Collectors Universe Inc. (NASDAQ:CLCT) Q3 2010 Earnings Call May 10, 2010 4:30 PM ET
Michael McConnell – Chief Executive Officer
Joe Wallace – Chief Financial Officer
Good afternoon, everyone. And thank you for joining us to discuss Collectors Universe Financial Results for the Third Quarter ended March 31, 2010. As a reminder, today’s conference is being recorded. 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 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 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 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?
Thank you. And welcome, everyone, to today’s conference call. Before I turn the call over to Joe Wallace, our CFO, I’ll comment briefly on the quarter and key elements of our thinking and plans going forward.
First, simply the company produced record results this quarter. Both top and bottom line performed well and represented a culmination of the focus and efforts of our employees over the last year. Understanding who we are, what we do well and being accountable to our plans have led to a renewed confidence in ourselves and formed a solid foundation to the business.
Second, our process to develop and then implement growth initiatives has begun to take shape. Last fall, we introduced coin facts, which in less than a year has approximately 3,000 subscribers and is growing every week. In late March, approximately six weeks ago, we launched PCGS Secure Plus and while it’s early days, we are pleased with the market’s initial response.
PSA and PSA/DNA launched a new service in the quarter targeted at personalized trading cards and will launch an innovative product within our photo and autograph activities in June. Selectively these and others in development are consistent with our strategy to protect our core businesses and to extend pragmatically. What I mean by that, to extend within our core markets, build upon our core competencies, to have low capital requirements and healthy profit margins.
Third, we have steadily improved the capital efficiency of our balance sheet in our business. Operating cash flow has increased substantially while capital deployed in the business has declined.
On a LTM basis return on equity is approximately 37% after being in single digits for years. Capital management actions over the last year include a significant Dutch tender last summer at $5 per share. We then full reinstatement and now subsequent increase in the quarterly dividend, as well as the tightening of the balance sheet accounts, such as note receivable. The Board will continue to seek to manage the capital resources of the company efficiently, just as we seek to manage the operations of our business efficiently.
At this point, I’ll turn the call over to Joe to discuss the quarter’s financial results in more detail.
Thank you, Mike, and good afternoon, everyone. I’ll now give a brief overview of the financial results for the third quarter and nine months of fiscal 2010. For the current third quarter, the company reported net service revenues of $10.8 million, operating income of $2.5 million and after tax income from continuing operations $2.4 million, or $0.32 per diluted share.
This compares to net service revenues of $9.3 million, operating income of $944,000 and after tax income from continuing operations of $891,000 or $0.10 per diluted share for the third quarter of fiscal 2009.
For the current nine months, the company’s net service revenues were $29 million, operating income was $5.8 million and after tax income from continuing operations was $5.8 million or $0.76 per diluted share.
This compares to net service revenues of $26.2 million, operating income of $858,000 and an after tax loss from continuing operations of $192,000, or a loss of $0.02 per diluted share for the nine months ended March 31, 2009.
The income tax provisions for the current year third quarter and nine months reflect an estimated annual effective tax rate of 5% reduced by a benefit that arose in the current second quarter related to a change in the rules for alternative minimum taxes.
The company continues to have net operating losses and other tax attributes available that should offset our minimized taxes over the short-term depending on our financial performance over the next few years.
In fiscal 2008 and 2009, the company had established non-cash valuation allowance of $13 million, excuse me, again with our deferred tax assets due to uncertainty of realization. As of March 31, 2010, except to the extent of the company earned taxable income in the current year we have maintained this valuation allowance.
Assuming we continue to generate taxable income in future periods and can conclude, excuse me, that is more likely than not that we will realize such deferred tax assets it may no longer be necessary for us to continue to have a valuation allowance against all of our deferred tax assets. Upon reaching that conclusion, we would record a non-cash tax benefit that would have the effect of increasing our net income in the period if such conclusion is reached.
Net income for this current third quarter and nine months of fiscal 2010 was $2.4 million or $0.31 per diluted share and $5.2 million or $0.68 per diluted share respectively and included loss of some discontinued operations of $68,000 for the current quarter and $0.6 million for the current nine months, primarily related to the lease excess space in New York City, formerly occupied by our jewelry businesses.
Net losses for the third quarter and nine months of fiscal 2009 were $4.8 million, excuse me and $17 million, respectively and included losses related to our discontinued operations of $5.7 million for the third quarter and $16.8 million for the nine months of fiscal 2009.
The higher earnings per share reflects the improved operating results of our continuing businesses. And in the case of the per share amounts, a lower weighted average number of shares outstanding. As a result, of the re-priced of shares in the July 10, 2009, Dutch tender offer.
The $1.5 million or 16% increase in net service revenues in the current third quarter, compared to the third quarter of the prior year was comprised of a 21% increase in grading and authentication fees and a 5% decline in other related services.
For the nine months the $2.8 million or 13% increase in net service revenues was comprised of an increase of 13% in grading and authentication fees with other related services substantially unchanged.
