related to legal fees incurred for the acquisition of Coinflation.com and legal disputes, compliance costs and recruitment costs; and three, third-party software and consulting fees of $65,000 in connection modification and upgrades.
In addition, non-cash stock-based compensation by $42,000 in the three months ended September 30, 2011 and related to restricted stock grants to management. The resulting operating income of $2.5 million for the quarter represented 21% of revenues compared to $1.8 million or 19% of revenues in the first quarter of fiscal ’11.
Turning to our balance sheet, the company’s cash position at September 30, 2011, was $20.6 million, compared with $21.9 million at June 30, 2011. Net cash used of $1.3 million for the quarter comprised of cash generated from continuing operations of $1.9 million, including payments of annual incentive compensation of $0.9 million and proceeds received from the exercise of stock options of $0.4 million, offset by cash payments of $2.6 million for the dividends to stockholders, $0.5 million for the purchase of Coinflation.com, $0.4 million for capital expenditures and $0.1 million used in our discontinued operations.
On September 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 repurchases under this (inaudible) fourth quarter, 2008.
On October 24, 2011, the company announced its quarterly cash dividend of $0.325 per share to be paid on November 25, 2011, to stockholders of record on November 11. In October, the company announced it had adopted a dividend reinvestment direct stock purchase plan. The plan enables stockholders to purchase additional shares of our common stock without having to pay any brokerage commissions or service charges.
Copies of the plan prospectus and information concerning the plan, including how to enroll, may be obtained by contacting our transfer agent. With that, I would like to thank you for your attention. Operator, we are now ready to take questions from the audience.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator instructions) And we do not have questions, you may continue.
Thank you very much and thank you for everybody joining our call today. If you would like to speak to either Joe or myself after having had a chance to read the full 10-Q, you know how to reach us and we will attempt to be very responsive. And so, thank you very much for joining the call. Operator, we’ll sign off now.
Ladies and gentlemen, that does conclude today’s teleconference. If you would like to listen to today’s replay, the phone number is 1800-406-7325, access number, 4486388. Thank you and have a good day.