Collectors Universe, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

Oct. 1.08 | About: Collectors Universe, (CLCT)

Collectors Universe, Inc. (NASDAQ:CLCT)

F4Q08 Earnings Call

September 30, 2008 5:00 pm ET


Lesley A. Snyder – Investor Relations Counsel

Michael R. Haynes – Chief Executive Officer & Director

Joseph J. Wallace – Chief Financial Officer


Dalton Chandler – Needham & Co.

Arnold Brief – Goldsmith Harris


Welcome to the Collectors Universe fourth quarter and fiscal year 2008 conference call. (Operator Instructions) I would now like to turn the conference over to Lesley Snyder, Investor Relations Counsel for Collectors Universe.

Lesley A. Snyder

Good afternoon everyone and thank you for joining us to discuss Collectors Universe’s financial results for the fourth fiscal quarter and year ended June 30, 2008. With us today from management are Michael Haynes, Chief Executive Officer and Joe Wallace, Chief Financial Officer. 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 the call due to the 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 & 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 result of new information, future events or otherwise. With that I would now like to turn the call over to Michael Haynes.

Michael R. Haynes

We will first review our results in the fourth fiscal quarter and fiscal year end of 2008 against our operating objectives for the company. Next, Chief Financial Officer Joe Wallace will provide a quick overview of our financials. At the conclusion of these remarks we will then be happy to answer any questions you may have.

First, let me start by giving a high level recap of our most recent fiscal year that ended June 30, 2008. In the beginning of the year we had set forth several key objectives, number one, continue to improve the performance of the collectibles’ group in our existing market. Number two, concentrate resources on the growth of our jewelry group in market share units, volume and revenue. Number three, improve operating efficiency in the consolidated results.

With respect to our first objective, the collectible’s group revenue was increased by 3% for the full fiscal year ended June 30, 2008 however, profit contributions from the collectibles’ group for fiscal year 2008 compared to the prior year varied with sports cards and other non-collectibles and services both providing increases in profit contributions. In our coin division profit contributions were lower primarily due to the lower unit volume of coins coming from trade shows in part as a result of two fewer coin shows in fiscal 2008 as compared to the prior year period.

For the fiscal year 2008 over the prior year coin unit volume from the vintage coins was basically unchanged with an increase of approximately 1% on unit volume of more than 400,000 units while the coin show unit volume decreased approximately 21% to about 75,000. In our growing world coin sector, submissions for world coins from both domestic and international submitters increased approximately 67% to about 40,000 units for the fiscal year 2008 over the prior year as specific marketing efforts to expand coin division grading to include coins from Europe and Asia began to contribute about 5% of revenue from the coin division in 2008.

Sports cards made up 21% of total annual revenues and the profit to contribution from this segment increased by about 15% in the fiscal year ended 2008 as compared to the fiscal year 2007 and the number of units certified increased by about 5% for the comparable period. Other collectibles and services provided about 20% of total annual revenues including revenues derived from the B-to-B and B-to-C coin exchange businesses and the profit contribution from these businesses increased by 73% for fiscal 2008 over the prior year on revenue increases of 19% for the comparable period.

With respect to our second objective of concentrating resources on growing our jewelry group, we achieved revenue growth in our jewelry segment of 32% from the fiscal year 2008 over the prior year although this growth rate was more modest than we anticipated as a result of the macroeconomic environment. Nevertheless, the steady progress in the development of this new market for the company provided operating improvements in the fourth fiscal quarter as compared to the fourth fiscal quarter 2007.

For our diamond sector, submissions increased 20% for the fiscal year 2008 over fiscal year 2007 and unit values increased over 132% for the same comparable periods primarily as a result of the growing success of our certified diamond exchange or CDE an Internet based business-to-business distribution system that connects sellers of our diamond grading subsidiary certified diamonds directly to jewelry retailers across the country. The CDE is a central element in our marketing plan in that it provides direct access for jewelers to diamonds certified by our diamond division.

