Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

TESSCO Technologies Inc. (NASDAQ:TESS)

F1Q09 (Qtr End 06/29/08) Earnings Call Transcript

July 23, 2008 10:00 am ET

Executives

Robert Barnhill – President and CEO

David Young – SVP, CFO and Corporate Secretary

Analysts

Jeff Rosenberg – William Blair

Tod Mureau – The Cardinal Group

Operator

Good morning, and welcome to the TESSCO Technologies first quarter earnings conference call. Today's call is being recorded and will be available for audio replay today at 12:00 P.M. Eastern time. You can access the replay by calling 888-286-8010 and entering the confirmation number 20755485. Today's call is also available via webcast at www.tessco.com/go/pressroom.

As in most presentations the following discussion may contain forward-looking statements and TESSCO's results may differ materially from those discussed here. Additional information concerning factors that may cause such a difference can be found in TESSCO's public disclosure, including TESSCO's most recent report on form 10-K as well as prior and subsequential file reports.

I am pleased to introduce Robert Barnhill, Chairman, President, and Chief Executive Officer and David Young, Senior Vice President and Chief Financial Officer of TESSCO. Also, in order to facilitate dialog, Ted Moreau of the Cardinal Group, TESSCO's retained Investor Relations Consultant will also join the call during the question and answer period. I will now turn the conference over to Robert Barnhill. Please go ahead, sir.

Robert Barnhill

Good morning. It was truly a great quarter as we continued our performance momentum. Earnings per share reached a record of $0.38 and thus increased our trailing 12-months earnings per share to $1.12. We delivered on our commitment to grow earnings independent of revenue growth through continued intense focus on increasing value to our customers, margins, and productivities.

We really made excellent progress on all fronts in a very difficult economy and marketplace, and it's evidenced by comparing the results of the first quarter to last year's first quarter. Earnings per share as we mentioned, reached a record growing 153%. Revenues in our non-concentrated customer base grew 9%. Gross margin exceed 25%, a 12% increase driven by improved margins in all of our commercial markets. Our productivity initiatives led to operating margin improvement, pushing operating margin to 2.9% over last year's 1.2%.

It was an excellent quarter and we're excited that the momentum is even accelerating as we go into the second quarter. David will now give a more intensive commentary on our results. David, you want to take it away?

David Young

Great. Thanks, Bob, and good morning.

It was a very strong quarter for us and we're very pleased to report these results. All comparisons here will be to last year's first quarter unless I state otherwise.

Revenues reached $122 million, that's a 2% decline and this decline was a result of lower revenues from our large tier 1 national carrier, but was partially offset by strong growth in our core non-concentrated business. Revenues from the core business grew by 9% year-over-year and 6% sequentially. Despite the overall revenue decline, gross profit actually increased by 10% year-over-year and 4% sequentially.

Gross margin was 25.4% compared to 22.6%, largely as a result of the change in product mix related to sales to this retail tier 1 carrier. However not including those sales, and the sales of the repair components, our gross margin increased 26.7% compared to 23.6% last first quarter and 26% even in the fourth quarter. And recall that the last two quarters also showed some gross margin enhancement, so we're very pleased with this continued margin expansion.

Operating expenses totaled $27.5 million, that's about a 3% increase, resulting from continued business generation compensation increases as we continue to focus on increasing our sales organization as well as some increased bonus accruals. Increasing the size and scope of our sales op organization is very important as we look to significantly increase the number of customers that buy from us and the average purchases of those buyers.

We feel that this 3% growth in operating expenses on a 10% growth in gross profit shows that we've done a good job in getting productivity quickly from these new sales people and that we're controlling all of our other expenses. Consequently, our operating margin reached 2.9% this quarter, compared to 1.2% in last year's first quarter, and 2% in the fourth quarter. EBITDA totaled $4.6 million or $0.86 a share compared to $2.7 million, or $.48 a share.

