Collectors Universe, Inc (NASDAQ:CLCT) F2Q2013 Results Earnings Call February 7, 2013 4:30 PM ET
Robert Deuster - Chief Executive Officer
Joe Wallace - Chief Financial Officer
Adrian Day - Adrian Day Asset Management
Good afternoon, everyone and thank you for joining us to discuss Collectors Universe financial results for the Second Quarter ended December 31, 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 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 and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
With that, I would now like to turn the call over to Robert Deuster. Robert?
Thank you, Karia. Welcome to today's second quarter conference call. I'd like to spend a few minutes discussing our business activity during the last quarter, some of the more significant events that had occurred and some commentary on the market outlook for the balance of the year, before I turn the call over to Joe to discuss the financial results.
We just finished our second quarter, which is seasonally our lowest quarter of the year. As expected the reduction in modern coin box submissions to us was evident until very late in the quarter when we saw a marked increase in activity in the coin bullion market. This uptrend continues today and will be reflected in our third quarter results.
Consequently when you look at the combined second quarter factors of lower gold prices during November and December, lower mint output of new coins evident earlier in the quarter especially when compared to the 2011 U.S. Mint's 25th Anniversary American Eagle Coin Program that was run back then and the holiday season in the U.S late last year. We experienced a lower than normal service revenue level in our PCGS business. But PCGS still represents 62% of our total service revenue for the quarter. At the same time we experienced continued growth in our PSA/DNA cards and autograph business and our certified coin exchange online business. They contributed 38% of the revenue up from 31% in the 2011 period. PSA/DNA alone grew 10% year-over-year.
These results show some of the balance we have in terms of our served market and the importance of some of the web based services we offer to coin and trading card customers. Since Collectors Universe maintains the largest database in the world for information on our certified coins, sports memorabilia and autographs, we provide collectors fee based as well as free access to up-to-date and important collectable and market data.
This not only brings them close to each other of their market of interest, but it provides critical valuation data for buying, selling or trading items. Since we have authenticated and graded more than 25 million coins and 20 million sports related collectables to-date, we maintain a population database that shows graded coins and cards by population and their rarity, supported by an up-to-date price guide of an item's latest estimated or realized market value.
There are also links to most items offered for sales for these items on eBay or from dealers. But this foundation and supporting information such as images and background facts about an item of interest our online tools make collecting or investing in collectables a safe and valuable activity. We consider the internet a crucial medium for our businesses to find, to communicate and build long-term relationships with our customers.
Our online community of customers relies on us to give them the information they need to excel in collecting and realize values for their item if they choose to sell or trade. The same community is also the source for the continuous expansion of our grading services to collectors.
Some of the more normal online tools we've provide our marketplace include a subscription base service called certified coin exchange providing dealers with the latest market price in an inventory available to buy or sale. A subscription based collector's corner service providing a listing of more than 75,000 collectable items available from dealers and collectors worldwide.
There are some web and mobile based applications that produce the most comprehensive access to collectable information, like for inflation a real time market pricing site that we maintain for precious metals and the melt value of coins. CoinFacts, this site gives you immediate access to image and background information on all PCGS graded coins.
Photograde an online image library of PCGS coins that assists collectors in estimating a grade for their coins before submission. And also a community that we have under our Set Registry online site. So it's an online resource for collectors of certified coins, trading cards and autographs and memorabilia to register their collectibles in sets and buy for recognition in the collectors community as having assembled important or valuable collections. There are currently 65,000 coin sets and 79,000 cards sets registered with us online today.
Collectible facts, an online source of trading card information for PSA graded cards. And we are moving to mobile access rapidly. The Coinflation and Photograde online sites are now available for free download on the iPhone. I would encourage you to go to the Apple App Store and try it today.
A point of interest recently in the coin market was the auction of the most valuable U.S. dollar. Last week it was announced that a very rare first strike 1794 silver coin in perfect condition sold for $10 million to a collector. This coin was graded by PCGS in 2003 and remains in with original holder.
