Collectors Universe Inc. (NASDAQ:CLCT)
F4Q12 Earnings Call
August 29, 2012 04:30 pm ET
Michael McConnell - CEO
Joe Wallace- CFO
Adrian Day - Adrian Day Asset Management
Good after everyone and thank you for joining us to discuss Collectors Universe financial results for the fourth quarter ended June 30, 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 open up the call to your questions.
Comments made during today’s call may contain statements regarding the company’s expectations about the 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 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 conference over to Michael McConnell.
Thank you and welcome everyone to today’s conference call. I’ll touch briefly on the quarter and full-year results and relate them to our overall strategy. I’ll then turn the call over to Joe Wallace, our CFO, 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.
Throughout fiscal 2012, I have discussed our investments in targeted growth and strategic initiatives notably Asia against the background trends in our core authentication in grading activities. Overall, revenues grew solidly for the year driven largely by both unit and average selling price increases.
A few data points. Units in our vintage coin line were essentially flat while ASP had a modest increase. Units in our World Coin Division grew by approximately 24% and ASP average selling price by approximately 28% for the year. Paris units doubled which is encouraging but ASP declined by approximately 15% for the year.
Units in our bulk division declined by 3% while the ASP increased by 7%. However, in the fourth quarter, units in our bulk division declined by approximately 12% and ASP declined by almost 22%, a significant and rampant slowdown compared to the trend during the first three quarters of the year.
At PSA, an 8% increase in ASP drove its revenue increase for the year. PSA/DNA was our standout performer for the year with units increasing by almost 40%, partially driven by our opening of an east coast office in the second half of the year. I wanted to highlight these data points and it is important to understand that within our key two key divisions, there are different lines of businesses that while they are related, can operate someone independently of one another.
Moreover in descending order of magnitude, our largest line of business on a revenue basis within the company is our Bulk Modern Coin division followed by our vintage coin division and then PSA, our card division and collectively these three represent approximately 70% of total grading and authentication revenue. Thus when we experience a slowdown in an area such as bulk like we did in the fourth quarter, it challenges the overall corporate results.
Turning to the cost and profit metrics. During the year a variety of items contributed to the decline in operating profit despite an approximate 4 million increase in revenue. All other things equal, we estimate for illustrative purposes the revenue increase would be expected to contribute an incremental operating income of approximately 1 million. Instead operating income excluding the prior-year impairment charge related to expose declined by approximately $500,000.
So, what drove the GAAP of approximately $1.5 million in operating income? First there were targeted investments in the P&L related to the global strategy, notably our expansion into Asia. This totaled approximately $450,000. Next we implemented a significant system upgrade for the first time in ten years. The P&L expenses associated with this upgrade was approximately $300,000 including depreciation related to the equipment purchases.
In 2012, we were required to conduct a SOC’s audit at a cost of approximately $50,000. You may recall we purchased for a significant amount of money last year a coin under our warranty claim and that coin was sold for less than we forecast resulting in a P&L charge of $200,000.
Despite that charge, our warranty reserves sits at a five-year high and we are comfortable with its current balance. Next and lastly, the previously mentioned impact on the P&L from the recording of the vouchers related to our collectors club memberships was approximately $300,000 for the year. This is virtually all profit that currently sits on the balance sheet as differed revenue and for which we have collected the cash.
Collectively these 5 items totaling approximately $1.3 million were the primary drivers to the GAAP that I referred to. Looking ahead we don’t expect approximately 1 million of these cost to recur in fiscal 2012 and 2013.
I hope this helps you to better understand our results for the quarter and year end, one of the challenges in being a relatively small company is to balance investments for the mid to long term future against near-term reported results. We have and will continue to manage this business for the long-term strategy and then work to explain to you any investments in relation to our core business and market trends and factors.
Importantly, the only item that I feel we could have and should have managed better during the year was the cost of the Hong Kong show in Asia in late March, early April. My best estimate is this cost to the P&L was a $150,000 more than it might have been if we had frankly been better managers of this initiative at that point in time.
Our strategy remains the same, as it has over the last several years and was affirmed in our company’s first off-site corporate retreat in mid-April. Specifically, we will protect our core business while stating prudently and pragmatically. Asia and our digital activities are primary focus areas for 2012, ‘13 and I am pleased to report that John (inaudible) has joined us in late June, currently as a full-time consultant as our Chief Digital Officer.
He brings terrific domain knowledge, energy and professionalism to us and I am excited to watch as he develops a plan for this very important area of opportunity. Many of you have asked over time about our dividend policy.
Allow me to communicate a statement from our released 10-K that I think will be helpful. The company does not anticipate a change in its dividend policy, absent a significant reduction in revenues, a change in strategy or a significant downturn in the economy.
Finally and importantly, several months ago, I indicated to the board that I would not seek an extension to my contract in fiscal 2013. Naturally, the board initiated a process to find my successor and together we're committed to ensure a smooth transition of leadership at the company and will communicate to you if and when appropriate. I am not and have not saw another job and I plan to simply return to the board as a non-executive director when my potential successor is installed. Thank you.