CDE was launched in the second fiscal quarter and by the end of the fourth fiscal quarter the number of retailer members had grown to over 1,800 and as of today CDE has over 2,300 members. By launching CDE we have created our own distribution network for our certified diamonds that rivals even the largest of jewelry chain stores. As we continue to grow this distribution network we will intensify the training of these stores to first check CDE for their diamond needs.

For the color gem stone sector, unit volume was up 135% in the fiscal year 2008 over fiscal year 2007 with unit values increasing by about 50% for the same comparable period. The rapid increase in unit volume is directly attributable to the introduction of the fast track service for the December, 2007 quarter, a service priced as low as $25 and targeted to the gem stones that are valued at $500 and up.

The gem stone certification business has historically been associated with gem stones valued at $20,000 and higher with these averaging approximately $350 per unit until our subsidiary introduced the fast track service. The colored gem stone exchange or CGE was launched shortly after the end of fiscal 2008 using basically the same software platform as CDE for diamonds and offers only colored gem stones with documents issued by our colored gem stone division. We expect that the CGE will influence more submissions for the fast track service in fiscal 2009.

With respect to our third objective regarding the improved efficiency and the consolidated results, we achieve our objective of improvement as evidenced by the fact that unallocated expenses decreased by 12% in the fiscal year 2008 as compared to the prior year period. And, the related cash flow associated with such expenses decreased 16% for the comparable period. The cash requirement for unallocated expenses decreased by approximately $1.2 million in fiscal 2008 as compared to fiscal 2007.

As previously disclosed, we have undertaken a top to bottom review of our efficiencies and corresponding implementation of new software and as a result we have implemented procedures and personnel reductions that are expected to realize over $4 million in annual cash savings. There was a non-cash charge in the fourth fiscal quarter of 2008 as a result of a fair value determination under applicable accounting rules with respect to the value of the company’s goodwill and certain assets of its jewelry business as of June 30, 2008.

The company’s tangible net worth did not substantially change and its cash flows were unaffected by the recognition of this fair value analysis and related charge. The company’s future prospects are unaffected by this impairment and the company’s financial condition continues to be strong with significant cash balance of more than $20 million and no debt. In our recent board of directors meeting of September 26, 2008 the board determined that due to market and economic conditions including the liquidity issues in the United States the prudent course of action would be to suspend the payment of cash dividends and at the same time the board of directors improved a 10% stock dividend on the company’s outstanding shares. The 10% stock dividend will be distributed on November 3, 2008 to all stock holders of record on October 20, 2008.

In today’s press release the Chairman of the Board Clinton Allen stated, “The financial climate is very uncertain and Collectors Universe has an excellent balance sheet with more than $20 million in cash and no debt. The board considers it prudent to maintain an extremely strong and conservative balance sheet given the current economic environment. Nevertheless, our board wanted to award our shareholders in an alternative manner by approving a 10% stock dividend and declaring such stock dividend for distribution on November 3, 2008.”

Our core business in the collectibles’ group is fundamentally healthy with large market shares and positive cash flows and with the recently implemented operational improvements to lower costs and increase efficiency all of which should lead to improved operating margins. Although the initiative in the jewelry markets has yielded slower growth than anticipated we are encouraged with the direction and progress of our jewelry business. We expect positive cash flow from consolidated operations for fiscal 2009 and with a strong balance sheet the company plans to maintain a conservative posture with its dominate position in market share in the collectibles market and to continue its growth in the jewelry business as it takes market share from its competition.

At this stage I would like to turn the call over to Joe who will give a financial review of the quarter and the fiscal year.

Joseph J. Wallace

I will now give a brief overview of the financial results for the fourth quarter and fiscal 2008. For the fourth quarter our net revenues were $10.3 million and we incurred a loss from continuing operations of $13.1 million or $1.57 per diluted share. This compares to net revenues of $10.7 million and a loss from continuing operations of $0.9 million or $0.10 per diluted share for the fourth quarter of fiscal 2007.

Our results for the fourth quarter reflect non-cash impairments of $11.2 million or $1.34 per diluted share related to our jewelry businesses. As discussed in more detail in our Form 10K filed with the SEC today, it was determined that such impairment should be recognized due to the occurrence of operating losses in our jewelry businesses in the current and prior year fiscal year periods and the uncertainty as to the timing of revenues and related cash flows in future periods.