The coin represents one of the earliest silver dollars produced by the young U.S. government. But that sale and the recent rediscovery in certification of a rate 1913 U.S. Buffalo nickel, the most valuable known certified copper, silver and gold U.S. coins have been graded by our PCGS business unit. In fact, of the top 10 most valuable coins in each of these metal categories, 7 or 8 of them are graded by PCGS. That's an impressive record and demonstrates the value of our brand and service to the collector community.
We have many initiatives underway at Collectors Universe, positioning the company for a longer-term growth both domestically and overseas. As mentioned in previous reports we're growing our presence and capabilities for PCGS in Europe and Asia. We're investing in both market arenas and bringing many of the online resources we've deployed in the U.S. market to collectors worldwide. We're seeing increasing volumes of coins submitted for grading to at Paris and Hong Kong offices every quarter.
The steady progress in our PSA trading cards and autograph businesses sealed by increasing Collectors interest and our expanding services and information online to that market. In particular our autograph authentication revenues grew 13% over last year's period. Our fiscal presence and grading relating activities at coin and trading cards expose and shows is very strong and a good indicator of general market vitality.
While the majority of our grading service revenues are realized at our Santa Ana operations show grading services are very important to collectors and dealers because they get their items turned around on site and the speed of service from our expert grading staff is well received.
So while the global and numismatic market does exhibit some seasonality and is influenced by economic conditions, precious metal prices and to a degree such as in last quarter, the holidays season. On balance from year-to-year the coin and bullion market is a growing and important asset class for investors and collectors around the world.
As I have mentioned earlier in my remarks, during the last quarter we did experience relatively low demand for modern coin grading compared to 2011. Close to the end of the quarter we saw a marked increase in modern coin and bullion submissions. That was a very encouraging and it has continued during out current quarter.
Much of this upturn in the market is due to the increased silver and gold coin production at the U.S. and other mints but also high consumer interest in physical silver and gold bullion. In fact earlier this month, the U.S. mints production of silver dollars was sold out in a couple of weeks ahead of their expectations and significantly above levels of only a few months ago.
Normally we see a stronger market demand for our services in all of our markets in Q3, but this recent modern coin activity is every encouraging and bodes well for all of our results in the next quarter and the balance of the year.
At this stage I'd 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'll now give a brief overview of financial results for the second quarter of fiscal 2013. For the second quarter, the company reports service revenues which comprise our grading up application related services revenues up $9.6 million, operating income of a $1 million and after-tax income from continuing operations of $0.6 million or $0.07 per diluted share. This compares to service revenues of $11.3 million, operating income of $1.9 million and after-tax income from continuing operations of $1.1 million or $0.14 per diluted share for the second quarter of fiscal 2012.
For the current six months the company's net service revenues were $20.3 million, operating income was $2.3 million and after-tax income from continuing operations was $1.4 million or $0.17 per diluted share. This compares to net service revenues of $23.2 million, operating income of $4.4 million and after-tax income from continuing operations of $2.6 million or $0.33 per diluted share for the six months ended December 31, 2011.
The income tax provisions for the three and six months period represents estimated annual effective tax rates ranging from 40% and 42%. As previously disclosed, as of June 30, 2012, we have fully utilized all of 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 decline in service revenues compared to the prior year periods of $1.7 million or 15% in the second quarter and $2.9 million or 13% in the six months included reductions of $1.9 million or 24% for the quarter and $3.4 million or 21% for the six months in coin service revenues, partially offset by increases of $0.3 million or 10% for the quarter and $0.5 million or 9% for the six months in our cards and autograph services revenues.
As discussed in the Form 10-Q filed with the SEC today, the decline in coin service revenues primarily reflects reduction of 16% and 23% in the number of coins authenticated and graded in the second quarter and six months respectively, and in the second quarter a reductions in the average service we earned are modern coins graded during the quarter due to the mix of programs in the quarter.
In addition in the second quarter of the prior year coin service revenues benefited from the popularity of the U.S. Mint's 25th anniversary American Silver Eagle Coin Program which contributed revenues of approximately $1.1 million in that quarter.