Our net income totaled $2.1 million or $0.38 a share compared with $900,000 or $0.15 per share last year. Our inventory turns declined to 7.4 from 9.5 and that's driven by the increase in inventory since the beginning of last year. And remember, that's when we decided that we needed to increase inventory somewhat in order to better meet the availability needs of our customers.

Day sales outstanding increased slightly from 37 to 40, partially due to the time of sales and collections during the various quarters. We had a very strong cash flow quarter. We generated about $8 million in operating cash flows. This allowed us to entirely pay down last quarter’s balance on our revolver, and we had about $5 million in cash that we ultimately used on the large share repurchase that I'll talk about in a few minutes.

To give a little more detail from a line of business perspective, network infrastructure revenues were $43 million. That's a 7.5% increase as a result of higher sales of RF propagation and site support products, partially offset by lower sales of broadband products. The strong sales of RF propagation and site support products typically carry higher margins, so our gross margin in this line of business increased from 24.3% to 27.2% and buyers in this like of business increased 3% and the purchases per buyer increased by 4%.

Mobile devices and accessories revenues totaled $58 million. That's an 8% decrease, again as a result of lower sales to the national tier 1 carrier. But despite the revenue decline, gross profit in this line of business increased as a result of change of product mix for the sales to that carrier as well as other retail customers. This is largely the effect of our line of proprietary products where we've seen some very nice improvement of late. Buyers in this line of business, excluding the tier 1 carrier and consumers grew by 3% and their monthly purchases also increased by 3%.

The installation test and maintenance revenues totaled $21 million. That's a 1% decline. Gross profit margin decreased to $22.4 million from $23.1 million as a result of decreased sales of the repair and components products. Buyers in this line of business declined about 2% and purchasers were essentially flat.

Now let's do the stock buyback. So during the first quarter, no shares of common stock were repurchased under the buyback program. However at the very beginning of the second quarter, we repurchased 470,000 shares in a privately negotiated transaction for $13.64 a share. And we're very pleased with this transaction. This opportunity to repurchase a large number of shares was presented to us and then after careful deliberation, we decided that it represented an excellent way to enhance shareholder value.

If we include those shares, and you go back to May 2003 when our stock buyback program began, we've bought just over 2.6 million shares at an average price of about $13.28 a share. And then currently we have 255,000 shares remaining available for repurchase.

Just to wrap up before I turn it back to Bob, it was a very strong quarter for us. We're all very happy with the momentum that we've built. This is the third consecutive strong quarter that we've had following the difficult start to last fiscal year and we think that we're very well positioned to continue this growth. I'll turn it back now to Bob to talk about the business outlook.

Robert Barnhill

Thanks, David.

In light of this first quarter results and the strong momentum that we're seeing in this current quarter, which ends in September, we're going to adjust our earnings per share guidance to $1.25 to $1.40 for the fiscal year, which ends March 29, 2009. And this compares – we're raising the bottom line – the bottom guidance and keeping the upper guidance at the $1.40. The guidance we gave last quarter was $1.10 to $1.40. And the high end, the $1.40 assumes, being able to hit that would assume that the market conditions improve and we continue to accelerate the execution of both our productivity initiatives as well as our growth initiatives.

So going forward, we know that revenues in the current market conditions will demand increasingly – increasing share with our current customers and markets and expanding the markets we serve. Our strategy is to expand both our value for our customers and expand our product solutions offerings. And this will allow us to grow buyers, grow customers, and the product categories they purchase. And as we said in the past, to execute this strategy, we're going to continue to invest in our sales and product management organization, electronic database marketing, the web tessco.com, and make customer and product offering acquisitions.

So with that I'll open it up for any questions you might have.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Jeff Rosenberg. Please proceed.

Jeff Rosenberg – William Blair

Morning. How are you?

Robert Barnhill

Good morning, Jeff.

David Young

Hi, Jeff.

