Robert Deuster - Chief Executive Officer
Joseph Wallace - Chief Financial Officer
Adrian Day - Adrian Day Asset Management
Collectors Universe, Inc. (CLCT) F1Q13 Earnings Call November 8, 2012 4:30 PM ET
Good afternoon, everyone and thank you for joining us to discuss Collectors Universe financial results for the first quarter ended September 30, 2012. With us today from management are Robert Deuster, Chief Executive Officer and Joe Wallace, Chief Financial Officer. The management will provide a brief overview of the quarter, and then the call up 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 forecast in this call due to a number of risks and uncertainties. Certain of these risks and uncertainties in addition to the 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 not like to turn the call over to Robert Deuster. Robert?
Thank you. Welcome to today's conference call. I will review the current market environment and some of our achievements for the first fiscal quarter of 2013. Then, our CFO, Joe Wallace will provide a quick overview of our quarterly financials. At the conclusion of these remarks, we would be happy to answer any questions that you might have.
First of all, I would like to say, I am very pleased to be part of the Collectors Universe team. While my time here has been short, I am reporting to you only a few weeks after my start in mid-October. I have been impressed with this unique company serving the worldwide collectibles market.
The services we provide in grading and authentication for the coins, sports memorabilia and autographed markets represents the highest benchmark in quality, security and market value for our customers. As we grow from this point, I hope to bring to Collectors the focused direction to expand globally, by efficiently increasing and expanding our services in the U.S., Europe and Asia, as well as, giving all of our customers greater access to our services in collectibles information online.
But before I discuss the market dynamics and our first quarter results, I would like to take a moment to thank Mike McConnell, who served as our CEO for the last four years, as he returns to our board. Mike's tenure, which focused on bring the company back to its core competency in the coin and sports memorabilia markets was essential enough to moving forward to better serve and grow in our primary markets.
As many of you know who follow the company, we participate in three primary collectible market segments, coin, sports memorabilia and autograph authentication. While they are each driven by different market factors our business results are mostly influenced by the precious metals and vintage coin market dynamics. Our PCGS coin division, which represent about 57% of our total service revenue with further sub segment into the vintage world and modern coin segment.
We also generate service revenue by grading coins submitted at coin shows. With the exception of vintage and world coins, the level of coins submitted to us for grading are mostly in the modern categories, are highly dependent on the price of gold, silver and platinum and the output from the mints such as the U.S. mint and of course public demand for those coin.
In recent quarters, the price of gold in particular has hovered around $1,700. Down from its high earlier this year, and thus the demand from the U.S. mint which is strongly influenced by lower demand from public buyers is also down, putting fewer coins into the market and thus to be potentially graded by us.
As reported last quarter and now again this quarter, we are seeing that lower level of submissions for grading in the modern coin sub-segment and it has lowered our reported total coin service revenue, which is down about 19% year over year. This is the most volatile part of our business and it will remain that way for the foreseeable future.
For vintage and world coins, we continue to hold a strong market position as the preferred grading service provider worldwide. Here the price of precious metals is less of a factor where demand for grading is driven more by personal economics and collector and dealer activity. Overall, the vintage and world coin market is fairly stable but underdeveloped. We continue to increasing demand for our grading services at major coin shows or dealer events with grading activity 14% higher this year than a year ago.
With our offices in Paris and Hong Kong now operating on a continuous basis, we are starting to see our global expansion serving the world coin market take hold. This is one of our most important strategies for growth in the coming years. An important component of serving the world coin market is providing the marketplace with the latest information on the price of precious metals, detailed facts about all of the coins in the market, and their value as they frequently trade around the world. Collectors Universe provides the most extensive online resource and database of coin information in the world today.
Our customers access this information through our collectors club Coinflation, Set Registry and Certified Coin Exchange websites. Already with the largest user community in the collectors' market, we are investing in significant enhancements to our current online capabilities. The goal is to include a more complete and easy to access portal for data on coin facts, linkages to Collectors Universe and our services in the marketplace to list, buy or sell coins. Our online capabilities will naturally extend to other markets we serve such as sports cards and memorabilia, thus providing a one-stop shop for all collectors.
