Collectors Universe, Inc. (NASDAQ:CLCT) Q3 2017 Earnings Conference Call November 2, 2017 4:30 PM ET
Joseph J. Orlando – Chief Executive Officer
Joseph Wallace – Chief Financial Officer
Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe's financial results for the first quarter ended September 30, 2017.
With us today from Management are; Joseph J. Orlando, Chief Executive Officer; and Joseph Wallace, Chief Financial Officer.
Management will provide a brief overview of the quarter and then open the call up for your questions. Comments made during today's call may contain statements regarding the company's expectations and 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 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. Please note, this call may be recorded.
With that, I would now like to turn the call over to Joseph Orlando. Joe?
Joseph J. Orlando
Thank you, and welcome to today's First Quarter Conference Call for fiscal 2018. I want to summarize the highlights during the quarter and then give you some commentary on the outlook going forward into our second fiscal quarter of the year. We closed the first quarter with record revenues, setting the tone for the New Year.
Our core authentication in grading businesses for coins, cards and memorabilia established all-time highs in service revenues, which included a record performance from our China operations. Service revenues in the fourth quarter were up year-over-year to a record $19.8 million, a 25% increase from a year ago. Our primary division showed growth of 35% in our coin business and 15% in our trading card and autograph business from the previous year.
The $19.8 million revenue figure was not only a Q1 record, it is a record for any quarter. This is even more impressive when you consider the fact that Q1 has traditionally been one of the slower quarters in our business cycle. In Q1, service revenues from all international operations was 25% of total company service revenues, a new high for Collectors Universe. The majority of the success was generated in Asia, which equates $4.5 million in revenue for the first time between our Shanghai and Hong Kong offices.
Year-over-year, the combined revenue was up nearly 300%. This means that hundreds of thousands of PCGS-graded coins have now made their way into the Asian market during the past few months alone and into the hands of local collectors. This gives more and more consumers a chance to touch and feel our product.
It also gets us closer to the goal of becoming the clearer preferred choice for grading overseas. As increasing numbers of collectors demand our brand from dealers and distributors, the more leverage PCGS will have as we move forward. Our PSA and PSA/DNA division finished Q1 with its seventh consecutive year of top and bottom line growth in the quarter. Just recently, PSA/DNA was selected to certify the historic 1947 Jackie Robinson Brooklyn Dodgers player contract, the document that broke the color barrier in baseball, one that forever changed the game and society. This historic piece is being auctioned later this quarter and is expected to set an all-time record for any piece of sports memorabilia. We continue to see healthy and consistent gross profit margins overall, finishing at 62% for the quarter, which was up 1% from the previous year.
Our operating income for Q1 was $4.5 million compared to $2.8 million in the previous year, an increase of 63%. Income from continuing operations was $3.6 million for the first quarter of fiscal 2018 or $0.41 per diluted share, up from $0.19 per share in the prior year. Our first quarter was also a period of strong unit growth for our primary businesses. Collectors Universe processed over 1.6 million units in Q1, up 56% from the prior year and an all-time record for any quarter in company history. While the greatest impact came from our Asia offices, virtually every single segment of our PCGS and PSA business experienced unit growth as well.
A key part of our submission driving system at Collectors Universe is using collectibles content, which comes in the form of articles, images, population data and pricing information. To plant the initial seed in current or prospective collectors through our website, our company web traffic established all-time highs in 12 months trailing average for unique visitors, total visits and page views.
More than half of that traffic is generated from mobile devices. And a large part of our effort is to make the collectibles information and competitive online venues like our Set Registry program more accessible and easier to use. The continued growth in this area as part of our long-term strategy to not only be the worldwide leader in authentication and grading, but to also cement our position as the industry leader in collectibles information. All of the effort made in the content arena helps create more commerce in the markets we serve, which ultimately leads to more submissions for our company.
As we have seen, the volume of collectibles submitted to us for authentication and grading continues to increase. While this is a good problem to have, we need to respond by increasing our capacity and our ability to process the millions of collectibles submitted to us annually in a more efficient manner.
We are happy to announce that our primary office will be moving shortly into a new Southern California facility to replace the current one. This new facility not only gives us the capability of increasing capacity from a sheer space standpoint, the layout has been customized by our team to improve the flow of our operation.
In addition, we will also be consolidating our current offices in China to a central location in Shanghai during the coming weeks to achieve the same goal overseas.
Now let me turn it over to Joe Wallace for a more detailed review of our financial performance. Joe?
Yes, thank you, Joe. I'll now give a brief overview of the financial results for the First Quarter of Fiscal 2018. For the first quarter, the company generated record revenues of $19.8 million, earned record first quarter operating income of $4.5 million, and after-tax income from continuing operations of $3.6 million or $0.41 per diluted share. This compares to revenues of $15.7 million, operating income of $2.8 million, and after-tax income from continuing operations of $1.6 million or $0.19 per diluted share for the first quarter of fiscal 2017.
