Michael McConnell – CEO
Joe Wallace – CFO
Brandon Austin [ph]
Collectors Universe, Inc. (CLCT) Q1 2012 Earnings Call May 9, 2011 4:30 PM ET
Good afternoon everyone, and thank you for joining us to discuss Collectors Universe financial results for the third quarter ended March 31, 2012. 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 the call will open up to your question.
Comments made during today’s call may contain certain 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 call over to Michael McConnell. Michael, go ahead.
Thank you and welcome everybody to today’s conference call. I touch briefly on the quarter’s results and relate them to our overall strategy. I will then turn the call over to our Chief Financial Officer, Joe Wallace, who will provide a more detailed explanation of the financial results. At the conclusion of Joe’s remarks, we will open the call to questions.
Your company produced solid financial results for the third quarter of fiscal year 2012, with record sales revenue of $13.1 million, the highest quarterly revenue in the company’s 26 year history. With that as the headline, I would like to comment on several key elements to the quarter.
First, I will explain the major drivers to the increases in sales and marketing, and G&A expenses as compared to the third quarter last year. The increases are primarily driven by three strategic activities, expansion into Asia, our Paris operation, and investment in information technology. We consider these appropriate and necessary investments to support the second plank of our strategy, namely to extend prudently and pragmatically.
During the last week of March and the first week of April, we officially planted our flag on the Asian continent. A team of our employees was in Hong Kong for the Hong Kong International Coin Convention Show. In preparation for this important growth initiative, we incurred launch costs in the quarter, specifically those costs totaled approximately $280,000, and have been recorded primarily in the sales and marketing and G&A line items.
The show achieved revenues of approximately 225,000, with an average selling price of $32. Because the show straddles Q3 and Q4, approximately 160,000 of the revenue from the show will not hit the P&L until Q4. Therefore the net impact to this quarter, the third quarter’s P&L of our expansion into Asia was a negative approximately $215,000. Lastly we incurred start-up [ph] capital expenditures for Hong Kong in the quarter of approximately $150,000.
We also held one more show in Paris then during the comparable quarter last year. This difference led to an increase in sales and marketing by approximately $60,000. Further, related to our international expansion, this year we held three international shows in Q3, typically our busiest quarter anyway, as compared to one international show in the comparable quarter last year.
This puts stress on the overall organization and cost us some efficiency. We will evolve and learn from our mistakes and calibrate the application of our human resources as we move forward with our international initiatives. Next, as we have refined the completion of our software upgrade, NuVision [ph], and invested in various IT related service enhancements for operations, we incurred additional IT and consulting costs in the quarter of approximately $110,000.
It has been a year of significant investment in our overall information technology and information technology infrastructure, and we expect this to moderate in the future. Next, I want to draw your attention to the refinement of our accounting for Collectors Club memberships, and the significant impact on grading revenue and profit this quarter. Historically, we brought into revenue that portion of a client membership fee, relating to the grading vouchers provided within the first 60 days of that new member.
Because of the upgrade to our financial software in the second quarter, we can now track the redemption of each individual voucher. As a result, $150,000 of high margin revenue that would have historically been brought into the P&L in the quarter, has instead been recorded as deferred revenue, and will come into sales when the specific vouchers are redeemed. Importantly, the cash for the membership has been received. Further, over the next year, we will gain a better understanding of the estimate for the number of unused vouchers.
Finally, looking forward, we are seeing a slowdown in our bulk modern business. As indicated in the past, this aspect of our business is volatile, difficult to predict, and subject to production volume impediments [ph] and precious metal prices. Compared to last year at the same time, there has been a noticeable decline in the production of gold and silver eagles at the US Mint. Additionally, precious metal market prices have been choppy to declining.
Together this has caused our customers to use a current phrase, take risk off in their business and commit to a demand fewer products from the mints. Thus we get fewer submissions and we have seen a shift in our mix towards what we call vintage bulk, which typically holds a lower ASP. These forces, largely uncontrollable are the realities of the bulk part of our overall business.
