Collectors Universe, Inc. (NYSE:PSB) F3Q2011 Earnings Call May 9, 2011 4:30 PM ET
Michael McConnell - CEO
Joe Wallace - CFO
Austin Memone - Allen Hendserson & Co
Good afternoon everyone and thank you for joining us to discuss Collectors Universe Financial Results for the third quarter at end of March 31, 2011. With us today for 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. (Operator Instructions). This conference is being recorded today, Monday, May 9, 2011.
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, possibility materially from those forecast in the call due to a number of risks and uncertainties. Certain of these risks are uncertainties in addition, to the other risks that are more fully described in the company’s fillings 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 application to update or revise the forward looking statements whether as a result of new information, future events or otherwise.
With that, I will now turn the call over to Michael McConnell. Michael?
Good afternoon and thank you to each of you for attending or call today. We are very pleased to report to you record financial results for our third quarter ended March 31, 2011. Today, I will comment on three areas before turning the call over to Joe Wallace, the company’s Chief Financial Officer. The three areas are this quarter’s results and selected highlights. Next, I will provide an update on our, what I call, ‘Extend Pragmatically’ strategy and philosophy and then finally I will preview briefly a key element of our 2011-2012 operating plan.
First the quarter’s results. Year-on-year revenue grew by approximately 9% excluding product sales to $12.6 million and operating profit increased by 16% to $3.3 million. This performance marked the best in the company’s 25-year history, truly a remarkable accomplishment, and each of our employees contributed to this milestone.
Several Highlights: grader productivity increased by 22% in the quarter as measured in units processed. This team is the engine that makes our company go and their performance numbers speak for themselves. On behalf of all of us, notably the shareholders, I would like to say to our grading rooms, thank you.
PSA/DNA experienced the second consecutive quarterly growth and driven largely by initiatives Joe Orlando and his team put in place a year ago. While the card market remained subdued, our DNA business has flourished. Quarterly revenue topped $870,000, a 36% year-over-year increase over the average proceeding four quarters.
Thirdly, government officials around the world have helped our company. With the rising gold and silver driven by investors’ appetite for hard assets or modern or bulk business, in particular, have seen excellent growth. Revenue in this division topped $4 million for the first time in any quarter and Miles Standish has worked tirelessly to develop programs to deliver value to our customers. By way of background, before last year we averaged approximately $6.5 million in our bulk or modern business for the proceeding five years. Last year, we achieved $9 million for the 2009-2010 year. As I have just said we just finished the quarter with a quarter alone was $4 million and I suspect we are on track to beat the $9 million achieved last year.
Next, as our digital presence has grown and evolved through our core websites, pcgs.com, psacard.com, as well as CCE Coin Facts and Collectors Corners, we have begun to drive advertising revenues. 750,000 people visit pcgs.com per month and it appears that user demographics are extremely attractive with median in income and age skewing high. As an aside, I remain an investor in several media and private equity funds and I continue to see an evolution of ad dollars from tradition print TV and even radio media to online and we may be approaching a tipping point. Our advertising activities, as if today, are slightly above a $2 million run rate for the first time, and we are extremely excited about this potential area for our business.
Now moving to some of our Extend Pragmatically initiatives. Various strategic initiatives developed last year are cementing a foundation for futures specifically our activities in Paris continue to grow. Units graded have increased by approximately 31% from our first show a year ago as compared to our most recent show. We have launched a modest version website and recently sold our first two ad deals. We plan to be on the European continent for years to come deliver in the type of market structure and standards that benefit our customers for so many years. We will continue to expand this business with a keen eye on costs and our current run rate shows us approaching breakeven in the fourth quarter.
Given our success in DNA we are exploring in East Coast presence, think of it as Paris like. The economics are compelling and strategic benefits potentially significant. I have more to report on this area on our next call.
Lastly, we continue to develop technology to solidify what we deliver to our customers in the market place and we are continuing to develop technologies, such as Coin Secure and the Coin Sniffer that we talked about in January to protect the integrity of the services we provide to our customers.