Directed revenue represented an increase of 25% in the quarter and included coin revenue increase of $3.5 million or 35% on the cards and autographs revenue increase of $0.6 million or 15%. Our international coin operations including China, were up about $3.4 million or 226% to 25% of consolidated revenues in the quarter as compared to 9% of revenues in Q1 2017.
China revenues increased by $3.2 million or 365% in Q1 2018. The 15% increase in cards and autograph revenues to $5.1 million in the quarter represented record quarterly revenues for that business, which has achieved quarter-over-quarter revenue growth in 28 out of the last 29 quarters. Our coin business represents 68% of revenues in the first quarter and reflects the continued importance of our coin business to our overall financial performance.
As previously disclosed, our second fiscal quarter is typically our seasonally slowest quarter of the year in the U.S. due to the winter holidays that occur in that quarter. And we expect that trend to continue in this year's second quarter. With respect to our overseas offices and in particular, China, our current expectations to China revenues in this year's second quarter will be lower than this year's first quarter due to the seasonal nature of that business.
This in contrast, the first and second quarters of fiscal 2017, when second quarter revenues in China were higher in the first quarter. We attribute that change to the fact that the second quarter of fiscal 2017 was our first full quarter of authenticating grading coins for the banking channel in China.
The gross profit margin increased to 62% for the first quarter as compared to 61% in this quarter fiscal 2017. And reflected the increase and mix of revenues in the quarter. On a quarterly basis, our gross profit margin typically varies between 59% and 65%.
Selling and marketing expenses were about 14% of revenues in the quarter as compared to 15% in Q1 2017. The increased dollars incurred in the quarter reflecting increased business development incentives related to the growth of revenues in China, an increased trade show and travel costs in support of our trade show authentication and grading activities.
G&A expenses represented about 25% of revenues in the quarter as compared to 28% in the same period of the prior year. The increase in dollar terms reflected higher payroll costs, including performance-based bonuses and incentives due to the improved performance of the business.
Recruitment costs and stock-based compensation costs. Overall, operating income was 5.4 – sorry, operating was $5.4 million for the quarter as compared to $2.8 million for Q1 2017, an increase of 63% in the quarter. And represented operating margins of 23% in this year's first quarter as compared to 18% in last year's first quarter.
Turning to our balance sheet. The company's cash position was $10.2 million at September 30 2017 as compared with $9.8 million in June 2017. Net cash generated of $0.4 million in the quarter included cash generated from continuing operations of $4.2 million and borrowings under our term loan of $1 million, partially offset by dividends paid to stockholders of $3.0 million, $1.7 million used for capital expenditures in capitalized software costs and $0.1 million used for discontinued operations.
In September 2017, the company obtained a five-year, $3.5 million unsecured term loan that will primarily be used to fund the company's shares of construction elevated facility costs in connection with our new business operations and headquarter facility. There were borrowings of $1 million outstanding under this loan as of September 30, 2017.
On October 24, we announced our quarterly cash dividend of $0.35 per share, which will be paid on November 24, 2017 to stockholders of record on November 15.
With that, I'd like to thank you for your attention. Joe?
Joseph J. Orlando
Thanks, Joe. Before we conclude, I would like to make a few comments on our outlook for the remainder of Q2 and the rest of fiscal 2018. Q1 was a record-setting performance for Collectors Universe but there is much more work to be done this year. It is imperative that we continue to build upon the foundation that we have started to lay overseas.
Our Management team believes in the potential of those markets, especially, in China. And our Q1 performance there clearly, shows the impact it can have on our company. I think the financial results show how those gains have translated into increased shareholder value. After ending fiscal 2017 with a record performance, our staff carried that momentum into Q1, resulting in an all-time revenue high. While Q2 has traditionally been our slowest quarter of the 4, due to the seasonality of the business, we are excited about our move to a larger facility later this month.
Despite the temporary disruption to our California operation, this will give our company the requisite space to grow in the future. Our priority is to build our brands on a global level, so we can continue to deliver increased shareholder value. By making sound long-term decisions and intensifying our focus in the coming years, we believe we can do just that. Of course, all our expectations are governed by several factors not in our control such as the price of precious metals, the market for collectibles, and the overall state of the economic climate primarily in the U.S. and the possibility of changing international trade policies worldwide.
Thank you for joining us today, and I look forward to speaking with you next quarter. Now I would like to open the call to any questions you may have.
[Operator Instructions] Looks like there are no questions at this time.
Joseph J. Orlando
Okay, well, thanks, everyone, for listening and joining us. We look forward to talking with you next quarter.
This does conclude today's program. Thank you for your participation. You may disconnect at any time.