Collectors Universe, Inc. (NASDAQ:CLCT) Q3 2019 Earnings Conference Call May 1, 2019 4:30 PM ET
Joseph J. Orlando – President and Chief Executive Officer
Joseph Wallace – Senior Vice President and Chief Financial Officer
Conference Call Participants
Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe's Financial Results for the Third Quarter ended March 31, 2019.
With us today from management are Joseph J. Orlando, President and Chief Executive Officer; and Joseph Wallace, Senior Vice President and 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 the Private Securities Litigation Reform Act of 1995.
The Company's actual results in the future may differ, possibly materially, from those forecast in the 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 that this call is being 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 third quarter conference call for fiscal 2019. I want to summarize the results for the quarter and then give you some commentary on the outlook going forward into our fourth and final fiscal quarter of the year.
Collectors Universe finished Q3 with excellent overall results. Service revenues in the third quarter were up year-over-year to $19.5 million from $17.5 million and 11% increase from a year ago. The $19.5 million figure also established a new Q3 record for the company. What is perhaps most satisfying is that the Q3 finish was a product of positive performances by both major divisions as PCGS and PSA improved from a year-over-year perspective.
Our primary division showed an increase of 7% in our overall coin business and 24% in our trading card and autograph business from the previous year.
The PCGS U.S. vintage and show services were up a combined $0.5 million versus last year's Q3.
It is important to note that while we do monitor each service separately, a more accurate portrayal of the performance can be found by combining the two services. Most of the coins submitted for show grading are of the vintage variety. In some cases these coins are submitted at our corporate offices. In other cases, the same types of coins are submitted onsite at shows for either convenience reasons, expedited turnaround times, or both.
So this year instead of thinking of PCGS vintage as being relatively flat down less than $0.1 million and PCGS shows as way up from last year, an increase of 41% or $0.6 million, both services are up about $0.5 million. Looking at the combined figures not only provides a more accurate reflection of performance from an investor point of view, but it also provides better insight into the overall market for our management team. Viewing this through the same lens is important.
Getting back to the overall performance in PCGS, the year-over-year improvement in Bulk approximately 11%, or $0.4 million for the quarter. Part of the growth and PCGS Bulk was aided by a successful Apollo 11 grading program that generated thousands of these popular commemorative coins for submission. The customized packaging created by the PCGS team helped raise our Q3 Bulk ASP over last year's ASP in the same quarter. Overall PCGS U.S. was up 10% or $0.9 million versus last year in Q3.
PCGS international produced mixed results. Our Hong Kong office finished the quarter with record Q3 revenues up 25% year-over-year, while our Shanghai and Paris offices were down slightly, but remained relatively flat compared to the previous year. Those two offices combined for a slight decline of about $0.2 million in the quarter versus last year.
On a positive note, our company hosted another one of its vintage coin grading events in Shanghai at the very end of the quarter. And it may have been our most robust so far for any quarter in terms of submissions. Unfortunately, since the event started near the end of Q3 but finished in the beginning of Q4, we were unable to recognize all the revenue by quarter close. Our long-term international expansion goals remain the same. Having a presence in key areas of the world is appropriate and important in our view, but we continue to reevaluate our international structure as we want to maximize our short-term prospects.
Turning to our PSA and PSA/DNA division, this part of our business finished the quarter with another record top and bottom line performance in Q3. The revenue figure of $6.7 million surpassed last year's record Q3 of $5.4 million, a year-over-year increase of $1.3 million. PSA’s record setting quarter included a new all time quarterly high for units shipped at slightly over 620,000 collectibles. Based on the first three quarters of fiscal 2019 this part of our company is expected to close out its ninth consecutive year of top and bottom line growth.
Heading into Q4 the PSA submission backlog remains at record levels. The company is currently revamping our existing space to expand operational capacity, so we can ultimately improve the extended turnaround times facing our customers.
Returning to our overall business, gross profit margins were 60% for the quarter, which was up from 55% a year ago.