Now turning to my third point, in next year we believe the core element to operating plan will be the evolution of a holistic digital strategy. The dollars and the opportunity for us are too significant. What does this mean? Currently, as of today the run rate revenue for our combined digital activities, which include CCE Collector’s Corner, all advertising on various websites and properties and Coin Fact total approximately $4.5 million, and these have grown by approximately 30% as compared to only one year ago. As most of us know, these revenue streams generate very, very high margins and returns.
So, with that in mind we are going to develop a comprehensive plan. Mind you, we already have a very good operation in this area and we are strictly going to make it the best as it can be. The plan will seek to optimize all elements of our digital presence advertising rate, advertising buys, lead generation fees, fees in market place subscription fees, and it will include our own internal cost effectiveness for advertising including cross marketing opportunities. The world has evolved and we will evolve with it and our team is very excited about his aspect of our plan for next year.
In summary, our results this quarter were terrific, we seem to be hitting our all cylinders, we have got a market tailwind, productivity measures are terrific, I think our strategic plan is sound and we combine that with the passion and commitment of our employees and things seem to be in pretty good shape right now.
Much of this is attributed to your leadership team including David Hall, who found this company 25 years ago; Don Willis, President of PCGS; Joe Orlando, President of PSA and PSA/DNA; [Casey East], who runs CCE and then Joe Wallace and Steve Meyer who help us here in the corporate and they make this engine run behind the scenes.
Looking forward, we continue to have a very healthy backlog. It was up 60% as compared to same time last year and in the fourth quarter has started well.
Thanking you for listening this morning and I will now turn the call over to Joe Wallace and of course we will have time for questions and answers at the end of the call.
Thank you, Mike, and good afternoon everyone. I will now give a brief overview of the financial results for the third quarter of fiscal 2011.
For the current third quarter the company reported net revenues excluding product sales of $12.6 million, operating income of $3.3 million and after-tax income from continuing operation of $2.0 million, or $0.25 per diluted share. This compares to net service revenues of $10.8 million, operating income of $2.5 million, and after-tax income from continuing operation of $2.4 million or $0.32 per diluted share for the third quarter of fiscal 2010.
For the nine months, the company’s net service revenues were $31.6 million, operating income was $6.7 million, and after-tax income from continuing operations was $4.1 million or $0.52 per diluted share. This compares to net services revenues of $28.9 million, operating income and after-tax income from continuing operations of $5.8 million or $0.76 per diluted share for the nine months ended March 31, 2010.
As discussed previously, and in our filings, we do not consider product sales to be an integral part of our ongoing revenue generating activities. The reduction in the after-tax income from continuing operations in the current three and nine-month periods relates to us recording for financial reporting purposes, income tax provisions of $1.4 million and $2.7 million in the three and nine months ended March 31, 2011, compared to income tax provisions of $129,000 and $54,000 in the three and nine months ended March 31, 2010.
As discussed on previous conference calls, at June 30, 2010, we released valuation allowances against deferred tax assets on the basis that it’s more likely than not that we will realize those assets in future periods. As a result, for financial reporting purposes under GAAP, we are required to record tax provisions in the current year, based upon an estimated effective annual tax rate of approximately 41%.
The company continues to have net operating losses and other tax attributes available that should offset or minimize the cash payment of taxes into fiscal 2012, depending upon our financial performance and actions to be taken. The small loss from discontinued operations net of tax was $35,000 in the current nine month period, mainly relates to accretion expense for the New York facility obligations for our former jewelry businesses partially offset the license fees earned in the current third quarter.
For the third quarter, our net revenues excluding product sales, increased by $1.8 million or 17% compared to three months ended March 31, 2010, and comprised increases of $1.5 million or 17% in grading and authentication fees, and $0.3 million or 13% in other related services. For the nine months, net revenues excluding product sales, increased by $2.7 million or 9% and comprised of increases in grading and authentication fees of $2.1 million or 9%, and $0.6 million or 12% in other related services.