The company also established a non-cash valuation allowance of $4.5 million against the deferred tax assets arising from the impairment losses recognized in the fourth quarter and state enterprise owned credits that were recognized in prior years. The valuation allowance was established due to the length of time and the extent of the taxable income required to fully realize these deferred tax assets. Once again, the details of and the basis for recognizing the valuation allowance is described in more detail in our Form 10K.

The 4% or $0.4 million reduction in our revenues from $10.7 million in the prior fourth quarter to $10.3 million in the current fourth quarter mainly reflect the 14% reduction in our coin revenues due to the volume of coin submission at trade shows being adversely affected by the continued high price of gold in the quarter. In addition, our modern coin submissions in the quarter were also down although vintage coin submission increased.

Net revenues from our other non-coin businesses increased by 10% in the quarter and included increases from our currency, autographs and jewelry businesses. [Inaudible] fees in the fourth quarter decreased by 5% or $468,000 primarily driven by the lower coin revenues discussed above while other related services increased by 5% or $100,000. The gross profit margin was 44% in the current fourth quarter compared to 49% in the same quarter last year and primarily related to decreases in the gross profit margins for coins due to the lower revenues earned on our higher ASP trade show revenues and the affect of our relatively fixed direct costs for coins.

Total operating expense in the current quarter at $17.4 million were inclusive of the $11.2 million impairments. Excluding the impairments, operating expenses were $6.2 million compared to $7 million for the fourth quarter fiscal 2007. A reduction of $0.8 million reflects decreases in sales and marketing expenses of $0.4 million related to our jewelry businesses and lower G&A expenses of $0.4 million. The resulting operating loss for the quarter was $12.9 million. Excluding the impairments, the operating loss would have decreased to $1.7 million compared with $1.8 million for the fourth quarter last year despite the reduction of 4% in revenues.

Income from continuing operations benefitted from interest income of $0.1 million in the current fourth quarter compared with $0.5 million in the fourth quarter of last year. The reduction in interest income reflects lower available cash balances and lower interest rates in the current fourth quarter compared to the same quarter of last year. For the year, our net revenues were $42 million and we incurred a loss from continuing operations of $15.6 million or $1.85 per diluted share.

This compares to net revenues of $40.5 million and a loss from continuing operations of $515,000 or $0.09 per diluted share for fiscal 2007. Our results for 2008 include the non-cash impairments of $11.2 million related to our jewelry businesses. Excluding such impairments, our operating loss for fiscal 2008 would have been $6.5 million compared to a loss of $2.9 million for fiscal 2007. The increase in the operating loss in fiscal 2008 reflects a reduction of about $3.3 million in operating income from our coin businesses, an increase loss of about $1.9 million from our jewelry businesses partially offset by increased results of our other businesses and a reduction in corporate expense.

Reduction in the operating income in coins reflects a decline of about $1.4 million in our high margin coin trade show revenues due to attending two less shows in fiscal 2008 compared to fiscal 07 and lower submissions of the shows we did attend due to the high price of gold in the second half of the year. In addition, we incurred increased warranty costs of $822,000 the second quarter due to significant warranty claims that arose at that time as well as higher direct costs for our coin grading activities.

The increased operating losses in our jewelry operations reflect our continued advancement in the development of those businesses in 2008. [Inaudible] revenues increased by 4% in fiscal 2008 compared with fiscal 2007 and included a reduction of 0.3% in grading revenues and an increase in other related products and services of 25%. Product sales which represent the sale of coins repurchased under our warranty policy and are not considered part of the company’s ongoing revenue generating activities were $1.1 million in 2008 compared with $0.3 million in 2007.

Excluding product revenues, our total service revenues including grading fees will have increased by 2% to $40.9 million in fiscal 2008 from $40.2 million in fiscal 2007. Other related services would have increased by 14% to $7 million in fiscal 2008 compared to $6.2 million in fiscal 2007. The 0.3% decline in our grading revenues reflect the 6% decline in coin grading fees driven as discussed above by the decline in coin tradeshow grading fees which were mostly offset by increases in our other grading activities except sports cards which was essentially unchanged.

