Collectors Universe. F1Q10 (Qtr End 9/30/09) Earnings Call Transcript

| About: Collectors Universe, (CLCT)

Collectors Universe (NASDAQ:CLCT)

F1Q10 Earnings Call

November 09, 2009 4:30 pm ET


Michael McConnell - Interim Chief Executive Officer, Director

David Hall - President, Director

Joseph Wallace - Chief Financial Officer


Garrett King - Unidentified Company

Andrew Kaplan - Harvest Capital


Good afternoon everyone, and thank you for joining us to discuss Collectors Universe financial result for the first quarter ended September 30, 2009. With us today from management are Michael McConnell, Chief Executive Officer, and Joe Wallace, Chief Financial Officer. Management will provide a brief overview of the quarter and then open the call for 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 Security and Exchange Commission. The forward-looking statements are made only as of the date of today’s conference call and the company undertakes no obligation to update or revise the forward-looking statements whether as a result of new information, future events or otherwise.

With that, I would now like to turn the call over to Michael McConnell. Michael, go ahead.

Michael McConnell

Thank you. Good afternoon, and thank you for joining us today. Before turning the call over to our CFO, Joe Wallace, who will discuss the financial results in more detail, I would like to review our primary areas of focus for the remainder of fiscal 2010.

The company and its employees have worked hard over the past six months to restore operating margins to approximate levels achieved several years ago. We will continue to hold ourselves to these standards, recognizing that the components of our performance will vary from quarter-to-quarter based upon mixed price and volume in our various divisions.

Importantly, we also understand that sustainable shareholder value creation and longer term corporate prosperity requires revenue growth. Accordingly, having addressed our cost structure, and improved operating efficiencies we are exploring and analyzing a number of initiatives that present the potential to extend our core businesses.

I spoke to these efforts on the August conference call, and I believe we are on track to develop and implement ideas that will help drive future revenue growth, most likely, contributing to financial results in fiscal year 2011, hopefully earlier, but it is more important that we do these well rather than quickly.

There are several other items worth mentioning from the quarter. First, last Friday we were repaid in full on the remaining significant CSC loan on our balance sheet. The total amount repaid was $2.3 million.

Second, you will see the disclosures in the 10Q regarding our net operating loss carry forwards. Last year, given continuing operating losses we took a full evaluation allowance against the NOL. Having returned to profitability, the likelihood of our ability to utilize the NOL has increased and as the Q states we will continue to review and monitor the NOL and its treatment on our financial statements.

Finally, on October the 26, the board announced the resumption of the quarterly cash dividend of $0.25 per share per quarter. After careful consideration of the company’s current strategy, our expected financial results and specifically operating cash flows as defined in our cash flow statement over the next several years.

The dividend as you know is payable November the 24, the shareholders, a record November 10. Given the company’s current strategy, expected levels of operating performance and in the absence of any deterioration in our core businesses we believe we can fund most, if not all, of the dividend payments over the next several years from cash flow from operations.

Thank you. And at this time I will turn the call over to Joe.

Joseph Wallace

Thank you Mike, and good afternoon everyone. I will now give a brief overview of the financial results of our continuing operation for the first quarter of fiscal 2010. For the first quarter, net service revenues were $9.3 million, operating income was $1.8 million or 19% of revenues, and income from continuing operations were $1.7 million or $0.22 per diluted share.

This compares to net service revenues of $9 million, operating income of $0.3 million or 4% of revenues and income from continuing operations of $0.5 million or $0.05 per diluted share for the first quarter of fiscal 2009. The higher earnings per share reflects the improved operating results of our continuing businesses and a lower weighted average number of shares outstanding as a result of the purchase of shares in the July 10th, 2009 touch standard.

In the current first quarter, the 3% increase in net service revenues was comprised of a 2% increase in grading authentication fees, an 8% increase in other related services. The increase in grading and authentication fees included an increase of $0.4 million or 9% per coins, and declines of $0.2 million or 8% for trading cards and autographs, $0.1 million or 41% for stamps.

The increase in our coin authentication grading fees in the first quarter primarily related to an increase in the grading authentication of modern coins. This represents a second successive quarter of increased total coin revenues resulting from an increase in modern coin revenues.

Although we continue to see positive growth in the level of modern coin submissions the level of revenues can be influenced by specific customers or marketing programs in a given period. So it is uncertain at this time if the increase in modern coin submissions is sustainable. In addition, the overall level of coin revenues also influence by the level of vintage and show revenues, which when taken together were actually down in the quarter.

The level of cards, autographs and stamps revenues continue to be adversely affected by the current recession and credit crisis. Therefore, we are not able to predict with any assurance whether or not the increase in coin authentication grading revenues will continue neither in future courses of fiscal 2010 nor the level of authentication grading revenues for trading cards autographs and stamps in the fiscal 2010.

Gross profit margin and service revenues increased to 60% in the current first quarter compared with 54% for the same period of fiscal 2009. The improved gross profit margin is the result primarily of the cost reduction programs and operational efficiencies achieved in our coin business. In addition, the higher proportionate coin revenues and the absence of direct stock based compensation costs helped increase the overall gross profit margin.

Operating expense declined by 18% in the first quarter to $3.8 million compared with $4.6 million for the same of fiscal 2009. The cost savings primarily related to G&A reductions in personnel, professional fees and a lower level of stock based compensation costs. The resulting operating income from continuing operations was $1.8 million or 19% of revenues in the first quarter as compared to 4% of revenues for the same quarter of last year and 19% of revenues earned in the fourth quarter of fiscal 2009 before the non-cash impairment charge recognized in that quarter.