Despite the current slowdown, we are on track to be within 2% of our total revenue forecast for the bulk division that we set at the beginning of the year, which frankly is very good for a portion of our business that is so difficult to predict. Overall, this year has been a balancing act of investing in selected growth initiatives, while driving growth and profit from our core activities.
We remain excited about our international opportunities on both the European continent and Asia. We will continue to drive growth from our digital activities and these will record a record result this year for the company, and the momentum of our PSA DNA division is solid, and it will likely beat its internal revenue forecast for the fiscal year.
Finally, we held a two day off-site strategic retreat for the senior team in April, and confirm our corporate strategy, which is simply put, we are going to protect our core business and we are going to extend prudently and pragmatically in those core businesses.
With that I will 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 third quarter of fiscal 2012. For the third quarter, the company reported service revenues, which comprised our grading, authentication and related services of $13 million, operating income of $2.9 million and after-tax income from continuing operations of $1.7 million or $0.22 per diluted share.
This compares to service revenues of $12.6 million, operating income of $3.3 million and after tax income from continuing operation of $2 million or $0.25 per diluted share for the third quarter of fiscal 2011. For the nine months, the company’s net service revenues were $36.2 million, operating income was $7.3 million and after tax income from continuing operations was $4.3 million or $0.54 per diluted share.
This compares to net service revenues of $31.6 million, operating income of $6.8 million and after-tax income from continuing operations of $4.1 million or $0.52 per diluted share in the nine months ended March 31, 2011. As discussed previously and in our filings, we do not consider product sales to be an integral part of our ongoing revenue generating activities.
In the three months ended March 31, 2012, service revenues increased by $0.4 million, and operating income decreased by $0.4 million, compared to the three months ended March 31, 2011. The reduction in operating income primarily related to one, the refinement of the company’s Collector Club revenue recognition policy, which led to the deferral of approximately $150,000 of revenue in the third quarter. And two, set up on tradeshow costs incurred related to the company attending its first show in Hong Kong, with reduced operating income by approximately $0.2 million in the third quarter.
For the three and nine months ended March 31, 2011, our estimated effective annual tax rate was approximately 41%. Due to the availability of net operating loss and other tax attributes to offset current taxable income, the provision for income taxes for the nine months ended March 31, 2012, mainly represents the non-realization of deferred tax assets.
However, through March 31, 2012, we have fully utilized all our Federal net operating loss and other tax attributes, and have made estimated tax payments of approximately $0.5 million for federal and state purposes in the nine months ended March 31, 2012. The small income from discontinued operations in the third quarter related to a license fee income of $51,000 for the most part offset by ongoing accretion expense for the New York facility obligations of our former jewelry businesses.
Our service revenues increased by $0.4 million or 4% quarter-on-quarter and comprised increases of $0.1 million in authentication and grading fees, and $0.3 million in other related services. For the nine months service revenues increased by $4.6 million or 14% and comprised increases in grading and authentication fees of $3.6 million and $1 million in other related services. The increased authentication grading fees in the three months ended March 31, 2012, mainly related to an increase in trading card fees, with coins and stamps at substantially the same levels at the three months ended March 31, 2011.
For the nine months ended March 31, 2012, the increase in authentication grading fees was related to increase in coin fees [ph] of $3.1 million or 16%, and trading card fees of $0.6 million or 9%. Our modern coin authentication grading fees were substantially unchanged compared to the third quarter of last year, which increased $1.3 million or 17% in the nine months compared to the same period in the prior year, reflecting marketing progress by the US Mint and by our dealers and customers.
World coin authentication and grading revenues grew by approximately $0.1 million or 11%, and $1.5 million or 100% in the three months ended March 31, 2012 compared to the same period in the prior year, reflecting increased submissions of world coins, including grading at our Paris, France, facility and in Hong Kong. Show authentication and grading revenues increased by approximately 15,000 or 1% [ph], and $0.2 million or 6% for the three and nine months ended March 31, 2012, reflecting higher average grading fees earned per show in the current year periods.