The 14% increase in other related services is primarily related to increased advertising revenues from the company’s coin and sports card publications, increased collectors club memberships and increased revenues earned by our CCE business. Our gross profit margin was 43% for the current year compared to 52% in fiscal 2007 and reflect the lower gross profit margin for coins for the same reasons as the fourth quarter as well as the warranty costs of $822,000 discussed above.

In addition, the lower gross profit margin reflects additional infrastructure and capacity costs incurred in our jewelry businesses in 2008 compared with 2007 in anticipation of future revenues. Total operating expenses were $36 million for the current year compared to $24.1 million for the comparable year ago period. Excluding the impairments of $11.2 million in 2008 operating expenses would have been $24.7 million compared to $24.1 million for fiscal 2007.

The increase of $0.6 million reflects higher sales and marketing costs related to increased costs by our jewelry businesses to foster brand awareness and attract increased submissions and higher costs incurred by our collectibles businesses for tradeshows and business development purposes. In addition, the company incurred higher intangible amortization costs related to capitalized software projects in fiscal 2008 compared with fiscal 2007.

Pre-tax income from continuing operations benefitted from interest income of $1 million in fiscal 2008 compared with $2.1 million in the same year ago period. The reduction in interest income reflects the same issues as the fourth quarter.

Turning to our balance sheet, at June 30, 2008 cash and cash equivalents worth $23.3 million compared with $42.4 million at June 30, 2007. The net cash usage of $19.1 million in fiscal 2008 related to payments for cash dividends for stockholders of $8.5 million, repurchases of common stock of $2.2 million, expenditures for capital equipment and software of $3.4 million and advances made to collectibles dealers of $3.1 million and cash used in operations of $2.3 million.

At June 30, 2008 the company had working capital of $26 million and no long term debt. Through June 30, 2008 we have repurchased a total of about 487,000 shares of common stock under our $10 million stock buyback program for a purchase price of approximately $5.8 million. In the current fourth quarter we purchased about 90,000 shares at a cost of approximately $0.9 million.

As announced today, the company will discontinue payment of its quarterly cash dividend of $0.25 per share of common stock and has declared a 10% stock dividend to stock holders of record on October 20, 2008 with the distribution of such shares on November 30, 2008.

With that I’d like to thank you for your attention. We are now ready to take questions from the audience.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Dalton Chandler – Needham & Co.

Dalton Chandler – Needham & Co.

With the $4 million in reduced operating expenses you were talking about, is that an across the board cut or do we expect to see that show up in some of the specific lines of business?

Michael R. Haynes

You’ll see it in all of the lines of business. Some of it is marketing expenses that we’ve lowered in our jewelry group since we’ve accomplished our awareness campaigns and we have now more focused marketing expenses which are lower and tighter generating more revenue. Then we also have some changes in personnel and headcount. Some of its in our corporate area, some of its in our coin division so you will see those lower expenses in a variety of places.

Dalton Chandler – Needham & Co.

And what’s the timing of those reductions kicking in?

Michael R. Haynes

Actually, they’ve already started in Q4, some of those – in the most recently completed Q4 some of them were applicable then, some of them have been applicable in our Q1 that we’re currently completing today and we have some more continuing in to Q2. But, generally speaking it’s all happening relatively quick.

Dalton Chandler – Needham & Co.

So by the time you get to Q3 you think you’ll have the full annualized $4 million implemented?

Michael R. Haynes

Quicker than that. Probably by the time we finish the end of Q2.

Dalton Chandler – Needham & Co.

Then we are getting in to the holiday season here, do you have any visibility on what the diamond and gem stone grading might look like this year?

Michael R. Haynes

We will definitely have increase over last year. We have new clients in a variety of areas generating new volume. Of course, our Blue Nile relationship is extremely strong and we’ve broadened that during this year. We’re doing more goods for them in more ways and also their sales are increasing not just domestically but they’ve opened up new markets worldwide.

