Collectors Universe Inc. (NASDAQ:CLCT)
F2Q2012 (Qtr End 12/31/2011) Earnings Call
February 9, 2012 04:30 pm ET
Michael McConnell - CEO & Director
Joe Wallace - CFO
Good afternoon and thank you for joining us to discuss Collectors Universe’s financial results for the second quarter ended December 31st, 2011. With us today from management are Michael McConnell, Chief Executive Officer and Joe Wallace, Chief Financial Officer. The management will provide a brief overview of the quarter and 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 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 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. Michael.
Thank you and good afternoon, everybody and welcome to the second quarter 2012 Collectors Universe conference call. We are pleased with the progress towards our fiscal 2012 strategic and financial goals through the first half of the year ending in December 2011. I’ll comment briefly on that progress and then turn the call over to Joe Wallace, our Chief Financial Officer who will summarize the quarter’s financial results.
We will then open the call for questions. Strategically, a number of important initiatives occurred this quarter. We developed a plan and framework for our first significant trip across the Pacific. During the last week of March and first week of April we will have a team of 22 attend a significant show in Hong Kong where we will conduct onsite grading and begin the process of building relationships in this area of the world.
Second within our online division, we initiated a listing fee. What does this mean? In addition to our membership, our customers now pay a modest listing fee for inventory listed. We believe our marketplace is equal to or superior to other options. At the same time, the price for our services has been significantly below our competitors, most notably eBay.
While no customers warmly embraces a new fee, we have been encouraged by the acceptance from our clients and importantly I see it as an affirmation of the quality and value of the service we deliver for them. Moreover we think this step leads to greater crispness in this business.
Notably coins that are sold will no longer show as being available for purchase. Why would a client pay a fee for an item that it has already sold. Next, we inked a number of advertising deals for our European websites, further evidence of the extension and possibilities for our product and services broadly defined in foreign countries.
Next our East Coast office for autograph authentication is meeting our objectives and providing better service and access to our customers while more aggressively competing against the firms in the Northeast.
Finally during the quarter we initiated and completed a significant upgrade to our core software systems. The project came in on time and on budget. It is very easy to say these words but many people worked long and hard to make this happen and we all know the many horror stories when it comes to these types of major IT projects. These are several examples of the types of actions we are taking that focus on and support our stated strategy which is to protect our core business and extend prudently and pragmatically.
Financially, I thought I would take a minute and provide a snapshot of progress we have made on corporate financial metrics over the last three calendar years. For the latest twelve months ended in December of 2008, we were loosing money. Operating income was negative and balance sheet metrics were not applicable.
For the latest 12 months of the quarter just ended December 2011, operating income was approximately 22% excluding stock based comp. Return on assets 16%, return on equity 23% and return on invested capital approaching 50%. This is with a balance sheet that is entirely equity financed and quite conservative. Not surprisingly, total shareholder returns over the same period including dividends was over 663%.
We think our strategy is working and its success is predicated on the credit thinking of our leaders to provide to our customer products and services they value, solid execution and attention to detail within our core business and a focus on running the business financially well.
I would like to say thank you to a number of the key executives for making this happen. Don Willis, President of PCGS; Miles Standish, President of our Modern Business; Muriel Eymery, Vice President of our International Development and she has been very busy lately; Joe Orlando, President of PSA and DNA; Cassi East, President of CCE and our online activities; and Anibal Almeida, he is our Operation Guru that helps move 3 million units through this building every year; and David Rosenberg, our IT leader.
They make this happen on a day-to-day basis and we are grateful to have such a talented executive team. Looking ahead, we are encouraged by a very solid start to our seasonally strongest third quarter. A variety of tactics are moving us ahead in the execution of our strategy and we will continue to develop and populate our business landscape with initiatives to drive the company forward, both strategically and financially.
I’ll now turn the call over to Joe.
Thank you Mike and good afternoon everyone. I will now give a brief overview of the financials of the second quarter of fiscal 2012. For the second quarter, the company reported service revenues which comprised our grading authentication and related services of $11.3 million.
Operating income of $1.9 million and after-tax income from continuing operations of $1.1 million or $0.14 per diluted share. This compares to service revenues of $9.4 million, operating income of $1.6 million and after tax income from continuing operation of $1 million or $0.12 per diluted share for the second quarter of fiscal 2011. For the current six months, the company’s net service revenues were $23.2 million, operating income was $4.4 million and after tax income from continuing operations was $2.6 million or $0.33 per diluted share.
This compares to net service revenues of $19.1 million, operating income of $3.4 million and after tax income from continuing operations of $2.1 million or $0.27 per diluted share for the six months ended December 31st 2010. I have discussed previously in our [calls] we do not consider product sale to be an a integral part of our ongoing revenue generating activities.
For the six months ended December 31st 2011, our effective annual tax rates were approximately 40%. The company continues to have net operating loss and other tax attributes available to offset the cash payment of taxes for part of fiscal 2012. Our expectation is that we will have utilized all our federal net operating loss and other tax attributes some time in the second half of fiscal 2012. Therefore we began making estimated payments of federal tax in the second quarter of fiscal 2012. The small losses from discontinued operations in the first half of the year mainly relate to accretion expense for the New York facility obligations of our former jewelry businesses.