Our operating income for Q3 after non-cash stock-based compensation was $4.8 million, compared to $2 million in the previous year. Income from continuing operations was $3.6 million for the third quarter of fiscal 2019 or $0.40 per diluted share, which was up from $1.5 million or $0.17 per share in the prior year.
Now let me turn it over to Joe Wallace for a more detailed review over of our financial performance in Q3. Joe?
Thank you, Joe. I'll now give a brief overview of the financial results for the third quarter of fiscal 2019. Excuse me. In the third quarter, which is typically the strongest quarter of year for coins in the U.S. the company generated record third quarter revenues with $19.5 million, earned record operating income of $4.8 million and after tax income from continuing operations of $3.6 million or $0.40 per diluted share.
This compares to quarterly revenues of $17.5 million, operating income of $2.0 million and after tax income from continuing operations of $1.5 million, or 17% per diluted share in the third quarter fiscal 2018. In the nine months the Company generated record nine-month revenues of $52.7 million, earned operating income of $9.8 million and after tax income from continuing operations of $7.2 million or $0.80 per diluted share. This compares to revenues at $51.3 million, operating income of $6.7 million and after tax income from continuing operations of $5.2 million or $0.58 per diluted share for the nine months of fiscal 2018.
The third quarter revenue increase of $2.0 million or 11% included increases of $1.3 million or 24% in cards and autographs and a $0.9 million, or 10% increase in U.S. coins. The cards and autographs increase represent a record quarterly revenues for that business. U.S. coin increase represented improved results from trade shows on modern coins. Total coin revenues increased by $0.7 million or 7% in the quarter.
Revenues in the nine months included a $3.7 million or 24% increase in cards and autographs and a $1.6 million or 7% increase in U.S. coins. The cards and autographs revenue increase represented record nine-month revenues for that business. Total coin revenues for the nine months were down $2.3 million or 7% due to the previously discussed absence of banking channel revenues in China.
In China, the non-banking channel revenues were up 3% in the nine months as we continue to build brand awareness for the long-term.
Our coin business represented 58% of revenues in the nine months and reflects the continued importance of our coin business to our overall financial performance.
As discussed above, our third fiscal quarter is typically our strongest quarter of the year in the United States for coins. In addition, we expect that our cards and autograph revenues will continue to grow in a stable manner.
With respect to China, our current expectation is that we will continue to see stability in our non-banking channel revenues in China in the fourth quarter. However, we do not expect any revenues from the banking channel in the quarter.
The gross profit margins were 60% and 58% in this year's third quarter and nine months as compared to 55% and 58% in the same periods of the prior year. The higher gross profit margin in the third quarter reflects higher gross profit margins for both coins and cards and autographs, due to higher average service fees earned and the higher number of units authenticated and graded in the quarter.
As previously disclosed, there can be variability in the gross profit margin due to the mix of revenues and the seasonality of our business. On the quarterly basis in fiscal 2018, our gross profit margins varied between 54% and 62%. Selling and marketing expenses were 13% and 15% of revenues in this year's third quarter and nine months, as compared to 14% and 15% in the same periods of fiscal 2018. In dollar term, selling and marketing expenses were substantially unchanged and included higher costs in our growing cards and autographs business, including business development costs incurred for our new Japanese subsidiary, for the most part, offset by savings and other parts of the business.
G&A expenses represented about 22% and 25% of revenues and this year's third quarter and nine months, as compared to about 30% in this third quarter and nine months of fiscal 2018. The dollar savings of $0.8 million in the quarter and $2.1 million in the nine months, primarily reflected one, lower payroll related costs of $0.2 million in the quarter and $0.9 million in the nine months, rising from staff reductions in the fourth quarter fiscal 2018 and management changes in the company's coin business that occurred in the first half of the year, two, the non-recurrence this year of moving and lease exit costs and the pre-litigation settlement for a combined cost savings of $0.4 million in the quarter and $1.0 million in the nine months. And three lower non-cash stock-based compensation of $0.2 million in the quarter and $0.3 million in the nine months.