And 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 financial results for the fourth quarter of fiscal 2012. For the fourth quarter the company reported service revenues, which comprised our grading, authentication and related services of $11.6 million. Operating income of $1.9 million and after-tax income from continuing operations of $2.5 million or $0.31 per diluted share.
This compares to service revenues of $12.2 million, operating income of [$1.6 million] and after-tax income from continuing operation of $1 million or $0.13 per diluted share for the fourth quarter of fiscal 2011. For fiscal 2012, the company's service revenues were $47.9 million, operating income was $9.2 million and after-tax income from continuing operations was $6.8 million or $0.85 per diluted share.
This compares to net service revenues of $43.8 million, operating income of $8.3 million and after-tax income from continuing operations of $5 million or $0.65 per diluted share for fiscal 2011. The income tax credit of $0.6 million in the current fourth quarter and the provision for income tax of $2.4 million for fiscal 2012 reflects an income tax benefit of approximately of $1.3 million primarily related to the company’s investment in its subsidiary.
To prior year periods include a permit loss of $1.4 million related to our [Expo] business. As previously disclosed, due to the availability of net operating loss is down to other tax attributes to offset current year taxable income, the provision for income tax for fiscal 2012 nearly represent the non-cash realization of deferred tax assets. However, we have fully utilized all our federal net operating losses through June 2012.
The $0.5 million or 4% decline in service revenues in the fourth quarter of fiscal 2012 compares the fourth quarter of 2011 includes a $1 million or 31% reduction in modern coin service revenues related to the previously disclosed slowdown in our modern coin business partially offset by a $0.4 million or 15% increase in cards and autograph revenues.
The $4 million or 9% increase in service revenues in fiscal 2012 compared with fiscal 2011 included increases of $2.5 million or 9% in coin revenues and $1.1 million or 11% increase in cards and autograph revenues.
Our coin business represented approximately 66% of total revenues in both fiscal 2012 and 2011 and reflects the continued importance of our coin authentication and grading business to our overall financial performance.
Our services gross profit margin was 59% and 61% in the fourth quarter and fiscal 2012 compared to 62% for both the fourth quarter and fiscal 2011.
The lower gross profit margin in the current fourth quarter was due to the lower and the mix of revenues in the quarter. Selling and marketing expense increased by $0.2 million in the fourth quarter and $0.8 million in fiscal 2012, the increase is mainly related to attending overseas trade shows, related business development initiatives and performance incentives. G&A expenses increased by $0.2 million in the fourth quarter and $1.5 million for fiscal 2012; the increases included personnel costs incurred to support the growth of business including performance incentives as such service cost related to upgrading and modifying systems and stock based compensation costs.
Turning to our balance sheet, the company’s cash position in June 30 2012 was $21.2 million compared with $21.9 million at June 30 2011. Net cash use of $0.7 million for fiscal 2012 comprised of cash generated from continuing operations of $11.2 million and proceeds received from the exercise of stock options of $0.6 million, net of payments of $10.4 million for dividends to stockholders, $1.3 million for capital expenditures, $0.5 million for the purchase of Coinflation.com and $0.3 million used in our discontinued operations.
On June 30 2012, the company continues to have $3.7 million remaining under its previously announced stock buyback program. The company has not made any market repurchases on this program since the fourth quarter of 2008.
On July 30 2012, the company announced its quarterly cash dividend of $0.325 per share to be paid on August 31 to stockholders of record on August 17 2012. Although, our dividend policy is subject to accrual on a quarterly basis, we do not anticipate a change in the dividend policy [offset] significant reduction in revenues, a change in strategy or a significant downturn in the economy.
With that I would like to thank you for your attention. Operator we are now ready to take questions from the audience.
Thank you, sir. Ladies and gentlemen, we'll now begin the question-and-answer session. (Operator Instructions) We just got a question from the line of Adrian Day with Adrian Day Asset Management. Please go ahead.
Adrian Day - Adrian Day Asset Management
I was just wondering if you could just talk a little bit in very broad terms about how you see the expansion in Asia. Let’s say, what are you expecting from it, what costs are likely to be over the next few years, I mean, a big picture outlook.
Yeah, sure, big picture, we're planning for a roughly breakeven operation for this fiscal year in Asia and the hope is that overtime that it can grow in to a more significant contributor to the business, all the while of being very mindful of the dollars that we’re allocating to the region. The good news is our business model scales pretty well and so I think that’s achievable in terms of protecting our downside as we pursue that growth initiative.
Adrian Day - Adrian Day Asset Management
If I may just a follow up, is it entirely coins and is it almost exclusively Hong Kong and Chinese people customers?
Yes and yes.
(Operator Instructions). And now at this time I am showing no further question in my queue. I would like to return the conference back over to management for closing comments.
Thank you everybody for listening on our call today. Should after you review the quarter results in the 10-K have further questions has always please don't hesitate to either give Joe or me a call directly, we'll do our best to answer our questions for you. Thank you very much operator. That concludes our call for today.
Thank you. Ladies and gentlemen, this conference will be available for replay. If you would like to listen to the replay of today's conference, you may do so by dialing 303590-3030-01800- 4067325 and then the access code [418-173#]. We thank you for participation and you may now disconnect.