Jeff Rosenberg – William Blair

Let's see, I guess first I wanted to start with maybe a little bit more detail on the tier 1 carrier and what's happening there. Could you maybe update us on sort of your percentage of sales from proprietary products? What did this mix shift mean? I think you've told us that number was about 10% in the past?

David Young

Yeah. It's up just a little bit this quarter. It's probably around 11%, so it has come up. What we saw with the tier 1 carrier was that our sales of some of the higher priced products declined for this quarter, but they were replaced by sales of the proprietary products. So we – we're able to – we lost – if you look consecutively, our gross profit dollars came down a little bit from that customer in the quarter. Revenues came down a lot, so we were able to replace the higher priced products with more of our proprietary products this quarter.

Robert Barnhill

So Jeff, you're really asking two questions. Question one is in terms of the large tier 1 and then also proprietary products that we sell to our expanded or to our total marketplace. And proprietary products in this past quarter was 8 – over 8% sequential growth and improved margins. And again, their proprietary products were not only doing accessories – cellular accessories, but network infrastructure product. We had a rollout of new Wi-Fi [ph] product, new backup power, as well as the rollout of increased cellular accessories.

We're also seeing I think it's – you've noticed with the announcement of AT&T today is that their – they really showed some tremendous results based upon wireless and we're starting to experience some of that sell-through as we moved into the second quarter and we feel that some of our results are really lagging what they're seeing in their marketplace. But it's really exciting. We've all seen the iPhone announcement, 1 million units sold in the first weekend, and we're starting to drive some definite benefits there with the independent channel as well as into them.

Jeff Rosenberg – William Blair

But in general do you think that that – I mean obviously that drove tremendous traffic through their stores. I mean that – so do you think that's something that is having residual benefits from you – for you this quarter?

Robert Barnhill

Absolutely. That's what we're seeing that some of the momentum being built. I mean we've got cases and headsets and chargers, and some just really exciting things that are happening there and it's driving not only sales to the tier 1, but also into the independent channel. And I also might say that it’s – the iPhone is generating increased opportunity for other smart phones as well, so we're seeing a whole product roadmap from the other OEMs that are going to be moving into some very exciting product.

The fancy phones, if you will, drive just so many other products from – people want to protect it with a case, they are all a – have the ability to do music, so we're selling stereo headsets, and so it's just really – it's a perfect example of this convergence that we keep talking about. The new iPhone software is awesome in terms of being able to get the various applications and not only is it driving the accessories, but it's going to be driving the network infrastructure that's needed to support the bandwidth required by these phones.

Jeff Rosenberg – William Blair

Great. Okay. And then when you look at the way the mix shifted in the quarter, is that something that you've got visibility that that sustains or is that something that we should think of as it's going to fluctuate from quarter-to-quarter? I mean how would you characterize how that – the predictability of that trend in your mix and what the trade-off between revenue and gross margins?

Robert Barnhill

Yeah. I think that we're going to continue to push our proprietary products across all the markets, and especially into the tier 1 carrier. But one of the other things that we're seeing in this in July, as we saw that some of the Bluetooth – some of the more expensive products are picking up. There were a couple of West Coast states that put in some hands free driving laws and so that significantly increases the sales of Bluetooth headsets.

David Young

Both Bluetooth and wired.

Robert Barnhill

And wired headsets, right. So I think I would expect that our margin in our core business is going to continue to show some slight improvement, but that national, that one big account, that's going to be a little bit, that's going to move around some I think.

Jeff Rosenberg – William Blair

So it's not as if you saw a migration to one of your competitors there in business that you've de-emphasized. It was more just the way the mix came through in terms of the volume of sales of the higher dollar value stuff.