As noted in prior earnings releases, in order to deliver on these online capabilities, we are investing significantly in our information technology systems and personnel. Our strategy here is to provide our customers in newly served markets with the online content, community and access needed to expand our grading services and make them more convenient than ever. In the coming quarters, we will roll out new features and capabilities on our websites and make communicating with Collectors Universe more seamless and efficient.
However, along with investing for the future, we are mindful of the volatility of our coin market and its current sluggish market condition. So we will balance our need to invest in future capabilities with our need to control costs in times of slower demand. As such, we will act to control our cost structure when needed.
In our October 15 preliminary release, it was noted that because of the lower coin levels submitted for grading in the last several quarters and the expectation that those market conditions may continue for the foreseeable future, we have reduced our coin operating cost structure by $1.1 million annually in response. We will continue on this course until market conditions improve.
Moving on now to our significant business segment. The PSA/DNA division represents about 27% of our total revenue and serves the sports card and memorabilia markets as well as the autograph authentication market. Similar in nature to the coin business, the dealers and individual customers submit their items for grading and authentication. Like the coin market, we provide the quality, security and benchmark for grading that the market seeks in order to establish a fair market for their collectibles. Our business continues to expand in both capabilities and products served here. Our current quarter showed service revenue in this division of 9% on a year-over-year basis. We have improved profitability in this division by realizing higher average selling prices for services and through internal efficiencies.
We had our second straight $1 million quarter for autograph authentication services. We are making a significant push in expanding the PSA collectibles facts section on our website. Additional information on cards, memorabilia and autographs graded by PSA will give our customers a wealth of facts on these types of collectibles and provide a much richer marketplace experience. Much like our strategy for coins on content, we will be continually investing here during 2013. Being the largest grading services company in the sports market, we expect continued growth and profit improvements throughout 2012 and 2013.
While we are currently focused on our current core businesses and giving our customers the highest level of service and value, we are not satisfied with the status quo. All of our served markets are dynamic and in the case of the coin market, global. Through initiatives started in the last year and to be fully developed and deployed in the coming year, we will bring to the market new capabilities and services that we believe our customers want and to extend our reach into markets currently underserved.
We believe a strong presence in the European and Asian markets are key and we are investing there. We believe the power and convenience of the Internet and e-commerce is reshaping many industries, including ours. We intend to be a leader in both of these strategic arenas.
Our report this quarter reflects the realities of my previous comments that there are market factors that define our near-term business prospects and as we remain as the market leader in the collectibles space, we will be impacted by them but for those elements of our business mix we control and for the opportunity to serve underdeveloped markets to provide growth, we are investing our resources to pursue them.
At this stage, I would like to turn the call over to Joe who will give you a financial review of the quarter. Joe?
Thank you, Bob, and good afternoon, everyone. I will now give you a brief overview of the financial results for first quarter of fiscal 2013. For the first quarter, the company reported service revenues, which comprised our grading, authentication and related services of $10.7 million, operating income of $1.3 million and after-tax income from continuing operations of $0.8 million, or $0.10 per diluted share. This compares to service revenues of $11.9 million, operating income of $2.5 million and after-tax income from continuing operations of $1.5 million or $0.19 per diluted share for the first-quarter of fiscal 2012.
The service revenues of $10.7 million and operating income of $1.3 million for the quarter were consistent with the preliminary results reported on October 5, 2012. The income tax provisions of $0.5 million in the first-quarter and $1.0 million for the first-quarter of fiscal 12 represents estimated annual effective tax rates of 40% and 41%, respectively.
As previously disclosed, as of June 30, 2012, we have further utilized all our federal net operating loss and other tax attributes. However we continue to have tax losses and credits available for state income tax purposes in California which should minimize taxes payable in California for the foreseeable future.
The $1.2 million, or 10% decline in service revenues in the first quarter compares to the first quarter of last year, includes a $1.5 million or 19% reduction in coin service revenues, partially offset by increases of $0.3 million, primarily in our cards and autograph services revenue.
As discussed in our Form 10-Q filed with the SEC today, the coin service revenues declined primarily reflected a 28% reduction in the number of coins authenticated and graded in the quarter and compliance reductions in modern coin grading and authentication fees of $1 million, or 40%, vintage fees of $0.4 million or 19%, world fees of $0.2 million or 21%, partially offset by a 14% increase in show submissions in the quarter.