Vintage authentication and grading fees decreased by $0.1 million in the third quarter, and increased by $0.1 million for the nine months. The decrease in the vintage authentication and grading fees in the third quarter related to the refinement in the company’s revenue recognition policy, the Collectors Club, which resulted in an increased deferral of coin fees of approximately $0.1 million for the quarter.
As discussed previously, and in our filings, the level of modern coin 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 quarters. In addition, the increase in our authentication and grading fees also reflects increased submissions of world coins from overseas, particularly Asia, and authentication and grading at our Paris, France, facility and Hong Kong.
As it is uncertain what the increased fees earned from the authentication and grading of world coins can continue at the levels achieved in the first nine months of the year, or whether we can expect continued future growth. However, we continue to focus attention on world coins as a growth opportunity for us. With a relatively higher growth of 16% of our coin authentication grading fees in the nine months ended March 31, 2012, compared to no growth in the three months ended March 31, 2012, reflects the fact that the company achieved record coin fees in the third quarter of fiscal ’11, and therefore revenue growth was more challenging in the current third quarter.
In addition, our coin business, and in particular our modern coin business, entered the fourth quarter of fiscal 2012, with slower momentum in the fourth quarter of fiscal ’11, and this slower momentum has continued through the first part of the quarter. Notably, year-to-date sales of silver and gold eagles from the US Mint are down approximately 24% and 44% respectively, as compared to the same period of last year.
This general market decline is impacting our customers who submit modern coins to us. Therefore, it is uncertain what level of growth if any, we can expect, and if we may experience a decline in coin revenues in the fourth quarter of fiscal 2012, compared to the fourth quarter of fiscal ’11. Due to the strong performance of our coin authentication and grading business relative to our other businesses in the first nine months of the year, our coin business represented approximately 67% of total revenues, compared to 65% of total revenues in the nine months of last year, which reflects the continued importance of our coin authentication and grading business to our overall financial performance.
The increases in revenues from other related services of $0.3 million or 17%, and $1 million or 20% in the three and nine months ended March 31, 2012, respectively included increases in advertising and commission revenues, revenues from web-based subscriptions related fees, and Collector Club memberships, partially offset by a reduction in the revenues of our Expo collectible trade show management business.
Our services gross profit margin was 62% and 61% for the three and nine month ended March 31, 2012, compared to 63% and 61% for the three and nine months ended March 31, 2011. There can be some period to period 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%.
The increases in selling and marketing expense of $0.3 million and $0.7 million in the three and nine months ended March 31, 2012, compared to the same periods of the prior year, mainly related to the company’s coin business, and comprised increased trade show and business development costs of $0.2 million in the quarter, and $0.3 million for the nine months, which is inclusive of the costs associated with attending and providing authentication and grading services for the first time in Hong Kong.
Increases in performance related incentives of $0.2 million in the nine months, and general sales and marketing increase in support of the growth of the business in the current year periods. G&A expenses increased by $0.2 million and $1.3 million for the three and nine months ended March 31, 2012, compared to the same periods of fiscal ’11. The [inaudible] increases included compensation and performance related incentive costs of approximately $0.2 million and $0.7 million in the three and nine month periods, related to improved financial performance of the business, and increased personnel costs to support the growth of the business.
Also consulting and outside services of $0.1 million and $0.2 million for the three and nine month periods in connection with system modifications upgrades and temporary help. In addition, non-cash stock-based compensation increased by $45,000 and $0.1 million in the three and nine months ended March 31, 2012. Those cost increases in the three months ended March 31, 2012, were partially offset by cost reductions, primarily related to lower legal and professional fees.
For the nine months ended March 31, 2012 the remaining cost increases included higher legal and professional fees and other cost increases arising from the growth of the business. The resulting operating income of $2.9 million for the quarter and $7.3 million for the nine months compared to $3.3 million and $6.7 million for the three and nine months ended March 31, 2011.