Dalton Chandler – Needham & Co.

Do you have a sense for with the reduction in cost what the new breakeven run rate might be in the diamond and gem stone business?

Michael R. Haynes

Well, we certainly know the answer to that but in general consolidated basis we will be in a positive cash flow for fiscal 09 on a consolidated basis. We’ll be making cash in our collectibles businesses and investing some of that in to our jewelry business although as you probably noted in Q4 our jewelry business improved its operating results over the prior year and we would expect that to continue throughout fiscal 09.

Dalton Chandler – Needham & Co.

Last question on the coin business, I know you’ve had some economic impacts there, some macroeconomic impacts there but the business started to trend down a bit I think even before that occurred. Is there a scenario here where you see us getting back to the growth, the historical growth levels or is this going to be a flattish business going forward?

Michael R. Haynes

Historical growth for that company over many decades has been in the 8% to 12% range. We went through a period in three, four and five where it was in the 15% to 20% range so I think we will return to those more historical rates. Everything tends to kind of move to the norm. The show business was particularly impacted because of the volatility in gold. The gold, we look at it between 50% and 80% of our volumes at shows is gold coins whereas in our normal gold business what we call our vintage business it’s around 15%. So, we have a much higher percentage at those shows and of course we had a little difference in the number of shows due to timing issues.

But, we would expect those growth rates to normalize in that 8% to 12% range. Our vintage business which is four times our show business in terms of unit volume was basically flat this most recent year, year-over-year. But, again we would see things returning to a more normalized let’s stay growth rate over the next few periods.

Dalton Chandler – Needham & Co.

Are you counting on really just an improved economy and lower gold prices to bring that about or does something else have to happen?

Michael R. Haynes

No. Actually, gold prices, the volatility, especially on the upside has caused some instability there in terms of unit volume. But, even if gold prices just stay the same as they are right now we would probably see some unit increases. We’re not anticipating higher or better economic conditions although current economic conditions for our coin business are certainly beneficial in some ways because uncertainty drives people to these types of assets.

We’re not looking for anything to get any better or any worse necessarily in the world. These types of growth rates we’ve experienced for more than two decades in both up and down cycles, sometimes faster, sometimes slower as we’ve witnessed just in the last say five years, sometimes faster, sometimes slower.


Our next question comes from Arnold Brief – Goldsmith Harris.

Arnold Brief – Goldsmith Harris

A couple of quickies but the one I would like you to elaborate the most on is that you anticipated in your dialog that the diamond and jewelry business is progressing slower than you anticipated and of course there’s an impairment charge and valuation allowance. It looks like it’s more difficult to establish that business than you anticipated and you go grow that at 30% or 40% for some time before it go to critical mass, you obviously have got to get that thing to jump start rather than go at a 20% to 30%. Could you elaborate what the difficulties are in getting that business going?

Michael R. Haynes

Well, our growth rates have been in the 30% to 50% over the last couple of years. Obviously, we want it to grow as fast as humanly possible. The challenges have been in part once we bring in a customer their internal growth rates haven’t been what we would have projected. For example, we bring in a jeweler who does 1,000 units a quarter, we would expect historically for his sales to grow between 5% and 8% but his sales aren’t growing between 5% and 8%. Of course, when you add all this market share together the year-over-year on our currently established customers, those that we brought in to the stable hasn’t been as aggressive.

Our taking share from other people has been fairly successful. That’s where most of the growth rate comes from, not from existing customers as we have taken share from some of our competitors. I think given the product that we have which we believe and the customers who utilize our service believe is better than our competitors and our pricing structure is lower than our competitors, we believe we have the right mix of product, quality and price to continue to take market share from our customers.

We’ve come out of an awareness campaign and now we’re moving more in to a specific business campaign and we would hope that we would get even quicker results from a more specific business related campaign than from an awareness campaign. So, we’ve just completed Q4 where our operating results year-over-year improved. We would expect to see that continuing march towards cash flow breakeven as we continue to improve that business over time.