We believe the decline in coin authentication and grading fees reflects stagnating gold and silver prices over the last year which in conjunction with the overall stabilization of the company has made investing gold and silver less attractive. As evidenced by continued lower sales of silver and gold Eagles by the U.S. Mint. Furthermore, we believe the reduction in our revenues reflects a general market decline in the overall coin authentication and grading market rather than a loss of market share.
Despite the decline in our coin authentication and grading fees in the quarter, our coin business represented approximately 57% of total revenues and reflects the continued importance of coin authentication and grading business to our overall financial performance.
Our services gross profit margin for the first quarter was 59% compared with 62% for the first quarter of last year. The lower gross profit margin was due to lower revenues in the quarter and to the relatively fixed nature of certain of our direct costs. The gross profit margin the for our coin business declined from 67% in last year's first quarter to 63% in the current quarter due to the lower coin revenues.
The increase in selling and marketing spends of $0.2 million in the quarter mainly related to cost incurred attending a trade show in Hong Kong and increased cost associated with our digital activities. These cost increases were partially offset by a reduction in business development incentives due to the lower coin revenues and operating results in the quarter.
G&A expenses were essentially flat in the quarter compared to the same period of the prior year. There were cost savings relating to management bonuses and incentives due to the lower operating results in the quarter and third party consulting fees. Those savings were offset by higher depreciation and amortization expense associated with capital expenditures and higher legal fees. In addition, G&A expenses included $164,000 of CEO transition costs of which $122,000 was non-cash stock based compensation.
Turning to our balance sheet. The company's cash position at September 30, 2012 was $19.6 million compared to $21.2 million at June 30, 2012. Net cash used of $1.6 million in the first quarter comprised of cash generated from continuing operations of $1.6 million offset by cash payments of $2.9 million for dividends to stockholders, $0.2 million for capital expenditures, and with $0.1 million used in our discontinued operations.
At September 30, 2012, the company continued to have $3.7 million remaining under its previously announced stock buyback program. The company has not made any open market repurchase under this program since the fourth quarter of fiscal 2008. On October 31, 2012, the company announced its quarterly cash dividend of $0.325 per share to be paid on November 30, 2012 to stockholders of record on November 16, 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) Our first question comes from Adrian Day with Adrian Day Asset Management. Please go ahead.
Adrian Day - Adrian Day Asset Management
I wanted to ask couple of questions on the Hong Kong operation, if I may. First of all, looking specifically at the costs. The costs are a little more than you thought they might be. What you look at the amount of money you might need to put into that operation to really build it?
Then the second one is perhaps a little more general. Can you just give us an idea of what kind of business are you getting? Is it mostly from Hong Kong people? Is it from the Chinese, from the mainland? Is it from the rest of Southeast Asia? Is it all coins? If it is coins, are they more local coins or are they world coins?
In terms of the cost, the cost we incurred in the first quarter were pretty much in line of what we estimated. On the revenue line, it wasn’t quite as healthy as we thought but in terms of the cost, we were incurring, they are pretty much in line with what we expected, and obviously they are not quite as high as they were in the third, fourth quarter of last year which was our first show. So in terms of the cost structure, that’s progressing okay.
I think in terms of the coins submitted, they are mainly Chinese coins. There is also local coins from Hong Kong as well and throughout Asia.
This is Bob Deuster. Most of the coins probably are not from mainland China because the difficulty getting coins in to Hong Kong. So they are coming from local dealers and from other parts of Asia for the most part at that stage.
Adrian Day - Adrian Day Asset Management
Okay, and is it retail people that are buying from you? Or is it dealers?
I think its both.
Adrian Day - Adrian Day Asset Management
Okay, I just wanted to get a feel for the business. Thank you.
(Operator Instructions) Gentlemen, at this time, I am showing no further questions in the queue. Please continue with any closing remarks you may have.
Well, I look forward to our shared company's progress on future calls. This is certainly an exciting time for Collectors Universe, as we look forward to global expansion and creating some new capabilities for the industry. So thanks again for joining us today. I hope you all have a good day and we will visit again next quarter. Thank you.
Ladies and gentlemen, this does conclude the Collectors Universe financial results for the first quarter ended September 30, 2012 conference call. You may now disconnect. Have a pleasant day.