The increased grading and authentication fees in both the three and nine-month periods were primarily related to increases in coin authentication and grading fees of $1.4 million or 21% in the third quarter, and $2 million or 12% for the nine months.
In addition, revenues from PSA/DNA autograph authentication and grading business increased by $0.3 million or 52% in the current third quarter, and $0.5 million or 27% for the current nine months. These increases were partially offset by decreases of $0.2 million and $0.4 million in our sports cards and stamp businesses in the three and nine months ended March 31, 2011.
The coin fee increase of 21% and 12% for the same three and nine month periods reflect a mix of grading and authentication fees earned in the respective periods. Modern coins fees increased $1.2 million or 40% in the quarter and $1.3 million or 90% for the nine months reflecting marketing progress by the US Mint, and by our customers and dealers in what is generally our seasonally biggest quarter of the year for modern coin programs.
World coins grew by approximately $0.5 million or 206% in the third quarter and $0.8 million or 117% for the nine months, reflecting increased submission of world coins, including grading at our Paris, France facility.
Vintage fees increased by approximately $0.1 million for the quarter and $0.3 million the nine months, representing increase of approximately 5% for both periods.
Show coin revenues decreased by approximately [$0.4 million] or 27% for the third quarter and $0.5 million or 14% for the nine months, reflecting one less show in the current third quarter and lower average grading fees earned per show for the three and nine month periods.
The level of modern coin and trade show revenues can be volatile and is therefore uncertain what level of growth in those revenues, if any, will be achieved in future quarters.
The increases in other related service of $0.3 million and $0.6 million in the three and nine months ended March 31, 2011, included increased web-based subscriptions, advertising, and collector club revenues, partially offset by a reduction in the revenues of Expos collectibles convention business. Due to the continuous strong performance of our coin business relative to our other businesses, coin revenues excluding product sales represented 65% of total revenues, which demonstrates the importance of the coin business to our overall financial results.
The gross profit margin, excluding product sales, in the current three and nine month periods, were 63% and 62% compared with 61% and 60% for the three and nine months ended March 31, 2010, reflecting the higher coin revenues on which we’re in a higher gross profit margin than our other grading and authentication businesses.
Operating results in the current third quarter and nine months were $4.6 million or 36% of revenues and $12.9 million or 40% of revenues. This compares with $4.1 million or 38% of revenues and $11.6 million or 40% of revenues for the third quarter and nine months ended March 31, 2010.
The dollar increase in selling and marketing expense reflect increased trade show cost in the nine months related to the France shows and the ongoing cost related to the France office, business development, incentive compensation, and general marketing cost increases.
The G&A dollar increases relate to outside consulting costs for more advanced technology to identify counterfeit or altered coins, increased payroll cost to support the growth in the business, outside legal service and increased non-cash stock-based compensation costs, partially offset by lower software amortization and depreciation costs.
The resulting operating income from continuing operations was $3.3 million or 26% of revenues for the third quarter and $6.7 million or 21% of revenues for the nine months compared to $2.5 million or 23% of revenues and $5.8 million or 20% of revenues for the same three and nine-month periods of the prior year.
Turning to our balance sheet. At March 31, 2011, cash and cash equivalents totaled $21.2 million compared with $20.3 million at June 30, 2010. Net cash generated $0.9 million in the nine months primarily comprised of cash generated from continuing operations of $8.2 million, proceeds received from the exercise of stock options of $0.9 million, offset by the payment of $7.4 million of dividends to stockholders, $0.5 million used in discontinued operations, and $0.3 million for capital expenditures.
At March 31, 2011, the company continued to have $3.7 million remaining under it’s previously announced stock buyback program. The company has not made open market repurchase under this program since the fourth quarter of fiscal 2009.