With respect to the second half of the year, sales of gold and silver Eagles by the U.S. Mint increased in the three months ended December 31, 2012, compared to the same period of 2011 represent the first quarter during calendar year 2012, of which sales of gold and silver Eagles increased as compared to the same quarter of 2011.
This increased level of sales appears to be continuing in the early part of calendar year 2013, which should lead to a higher level of submissions in our third fiscal quarter, which is typically our strongest quarter of the year. Therefore, we expect an improved performance in the business in the second half of fiscal 2013 compared to the first half of the year.
Despite the decline in our coin revenues in the first half of the year, our coin business represents approximately 59% of total revenues in the six months and reflects the continued importance of our coin authentication and grading business to our overall financial performance.
Our services gross profit margin was 59% for both the second quarter and six months compared with 60% and 61% for the respective periods of the prior year. The lower gross profit margin was due to the lower revenues in the quarter and to the relatively fixed nature of certain of our direct costs.
The gross profit margin for our coin business declined to 62% in both the current quarter and first half of the year from 66% and 67% in last year's three and six months periods due to the lower coin revenues.
Selling and marketing expenses were essentially flat in the second quarter and increased of $150,000 in the six months. The increase related to cost incurred to attend a trade show in Hong Kong in the first quarter. Sales and marketing cost reflect increased cost in connection with our e-commerce activities offset by reductions in business development incentives due to the lower coin revenues and operating results in the quarter.
G&A expenses were down $0.2 million in both the second quarter and six months compared to the same periods of the prior year and reflect lower stock-based compensation expense in the respective periods.
Turning to our balance sheet, the company's cash position at December 31, 2012, was $17.5 million compared with $21.2 million at June 30, 2012. Net cash used at $3.7 million at the first half of the year comprised cash generated from continuing operation of $2.5 million offset by cash payments of $5.5 million for dividends to stockowners, $0.4 million for capital expenditures and $0.3 million used in our discontinued operations.
At December 31, 2012 the Company continued to have $3.7 million remaining under its previously announced stock buyback program. The Company has now in the open market repurchase under this program since the fourth quarter of fiscal 2008.
On January 29, 2013 the Company announced its quarterly cash dividend of $32.5 per share to be paid on March 1, 2013 to stockholders of record on February 15, 2013.
With that I would like to thank you for your attention. Operator we are now ready to take questions from the audience.
(Operator Instructions) And our first question comes from the line of [Mathew Finesse with R. C. Management]. Please go ahead.
Hi guys, thank you for taking my question. Given that you have now fully utilized your federal tax laws carry forwards and operating cash flows have declined materially. Can you articulate your dividend payout strategy and do you continue to pay your dividend well in excess of your earnings power?
Yes our position on the dividend is we are going to maintain it because we feel that with the current strength of our balance sheet plus the ability to generate the cash within the business which is beyond what is reflect in the last several quarters we think this is a prudent way to return some of the value of the Company to shareholders. So we do not have a change in our policy on dividends in the forecast.
Okay, thank you. That's it from me.
(Operator Instructions) And our next question comes from the line of Adrian Day with Adrian Day Asset Management, please go ahead.
Adrian Day - Adrian Day Asset Management
Yes good afternoon. Quick question on the seasonality of the coins. Are you seeing any seasonality in Europe and Asia or is it too soon to tell?
I think it is a little bit too soon to tell. They don't necessarily have the same sort of, if you look at the total market the same seasonality as we do because it is little bit more mature in the US plus the mint schedules in the U.S. are pretty well established. Our presence in Europe and Asia is really just at the beginning stages. So we are not able to measure it over a very long period of time so we should be able to answer that question a little bit better as time goes on, but they are definitely not in sync.
Adrian Day - Adrian Day Asset Management
Okay, thank you.
(Operator Instructions) And there are no questions in the queue, please continue.
Well thank you for joining us today on our second quarter call and we look forward to speaking with you at the end of the third quarter. Good day.
Ladies and gentlemen, this concludes the Collectors Universe financial results second quarter conference call. If you would like to listen to a replay of today's conference please dial 303-590-3030 or 1-800-406-7325 with access code 4181738. Thank you for your participation you may now disconnect.
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