Our coin revenues in the current third quarter increased by $1.6 million or 28% and for the nine months increased by $3.6 million or 24%. Strong coin performance was driven by increased revenues earned from the grading and authentication of modern coins, which increased by $1 million or 53% in the quarter and $2.8 million or 67% for the nine months.
Also contributing to the increases in our coin revenues in the three and nine months ended March 2010 were revenues earned at coin shows, which increased by $0.5 million or 59%, and $0.8 million or 30% respectively, primarily due to an increase in number of coins attend -- number of shows attended in the current year period.
Our other grading and authentication businesses were impacted by the current economic recession and credit crisis. Although, revenues from our trading cards and autograph business increased by 2% in the current third quarter, compared to the third quarter of last year, that increase reflected lower [comparative] revenues for the third quarter of fiscal 2009, due to the economic downturn that began in that quarter.
For the current nine months ended March 31, 2010, revenues from our trading cards and autographs business declined by 5%. The volume of stamp submissions continued to decline, compared to the prior periods by 23% in the current quarter and 26% of the nine months.
Although the growth in the level of modern coin submissions provided substantially all of the additional revenues in the nine months ended March 31, 2010, the level of modern coin revenues can be volatile due to specific customer activity or marketing programs in a given period.
We are continuing to see growth in modern coin revenues so far during this year’s fourth quarter. However, it is uncertain at this time if the increase in modern coin submissions is sustainable for the longer term.
In addition, due to the strong performance of our coin grading and authentication business, relative to our other businesses in the first nine months of the year, our coin business represented approximately 65% of total revenues, compared to 58% of total revenues in the same nine months ended March 31, 2009, thereby increasing the importance of our coin grading and authentication business to our overall financial performance.
The gross profit margin and service revenues increased to 61% and 60% for the current third quarter and nine months, compared with 56% and 53% for the same periods of fiscal 2009.
The improved gross profit margin is a result primarily of cost reduction programs and operational efficiencies achieved in our coin business. In addition, the higher proportion of coin revenues and the absence of direct stock-based compensation costs helped to increase the overall gross profit margin.
Operating expenses declined by 5% and 11% in the current third quarter and nine months to $4.1 million and $11.6 million respectively, compared with $4.3 million and $13 million for the same periods of fiscal 2009.
Selling and marketing expenses increased by $0.4 million for the quarter and $0.5 million for the nine months, reflecting increased costs incurred due to attending more tradeshows and increased incentive compensation.
G&A costs declined by $0.6 million in the quarter and $1.9 million for the nine months, reflecting staff reductions and other cost-saving measures that we began implementing in fiscal 2009.
G&A expenses include increased stock-based compensation costs of $213,000 and $335,000 recognized in the current third quarter and nine months, reflecting costs recognized for performance-based stock awards, for vesting was determined to be probable.
The resulting operating income from continuing operations was $2.5 million or 23% of revenues in the third quarter and $5.8 million or 20% of revenues for the current nine months, compared to operating income of $944,000 or 10% of revenues and $858,000 or 3% of revenues for the three and nine months ended March 31, 2009.
As noted in our earnings release, the operating income for the third quarter was a record level of operating income for the company.
Turning to our balance sheet, at March 31, 2010, cash and cash equivalents totaled $19.8 million, compared with $23.9 million at June 30, 2009.
Net cash used of $4.1 million in the nine months through March, primarily comprised of cash generated from continuing operations of $7.4 million and the collection of CFC note receivable of $2.4 million, offset by the repurchase of shares in the Dutch auction tender offer for cash of $8.9 million. The payment of dividends to stockholders of $3.7 million and cash of $1 million used in discontinued operations.
As previously disclosed on July 10, 2009, we completed a modified Dutch auction tender offer and accepted to purchase 1.75 million shares for a total cost of $8.9 million cash.
At March 31, 2010, the company continued to have $3.7 million remaining under its previously announced stock buyback program. The company has not made any open market repurchases under this program since the fourth quarter of fiscal 2008.
On April 20, 2010, the company announced an increase in its quarterly cash dividend from $0.25 per share per quarter to $0.30 per share per quarter. The first quarterly dividend of $0.30 per share under the new policy will be paid on May 28, 2010 to stockholders of record on May 14, 2010.
With that, I’d like to thank you for your attention. Operator, we are now ready to take questions from the audience.
Question-and Answer Session
Thank you, sir. (Operator Instructions) And I show no questions at this time. I’d like to turn the conference back to Mr. McConnell.
Thank you, everybody, again for listening to our call today. Joe and I will present at two conferences this month, Investor conferences. Tomorrow we’re in San Francisco at the JMP Conference. And then on May 25th we’re scheduled to speak at the B. Riley Conference in Santa Monica. Both of these can be heard via our website at Collectors Universe and a replay will be available for 30 days as well. Additionally, should anyone have further questions, please don’t hesitate to contact either of us directly. Thanks again for dialing into our call today.
Ladies and gentlemen, this does conclude the Collectors Universe third quarter 2010 earnings conference call. If you’d like to listen to a reply of today’s conference, please dial 1-800-406-7325 or 303-590-3030 and enter the access code of 4294707 followed by the pound sign. Thank you for your participation. You may now disconnect.
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