Robert Barnhill

In terms of – there's two pieces you look at is one, the phone launches, and then two, just the sell-through. And so this particular quarter we had fewer phone launches as they prepared for the iPhone, and we saw a growth in the sell-through side of the business. The other important thing is that the margin improvement that we're driving is across-the-board as we continue to look at pricing initiatives. That's why the availability is so important, the making sure that we truly deliver value to the customer and then that we get rewarded for that value we deliver. We're driving some extraordinary productivity gains in terms of inbound freight, landed freight. So all of our landed gross profit margins are really starting to pick up as well as our delivery to our customer as far as driving that. So we look at if mix is very important, but also these other initiatives are driving across the mix to keep that gross margin improving.

Jeff Rosenberg – William Blair

Okay. And then I just wanted to shift gears for a minute onto the repair side and your other large relationship there. I mean is there anything that we need to be looking at going forward in terms of any changing in the contractor or potential shifts there in that relationship? I just thought you could refresh our memory on where we're at there in terms of the growth you expect and the pricing and the nature of the contract.

David Young

Yeah. That current contract expires at the end of the calendar year. We're talking to them right now about extending that. The model may change a little bit, but we can't really comment yet on that. But at least through the December quarter we think that the dollar's, and as we said before the gross profit dollars are going to stay about flat, and then you'll see some changes in margin depending on what types of products we sell. But then after that, we'll see what happens after that, but we expect to continue that relationship.

Jeff Rosenberg – William Blair

Great. Thanks very much.

David Young

Okay, Jeff.

Operator

Your next question is from the line of Ted Moreau. Please proceed, sir.

Tod Mureau – The Cardinal Group

Yes. Good morning.

David Young

Good morning, Ted.

Robert Barnhill

Hi, Ted.

Tod Mureau – The Cardinal Group

A couple of questions, Dave, maybe directed to you and then, Bob, you can add. But Dave, can you just sort of reiterate the operating margin levels that you're at and what – how does that compare to what you traditionally have done years ago when network infrastructure was really the driver of your business? And can you return to historic margin levels and what levels might they be? What will it take to get there?

David Young

Yeah. I mean I think that if you look at our recent history, the 2% operating margin had been a pretty high number. So this quarter, between the gross profit changes and the productivity initiatives, and Bob will talk about those a little bit, but they're really across-the-board, a lot of things that we're looking at.

I think that to get to – our long-range target is to get that number up in the 4% and 5% range. So, we did it before, as you mentioned, way back many years ago when the business was a lot smaller and a lot different, but we think by the things that we're doing on the gross profit line as well as the SG&A that that's a good target for us to have.

Robert Barnhill

And also when you look at the facilities that we have, we have a great amount of capacity, so facilities expense, expanded fixed cost is going to be minimal, if any. And as we mentioned earlier, the big fixed cost addition, which is really in the form of variable cost is in the sales organization, the product management and the continued enhancement of tessco.com and the electronic marketing initiatives. So as we drive that top end, that's why the revenue growth, even in this market is going to be very important going forward. That is going to – the operational leverage is really going to kick in.

Tod Mureau – The Cardinal Group

Right. And Bob, I know it's a hard question, but what kind of timeframe do you think it'll take to – you've done very well on really what would be a difficult environment, so if things would – macroeconomics improve, you might have some pretty good leverage here over the next couple of years.

Robert Barnhill

Yeah. I think that the big thing is we've been aggressively adding to the sales force, which is really one of the primary drivers of our – of the interface with our customer, and building those relationships. And we started that aggressively adding really three quarters ago, and these new people are coming on now in terms of generating productivity.

So we're looking forward to – we grew 9% year-over-year, which we want to grow much greater than that going forward. And we certainly have put the staff in place, the sales team and also a lot of the new initiatives for tessco.com in terms of where we drive in additional people. And then the net bottom line is where we offer the customer the availability and where we can deliver what they need, when they need it, which is really being rewarded in this marketplace.

So we look at a continued growth in that core business as we move forward, and as we've talked about in the past, the two concentrated relationships are extremely important. We have outstanding relationships with the management and the team, but we will, because of the size, they'll continue to fluctuate. That's why it's important to look at our results under those as we say the core business.