On April 25, 2011, the company announced its quarterly cash dividend of $0.325 per share to be paid on May 27, 2011 to stockholders of record on May 13, 2011. In addition, subsequent to March 31, 2011 to company repurchased certain coins under its coin warranty policy for approximately $915,000 including one coin for approximately. Management currently expects the estimated loss on these coins to be covered by its current warranty reserves and our normal ongoing warranty accruals. However, the estimated value of coins can be subjected and can vary depending on market conditions for precious metal and the uniqueness and special features of a particular coin.
Finally, on April 2011, the company disposed of its remaining discontinued Gemprint and diamond jewelry assets for approximately $216,000 will enable us to take an income tax reduction of approximately $5.5 million in fiscal 2011.
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 the line Austin [Memone] with [Allen Hendserson & Company].
Austin Memone - Allen Hendserson & Co
Two questions for you. The first one is, you talked some in the past earning out your dividend and just was curious. It seems like you did this quarter. You think you kind of reset that or you have earned out your dividend and you will continue for the future quarters?
No, we’ve got some work to do to get there. I mean, when you tax effect our cash earnings, we’re going to have to pedal real hard and it’s not around the corner but we’ve got sufficient get us to that point. I mean, I don’t believe, and Joe, you correct me if I am wrong, that the minute we start paying cash taxes we will have earned our way into paying the dividend. I think that’s unlikely to happen. Joe?
Yes, I think the approach we’ve taken is obviously we’ve got some significant cash reserves to pay dividend for the next number of years. So, our plan is to work towards earning that dividend after taxes over the next three to five years.
Austin Memone - Allen Hendserson & Co
Makes a lot of sense, I’m good with that. Second question, what kind of growth rates do you expect over the next three to five years and how much of that is influenced by what commodity prices? This is my final question. So, growth rate for your five years and then how much of that influenced by commodity prices?
I will take the second part of it first. As you know, we have sort of pushed the data around a fair amount here and there is a loose correlation at best between gold, silver prices and our level of submissions, okay?
Austin Memone - Allen Hendserson & Co
So, I know, we struggle and wrestle with this internally and I know that the investment community would like to have a tighter R-squared, if I could back to college statistic, it’s not the case, okay. So, let us put that to the side.
In terms of growth, I mean, look, we’ve got different pockets of growth here, right. What we are trying to do two things: one, I’m highlighting for you in the modern business which is probably the one most sensitive to movements in gold and silver. It is very hard to predict and it is largely outside of our control.
So, what do we do? It’s well up on its 5-year average before last year and so, it’s the hardest part our planning process is to predict what that revenue is going to be, all right? What I can sort of say is if governments continue to put money and probably will help our business. At the same time, Miles and his team are getting in contact with more mints and coming up with more creative programs so the authorized dealers a reason to [USS] combine and sell products to their customers.
Separately from that it’s why we’ve been talking for two years about [Paris]. It’s why PSA/DNA is going to expand to the East Coast. You heard me talk about us spending a lot of time on what I call our digital activities, all of which are going to contribute to sort of growth if we do them well. How it sort of works with this big lift we’ve got in any given quarter or year in the modern it’s just too hard for us to say. So, this is a hard business to model, 5% growth per year because of, like I just told you, we went from 6.5-year average to 9 and I think this year we will above 9. I can’t sit here and tell you it’s not going to go back to 7 next year, right?
What I can tell you is the return on capital is going to be very high. We’re not going to waste capital resources on initiatives to chase growth. We are going to continue to manage the costs of our business really, really well, and what happens in the modern part of the business is just very difficult to predict.
(Operator Instructions). I show no further questions at this time. Please continue.
Once again, I’d like to thank everybody for listening today. As usual, if anybody has any follow up questions after having had a chance to review the full details of the release please call either Joe or myself and we’ll do our best to answer your question. We just thank you for showing up today.
Ladies and gentlemen, that concludes our call for today. If you would like to listen to a replay of today’s call, please dial 303-590-3030 or 1-800-406-7325 and enter the access code of 4438578. Thank you for your participation. You may now disconnect.
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