Our service revenues increased by $1.9 million or 20% quarter on quarter and comprised increases of $1.6 million in authentication and grading fees and $0.3 million in other related services. For the six months service revenues increased by $4.1 million or 22% and comprised increases in grading and authentication fees of $3.5 million and $0.6 million in other related services. The increased grading and authentication fees in both the three and six month periods are primarily related to increased coin authentication and grading fess of $1.3 million or 24% in the second quarter and $3.1 million or 28% for the six months.
In addition, trading cards and autograph authentication fees increased by $0.3 million or 12% in the current second quarter and $0.4 million or 10% for the six months. The coin fee increased to 24% and 28% reflect increased fees earned from the grading and authentication of modern coins which increased $0.5 million or 26% in the quarter and $1.3 million or 34% for the six months, reflecting marketing problems by the US mint and by our customers and dealers.
And world coin increased fees of approximately $0.6 million or 131% in the second quarter and $1.4 million or 187% for the six months, reflecting increased submission of world coins, including grading at our Paris, France facility.
In addition vintage fees increased by approximately $0.1 million or 6% for the quarter and $0.2 million or 4% for the six months and show fess increased by approximately $0.1 million or 7% for the second quarter and $0.2 million or 8% for the six months.
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 revenues, if any, will be achieved in future periods.
In addition, it is uncertain if the increased fees from the authentication and grading of world coins can continue at the levels achieved in the first half of the year or whether we can expect continued future growth. However, the management plans to continue to focus attention on world coins as a growth opportunity and in January 2012 that it has plans to expand operations to Asia.
The increase in other related service of $0.3 million for the quarter and $0.6 million for the six months included increased advertising commission revenues, web-based subscriptions and Collector Club membership revenues. Partially offset by a reduction to revenues of our Expos Collectible Convention business.
Due to the strong performance of our coin business relative to our other businesses, coin service revenues represents 67% of total revenues in the first half of the year compared with 63% of revenues in the first half of last year. The services gross profit was 60% and 61% for the three and six month periods compared to 59% and 60% for the three and six months ended December 31, 2010. There can be some variability in the gross profit margin depending upon the mix of revenues in any quarter and seasonality. During the fiscal year ended June 30, 2011, our quarterly service gross profit margin varied between 59% and 63%.
Selling and marketing expense at $1.6 million for quarter and $3.2 million for the six months represent 14% of revenues compared to $1.3 million and $2.8 million for the corresponding periods of the prior year.
The increased selling and marketing expense of $0.3 million for the quarter and $0.4 million for the six months primarily related to company’s coin business and comprised increased business development performance related incentives of $0.2 million for the quarter and $0.3 million for the six months. $0.1 million in increased trade show cost this year’s second quarter due to the mix, the timing of mix of shows in that quarter and increased general sales and marketing costs.
G&A expense were $3.3 million for the quarter and $6.5 million for the six months represented about 28% of revenues compared to $2.8 million and $5.5 million for the corresponding periods of the prior year.
The increased G&A expense of $0.5 million for the quarter and $1 million for the six months comprised increased compensation cost for approximately $0.3 million for the quarter and $0.6 million for the six months related to higher incentive costs due to the improved performance of the business and increased personnel cost to support the growth of the business.
Also outside legal and professional fees was up approximately $0.1 million for the quarter and $0.2 million for the six months related to legal fees incurred for the acquisition of Coinflation.com, legal disputes compliance cost and recruitment costs.
And finally, consulting and outside services of $0.1 million for both the three and six month periods in connection with system modification upgrades and temporary help held. In addition, non-cash stock-based compensation increased by $0.1 million for the three and six months ended December 31, 2011.
The resulting operating income of $1.9 million for the quarter and $4.4 million for the six months represent an increase of 22% for the quarter and 29% for the six months compared to the same periods of fiscal 2011.
Turning to our balance sheet; the company’s cash position at December 31, 2011 was $20.3 million compared with $21.9 at June 30, 2011. Net cash used of $1.6 million for the first half of the year comprised cash generated from continuing operations of $4.6 million and proceeds received from the exercise of stock options of $0.4 million; offset by cash payments of $5.2 million for dividends to stockholders, $0.7 million for capital expenditures, $0.5 million for the purchase of Coinflation.com and $0.2 million used in our discontinued operations.
At December 31, 2011, the company continue to have $3.7 million remaining as was previously announced stock buyback program. The company has not made any open market repurchases since the fourth quarter of fiscal 2008. On January 26, 2012, the company announced its quarterly cash dividend of $0.325 per share to be paid on March 2, 2012 to stockholders of record on February 17, 2012.
With that, I would like to thank you for your attention. Operator, we are now ready to take questions from the audience.
[No Q&A session for this event]
Okay. Thank you everybody for listening in on the call today. You have our numbers and in fact you’re viewing the materials you would like to speak to either Joe or myself. And operator, that concludes our call.
Thank you. Ladies and gentlemen, that does conclude our conference for today. And if you like to listen to our replay of today’s conference, please dial 303-590-3030 or 800-406-7325 and enter the access code 4513526. We would like to thank you for your participation and you may now disconnect.
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