Tod Mureau – The Cardinal Group

Bob, also on that subject with the new marketing people in place, has there been any particular markets or areas, or areas of new business that you've been able to penetrate and improve your market share?

Robert Barnhill

Well, the public network operators are starting to pick their head up a little bit and we're gaining some of that business, as David indicated, with our – what we call our aura of propagation. But the exciting marketplace for us is the self-maintained user as we look at the government, the public safety, the enterprise, transportation, energy, which is really starting to drive some excellent results for us.

And then the reseller market, very important, both on the commercial side as well as the retail side, and we continue to build programs. We just added a key market director into that commercial bar, the value added reseller market. So it's – we're again looking at what – we can have a direct affect on really all the markets other than the public network operators, because of their CapEx spending, but as we see in this – even in this economy, the self-maintained user is making the investment in wireless because they get out of the recurring charges paid to the carrier to do their data transmission and their data haul. So it's very exciting in terms of what we see in that self-maintained user market.

Tod Mureau – The Cardinal Group

Right. And Bob, maybe back to that network infrastructure question because you grew that the public operator part of the business pretty well. You alluded to iPhone and AT&T and AT&T came out this morning with I think probably reiterating guidance on their '08 and indicating there's capacity upgrades that are going to be required in wireless.

Would you say your networking infrastructure business was a combination of AT&T and others upgrading their capacity in an improved macro environment along with your marketing initiatives? Is it a combination, or I mean – and is there definitely a better macro environment in network infrastructure than in the past?

Robert Barnhill

Yeah. I think that that can. We're looking at all of the T1s as the top tier carriers, as well as the secondary and tertiary. And we're in with all these people, looking at their CapEx plans, and we also have very closer relationships with the contractors, the people who are doing a lot of this work, and then just the emergency repair and maintenance, which is one of TESSCO's hallmark in terms of being able to deliver what they need when they need it, what we call our SOS service is driving the repair and maintenance if there's a storm or a hurricane or whatever.

So it's really across-the-board that we're – but the continued question is in terms of the primary CapEx spend of the carriers and we see, as we've said over and over again, we see it pop here, pop there, but there's not that long-term run that we all enjoyed six, seven years ago.

Tod Mureau – The Cardinal Group

Well, looks to me like they might be on a more steady, maybe it's at a lower rate of growth, but it looks like network upgrades are in place when you have these open access initiatives and LTE. Your 3G networks are just beginning – and 4G networks are just going to start to be built.

Robert Barnhill

Right. And as we – just with the iPhone, I mean these devices are bandwidth hogs. And you've got to have that capacity in there because the customer is not going to be satisfied with a fancy device that they've got to sit there and wait ten minutes for it to download. So that's going to drive that network build.

Tod Mureau – The Cardinal Group

Right.

Robert Barnhill

But I just want to emphasize that while the public networks are very important to us and we're extremely focused on them, the private systems and the private networks are where we feel is going to be the continued long-term consistent growth as we go forward. And –

Tod Mureau – The Cardinal Group

Right. And Bob, maybe one final question and I'll turn it – turn the floor back and maybe come back, but since we're on the subject, I'm a pretty much proponent of the Verizon open access initiatives and the concept there would be that you have non-proprietary products and access devices, mobile devices, that you can hook into the network and that could open up more accessory devices. The Consumer Electronic Show's probably going to get more interesting here, but is that what you see as well?

Robert Barnhill

Absolutely. And in a way, Apple has proved a piece of open access with all the applications that they've allowed independent providers to put on their site. So it's not an open access in terms of the device, but it's an open access in terms of what rides on that phone and what rides on that network. And it's driving huge gains for AT&T and Apple. So to your point, because then you get into where the device is open onto that network, it's going to be very, very exciting as we go forward.

Tod Mureau – The Cardinal Group

Great. Well, let me turn it back to the floor and come back if (inaudible).

Robert Barnhill

Okay. Thanks, Ted.