Those cost reductions were partially offset by increased depreciation, expense, related to assets capitalized as part of the company's new facility, and higher amortization cost for capitalized software projects. The resulting operating income of $4.8 million in this year's third quarter, represented an operating margin of 24% and $9.8 million in this year’s nine months represented and operating margin 19%. Adjusting for non-cash stock-based compensation expense, the operating margins were about 26% in the quarter and 20% in the nine months.
Turning to our balance sheet. The company's cash position was $15.7 million at March 31st 2019, as compared to $10.6 million in June 2018 and $12.4 million in December 2018. Net cash generated a $5.1 million in the nine months, included cash generated from continuing operations of $11.9 million, partially offset by cash dividends paid to stockholders or $4.9 million, $1.5 million used for capital expenditures and capitalized software costs and $0.4 million used to pay down the company's term loan.
On April 22nd 2019, we announced our quarterly cash dividend of $0.175 per share, which will be paid on May 31st to stockholders of record on May 17th.
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 about the close of Q3 and the outlook moving forward into our fourth and final quarter of the fiscal year. Q3 is typically our seasonally strongest quarter of the fiscal year and in 2019 it proved to be just that. In March Collectors Universe set a Q3 top line revenue record and a new operating income high, not only for Q3, but for any quarter in company history. PCGS is strong showing in the U.S., from high value coin services to bulk, coupled with PSAs continued growth propelled the company to new heights.
The record setting performance is a testament to the quality of the management team, staff and the unquestioned power of our brands, but there is more work to do. While we are excited about the progress we have made, there are both short-term and long-term goals that have yet to be met. For PCGS in the short-term a re-evaluation of our international approach is already in motion. Active coin and currency collecting markets exist all over the world, especially in China. And we will continue the effort to gain traction overseas.
That said, we want to make sure our allocation of company funds and resources are reasonable based on the current size of those businesses. Speaking of currency, after a long licensing agreement came to an end in Q3, the company was able to secure its name PCGS Currency once again. At the very least regaining control of our name can only assist in clearing up any market confusion around banknote grading all over the world. We're in the process of deciding how to best take advantage of this reacquisition domestically and internationally, from a branding and service standpoint. No matter how our management team decides to proceed, this is positive news.
Turning to PSA, our short-term goals are clear. Increasing our daily throughput is at the top of the list. Even though the division has been consistently setting new shipping highs year after year, we are still unable to properly measure the true demand for our services because of the immense submission backlog that exists. Just in the past few weeks, our team reconfigured an area of the company's operation to create space for additional processing stations. We have increased our capacity every quarter for years, but the submission backlog has not decreased in a material way. The incoming business is, as they say a great problem to have, but a problem nonetheless.
In addition, keep in mind that PSA just started to make a concerted effort overseas. It is a measured approach by design, which gives the staff more time to address the build-up in domestic demand. Since our last earnings call, we launched Phase 1 of our new Set Registry achievement program for both PSA and PCGS, commonly referred to as game of vacation, the program's purpose is to increase user engagement. Participants on the Set Registry can earn points, digital awards and be recognized for their accomplishments as they build and improve their collections. In Q3, our team launched Phase 2 of this already popular new version of the Set Registry, this update added new achievements for members and public leaderboards that allow users to see how their current achievement score compares with other participants.
We will continue to add new features as the Set Registry evolves to enhance user activity and customer satisfaction. From a long-term perspective, there is no doubt that we can continue to improve the fundamentals of the company from operations, as we touched on earlier in the call to customer service. This effort will not cease as we delve further into Q4 and turn the corner into fiscal 2020. As we refine the foundation of our core businesses, it is also important that we look for new ways to grow the company. The company has leading brands and strong industry positions and areas such as authentication, grading, content and collection management, but the ultimate vision and story of Collectors Universe is still being written.
Our management team is focused on closing out fiscal 2019 in strong fashion. But investing in the future of the business and evaluating new potential revenue streams is paramount. So we can provide better returns to shareholders in the future. 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.
Joseph J. Orlando
I would like to thank everyone for joining the call today and look forward to closing out the fiscal year and talk to you soon.
Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect your lines.