Turning to our balance sheet, the company’s cash position at March 31, 2012 was $20.5 million compared to $21.9 at June 30, 2011. Net cash used of $1.4 million for the nine months comprised of cash generated from continuing operations of $7.7 million and proceeds received from the exercise of stock options of $0.6 million; offset by cash payments of $7.8 million for dividends to stockholders, $1.1 million for capital expenditures, $0.5 million for the purchase of Coinflation.com, and $0.3 million used in our discontinued operations.
At March 31, 2012, the company continued to have $0.7 million remaining under its previously announced stock buyback program. The company has not made any open market repurchases on this program since the fourth quarter of fiscal 2008. On April 26, 2012, the company announced its quarterly cash dividend of $0.325 per share to be paid on June 1, 2012 to stockholders of record on May 18, 2012.
With that, I would like to thank you for your attention. Operator, we are now ready to take questions from the audience.
(Operator instructions) And our first question comes from the line of Brandon Austin [ph]. Please go ahead.
Hi, guys. How are you doing this afternoon?
Okay. How are you self?
Very good, thanks.
We are doing good. We are doing good. Just on the gold and silver coins, what percent of your business is in that bulk business?
You mean what percent of the gold and silver within bulk, as compared -- I mean there is mix within bulk, and then bulk as a percent of coins and bulk as a percent of the company, which one do you want?
I asked gold and silver coins as a percent of your overall business?
Gold and silver coins and if you -- almost all of the coins, except for copper, right?
Yes, no. In terms of, you know the affected part of the business in terms of the Mint and what you are talking about in terms of the slowdown?
Yes. Our bulk business, maybe this is a better way to answer it for you; the area that is being affected is our modern bulk business.
Okay. And that modern bulk business on an annual basis has ranged -- it is in the range of $10 million or $11 million, right. And then within that the modern portion of it Joe is roughly…
It is probably two-thirds.
Yes, 60% to 70%.
Okay. So this is basically affecting…
10% to 15% of the company’s overall revenues.
Okay. 15% of the company’s overall revenues.
10% to 15%.
10% to 15%, okay, great. And then, can you guys talk a bit about what is going on in terms of your Asian expansion, and you know, what ultimately is your hopes and dreams there?
Sure. It is very early days, and essentially what we did is we attended a large regional trade show there. And we graded on site, which would be no different than us going to Baltimore or Las Vegas, or Paris, France, to grade on-site. It was, we probably spent a little too much money. It was part of that pressure we were feeling from an efficiency standpoint given three international shows versus one and the impact that has on graders et cetera, but the revenue was well over twice what our average revenue is in Paris.
And I will tell you there was a large submission that we did not get, while we were there, that we would be hopeful in the future. So we went and took our shot, and planting a flag there. And I would say it was a modest success on the top line, slightly disappointing in terms of our management of the expenses. But from a strategic perspective, we see Asia as being a significant opportunity to add revenue and growth to this business.
All right. And I get the sense that management of the economics is a little more favorable in Asia relative to what you guys achieved in the rest of the world, is that a fair characterization?
Well, yes, it is. They are more favorable than Paris because frankly we went in with a larger average selling price. We learnt from our experience that started almost 2 years ago in Paris.
Okay. And I guess my last question is with Europe seemingly having the issues that it is having, are you guys witnessing any potential uptick in gold coin demand given Europeans are very conditioned to run to gold when things gets scared [ph]?
Yes, look I was at the show that we hosted over there towards the end of April. And we did not sort of see an uptick. I think however, that if the governments around the world resort to printing money again, which the headlines suggest might be on the horizon, I would expect to see some benefit to precious metal prices, namely gold, and then the flow out effect to us. But that has not happened yet, and we can calibrate whether or not we think that is going to happen from these governments over the next six months, but if it does, it will help our business.
Great. Thanks guys.
You are welcome. Thank you.
(Operator instructions) And I’m showing no further questions.
Okay. Everybody thank you very much. If after you have had a chance to read the Q and digest the press release, please feel free to give either Joe or myself a call if you got questions or comments. Thank you everybody for attending.
Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation, and you may now disconnect.