Operator

(Operator instructions) I'm showing we have a follow-up from the line of Ted Moreau. Please proceed.

Tod Mureau – The Cardinal Group

Right. If there's still some time left, maybe another five minutes, Bob. But what – with the recent buyback, can you maybe add a little color to the circumstances that surrounded that transaction, anything that you're willing to offer there?

Robert Barnhill

Sure. Pretty much what we stated is that the we were approached after the end of our quarter with would we be interested in buying the shares, the 470,000 – right, David – shares, and while it was a bigger block than we would have originally been anticipating as it worked out, the Board obviously, their very thoughtful review of our results going forward. The cash availability, we – and the pricing that we would have to pay and what we thought. So we made the purchase and we feel very excited for all shareowners in terms of what it's doing to their ownership and going forward.

So it's consistent with our buyback strategy, and as David said, we still have some remaining shares that the Board will be looking at in terms of what we will do going forward as far as the buyback. But it was very, very exciting for the company to – and to shareowners alike to be able to repurchase that side of the block.

Tod Mureau – The Cardinal Group

Great. And then maybe a wrap up question on – with the improved profitability and hopefully the improving stock price here, and your really strong balance sheet and cash flow position, what are you thinking about in terms of growing the business and acquisition type investments? Where might you focus that? Are you seeing with the private equity markets maybe that issue here with financing questions? Are you seeing better pricing and availability perhaps an opportunity on the acquisition side?

Robert Barnhill

Well, first and foremost is growing – we're very excited about growing the core business, and we feel that the opportunity is there for us to continue to expand the product offering and expand the customers that we're serving. With that having been said, we're continuing to look at acquisitions as I mentioned earlier of a customer base and/or a product offering acquisition. And we have a pipeline of opportunities that we're looking at. It's important they have to be the right opportunity. If we find something that is of interest, it has to be accretive immediately and also has to be able to leverage our operating platform.

So we said we've got a tremendous amount of capacity, both from the technology systems to the infrastructure, the building, and the capability to do configuration delivery and fulfillment to our customers. So it's a continued search, but it's always focused on a, can we get a new group of customers that we're not doing business with today that we can sell all of our product line to? And then and/or can we get a product offering that we're not involved in today that we can take to our existing customers? So it's a tough search when you put those parameters on, but at the same time, we continue to grow and focus on growing that core business.

Tod Mureau – The Cardinal Group

And Bob and Dave, on the subject, are you seeing any change in the environment with all the credit issues now? Any private – are valuations better or are there situations becoming available because of the private equity funds maybe having to liquefy and –

David Young

Yeah. I mean I think that we're seeing about the same number of deals, but I think that the valuations because maybe the private equity guys aren't as active that – and the funding is maybe not there for some, I think the valuations are getting a little bit better, but I don't think we've seen a marked change.

Robert Barnhill

Yeah. I think in some cases reality hasn't set in yet.

Tod Mureau – The Cardinal Group

Right. Well, great. Well, great performance and operating results, and let's hope we can – it will continue.

David Young

Thanks, Ted.

Robert Barnhill

Thanks, Ted.

Operator

There are no further questions at this time.

Robert Barnhill

Great. Well, I appreciate it and again it's always a pleasure to be able to communicate the good news and good performance and I just want to reiterate that we remain intensely focused on improving these earnings through our gross profit and productivity enhancement. And to continue to reduce the concentration by growing the core business customers and their purchases.

As we look forward, we believe we're in a very strong position to prevail in a weak market and to really capitalize when the market strengthens and see the new opportunities emerging. We continue to expand our industry leadership and delivering our total source of offering, when and where the market needs it. And our fundamental goal remains to create enduring superior value for customers, manufacturers, team members, and our shareowners. So, I thank you and look forward to communicating soon.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TESSCO Technologies Inc. F1Q09 (Qtr End 06/29/08) Earnings Call Transcript
This Transcript
All Transcripts