Interest income net was $14,000 compared with a $126,000 for the first quarter of fiscal 2009 and reflects lower prevailing interest rates due to the investment cash balance in government money market funds and lower average cash balances in the quarter. Tax rate of 7% for the quarter reflects federal alternative minimum taxes and estimated state taxes. The company continues to have net operating losses on other tax attributes available. That should offset our minimized taxes over the short term depending on our financial performance up in the next few years.

Turning to our balance sheet; at September 30, 2009, cash and cash equivalence totaled $16.4 million compared with $23.9 million at June 30, 2009. Net cash used in the current first quarter of $7.5 million was comprised of cash generated from continuing operations of $1.9 million offset by cash use of $8.9 million to purchase shares and debt, $0.1 million for capital expenditures and $0.4 million used in discontinued operations.

Subsequent to September 30, 2009, the company collected a customer note receivable for $2.3 million relating to our CFC financing business. As discussed earlier, on July 10, 2009, we completed a modified Dutch Auction Tender Offer and accepted for purchase 1.75 million shares for a cost of $8.7 million cash.

At September 30, 2009, the company continued to have $3.7 million remaining under its previously announced stock buy-back program. On October 26, 2009, the company announced a resumption of a cash dividend policy, which calls for the payment of $0.25 per share per quarter. The first payment of dividends under this policy will be made on November 24, 2009, to stock holders of record as of November 10, 2009.

With that, I would like to thank you for your attention. Operator, we are now ready to take questions from the audience

Question-and-Answer Session


(Operator Instructions) Your first question comes from Garrett King – Unidentified Company.

Garrett King - Unidentified Company

Given that you are going to be paying out the current payout rate about $7.5 million in dividends going forward, which is about your run rate, kind of cash flow generation, how much money do you plan on investing in the business going forward?

Michael McConnell

Yes Garrett, that’s a good question. Obviously, we are monitoring, and when you look carefully at what I said, the reason I said, most if not all, of the dividend from operating cash flows was for that very reason.

As we explore a number of what I call incremental or organic growth opportunities, we may very well decide to invest in those initiatives that will flow through the P&L and my result in any given year over the next one or two years or given quarter, the operating cash flow not covering dollar for dollar that dividend payments, exactly why I said it.

Garrett King - Unidentified Company

Okay. And do you have any idea about what percentage of your coin authentication revenues comes from gold coins?

Joseph Wallace

It's probably somewhere around 20%.

Garrett King - Unidentified Company

20%, okay.

Michael McConnell

And that could change a lot quarter by quarter, because it depends in particular if we’ve got a modern coin program undertaking the units might whip around quarter to quarter. So, I would like to just add that comment to Joe’s.


Your next question comes from Andrew Kaplan – Harvest Capital.

Andrew Kaplan - Harvest Capital

Could you, I realize it's difficult, because you don’t have any specific acquisitions in mind yet. But parameters around the kinds of things that might be good acquisitions for you and I know you kind of contrast that with specific experience going back with the jewelry business that would not be a good fit for your other business for various reasons. Can you compare and contrast whether would or wouldn’t be a good acquisition for you guys given what you’ve learnt?

Michael McConnell

Yes, sure. I think I can't be even more specific than that. I mean currently we do not anticipate making any acquisitions at all for all of the reasons that we know about, how difficult it is to do those well, not only in our company but at other companies. And when I talk about growth initiatives these are organic.

They are incremental to our core businesses. They are trying to leverage three things, our brand, our content in e-commerce world. I spoke to those in August, and so to answer your question, we did not have any current plans to make any acquisitions at all.

Now having said that, something comes along that is very compelling for value, of course we will take a look at it. But the people around the board table and the executive management of this company have been around this industry for a long time, and they don’t feel that there are any compelling potential acquisition opportunities but that’s not to say that something couldn’t come along.

Andrew Kaplan - Harvest Capital

If I can ask a follow up, in the past I think one of the rational you had for entering some other lines of business was that the scale or just the total top line revenue as a public company, you are able to get insufficient operating leverage I guess, because of some of the fixed cost surrounding being a public company. And as you are picking around that change at all if some of those guys down or are you just now more comfortable that you can kind get the scale without acquisitions.

Michael McConnell

Yes. I mean look, there is no sort of ideal spot to be at in terms of scale. Depending on how people look at certain costs, it costs anywhere from $750,000 to $1.5 million to be a public company. That is more or less related to those requirements, and we have aggressively managed those down this year and certainly would not change our strategic priority to somehow leverage that level of cost.

The value of destruction of that kind occurs in getting the other side of it wrong. It far outweighs the headwind from that figure, the level of that figure today. So, we are not worried about scale vis-à-vis being a public company.


Thank you. I show no further questions at this time. I would like to turn the call back to management. Go ahead please.

Michael McConnell

Well, I would like to thank everybody for joining us today. Obviously Joe and I are available should you like to reach us offline and we thank you for your interest in the company.


Thank you ladies and gentleman this concludes the Collectors Universe financial results for the first quarter conference call. If you would like to listen to a replay of today’s conference please dial 1-800-406-7325 or 3035903030 and enter the access code 4181696 followed by the #. ACT would like to thank you for your participation, you may now disconnect.

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