Arnold Brief – Goldsmith Harris

But, given the low revenue base the 30% to 40% growth rate, I’m not going to live long enough. There must be some resistance to this program otherwise you’re seeing revenues of $1 million to $2 million and maybe growing from that level. But to grow 30% when you’re doing a couple of hundred thousand a year is nothing. I mean, it will take you forever to get to breakeven.

Michael R. Haynes

Well, I would submit that 30% compounded annually is a pretty big number.

Arnold Brief – Goldsmith Harris

Not off a low base it isn’t.

Michael R. Haynes

What we’ve gathered so far has been a result basically of an awareness campaign. We’ve just changed gears earlier this year, basically at the beginning of the fourth quarter in to our more focused campaign now that everyone knows who we are, they’re beginning to understand our features and benefits so we would expect that growth rate to improve because we’re now more focused in that area.

Arnold Brief – Goldsmith Harris

Can you give us a timeframe when you think the diamond jewelry business will at least reach breakeven?

Michael R. Haynes

We would expect that by the time we get to the holiday season in 10. We’ve got the holiday season in 9, we’ll be pretty close to that holiday season in 10, we should be breakeven to contributing.

Arnold Brief – Goldsmith Harris

Has the new grading service from [Mister Albanys] had any impact on your business?

Michael R. Haynes

None that we can specifically identify.

Arnold Brief – Goldsmith Harris

It hasn’t helped or hurt?

Michael R. Haynes

I really can’t see any difference from where I sit. I don’t think it’s really had any affect positively or negatively. Just for clarity, it’s actually more I guess a validation service, not really a new grading service. It’s really a validation service.

Arnold Brief – Goldsmith Harris

It hasn’t helped or hurt you?

Michael R. Haynes

No, I haven’t seen one way or the other.

Arnold Brief – Goldsmith Harris

It struck me with gold prices up everybody – not everybody but there’s a lot of people dragging their jewelry in to various places to sell it at these prices. I know there’s been a lot of activity on sales of gold and silver jewelry. It would seem to me that would also encourage the sale of gold coins. You’re saying it hasn’t?

Michael R. Haynes

We haven’t noticed any activity there. There’s actually an interesting article today in The Wall Street Journal about I think it relates to sports cards. We actually provided a photograph of the Honus Wagner card for the article, our PSA group did. I think if you read that you’ll get a good sense of how people who buy these moderate to high end collectibles view that asset.

Now, I think we perhaps will see some liquidations and to the extent we do then those people bringing those goods to market will need third party certification in order to realize maximum value so there could possibly be some lift in our unit volume there. But, typically we don’t see huge movements in unit volume for either liquidations or additions. It really has more to do with more of the goods coming on the marketplace as trusts and estates begin to liquidate, the entire body of owners of collectibles begin to turnover not necessarily because of the economic conditions.

Arnold Brief – Goldsmith Harris

Finally, could you give us some idea of how you view the longer term outlook for the world coin grading service?

Michael R. Haynes

Well, we’ve certainly had some significant increases there. We have some specific marketing taking place in Europe primarily but a little bit in Asia. We would expect unit volume there to continue to increase. We do not have any immediate plans to open up any footprint in Europe or in Asia but rather working with distribution systems to bring those goods in the United States for analysis by our people. We see a market out there that is basically the consumers are similar to the consumers we have here in the United States.

Third party grading in Europe and Asia is in its early stages so we would expect to realize a very good opportunity there in the next two years or so.

Arnold Brief – Goldsmith Harris

Do you have plans to establish a footprint overseas as it gets larger?

Michael R. Haynes

As I stated, not immediately. We would need much more volume than we currently have in order to justify that. But, clearly if we were doing a million units a year in world coins, that would certainly justify the footprint and that’s really just a economic analysis crossing the local rates versus the additional distribution costs across the oceans.


We have no further audio questions at this time.

Michael R. Haynes

We appreciate very much your time and the opportunity to chat with you about these changes. We look forward to having further conversations with you as we continue to grow and develop the businesses in to fiscal 2009. Thank you very much for your time.

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