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Edited Transcript of CLCT earnings conference call or presentation 28-Aug-19 8:30pm GMT

Q4 2019 Collectors Universe Inc Earnings Call

SANTA ANA Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Collectors Universe Inc earnings conference call or presentation Wednesday, August 28, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph J. Orlando

Collectors Universe, Inc. - CEO, President & Director

* Joseph J. Wallace

Collectors Universe, Inc. - CFO & SVP

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Conference Call Participants

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* Bobby Nouredini;BBN Management, LLC

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Presentation

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Operator [1]

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Good afternoon, everyone, and we thank you for joining us to discuss Collectors Universe's financial results for the fourth quarter and fiscal year ended June 30, 2019. As a reminder, this call is being recorded.

And 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 for 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 this call due to 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.

And with that, I'd like to turn the call over to Joseph Orlando. Joe?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [2]

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Thank you, and welcome to today's fourth 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 first fiscal quarter of 2020.

Collectors Universe finished Q4 with excellent overall results. Revenues in the fourth quarter were up year-over-year to $19.8 million from $17.5 million, a 16% increase from a year ago. The $19.8 million figure also established a new all-time quarterly record for the company, and the approximately 1.25 million units shift set a new high watermark for Q4.

Like our record-setting Q3 finish in March, the Q4 results were a product of positive performances found within both major divisions as PCGS and PSA improved from a year-over-year perspective. Our primary division showed an increase of 9% in our overall point business and 29% in our trading card and autograph business from the previous year. Within the PCGS division, our U.S. vintage and show services were down slightly at around 3% or $0.2 million combined. PCGS Bulk, on the other hand, was up approximately 48% or $0.8 million for the quarter compared to Q4 last year, continuing the positive momentum generated in Q3. In addition to processing more units versus Q4 in fiscal 2018 and similar to Q3 of this year, the customized packaging created by the PCGS team helped raise our Q4 Bulk ASP over last year's ASP in the same quarter. Overall, PCGS US was up 8% or $0.6 million versus last year in Q4.

PCGS International produced mixed overall results from a year-over-year perspective. Our Shanghai operation was up nearly 50%, an increase of about $0.5 million, while our Hong Kong and Paris offices were down slightly compared to the previous year, finishing a combined $0.2 million below the pace set last Q4. PCGS did finish the quarter with a robust international coin backlog entering Q1. Interest in our services remains solid as we continue to tinker with the international approach from a strategic standpoint.

Turning to our PSA and PSA/DNA division, this part of our business finished the quarter and fiscal year with another record top and bottom line performance in June. The revenue figure of $7.6 million surpassed last year's record Q4 of $5.9 million, a year-over-year increase of $1.7 million. PSA's record-setting quarter included a new all-time quarterly high for units shipped at slightly over 680,000 collectibles. This brought the annual total for fiscal 2019 to approximately 2.5 million collectibles, another new record.

PSA's outstanding performance helped close out its ninth consecutive year of top and bottom line growth. Furthermore, PSA closed Q4 with the highest submission backlog in the division's history despite increasing its output in each of the last 4 quarters. This is a clear indication of the power of the PSA brand and the continued demand for our services. The company continues to work on expanding operational capacity, so we can ultimately improve the extended turnaround times facing our customers.

Returning to our overall business, gross profit margins were 59% for the quarter, which was up from 55% a year ago. Our operating income for Q4 after noncash stock-based compensation was $4.5 million compared to $2.2 million the previous year. Income from continuing operations was $2.8 million for the fourth quarter of fiscal 2019 or $0.31 per diluted share, which is up from $1 million and $0.11 per share in the prior year.

Now let me turn it over to Joe Wallace for a more detailed review of our financial performance in Q4. Joe?

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Joseph J. Wallace, Collectors Universe, Inc. - CFO & SVP [3]

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Yes. Thank you, Joe. I will now give a brief overview with the financial results for the fourth quarter and fiscal '19.

In the fourth quarter, the company generated record quarterly revenues of $19.8 million, earned record Q4 operating income of $4.5 million and after-tax income from continuing operations of $2.8 million or $0.31 per diluted share. This compares to quarterly revenues of $17.1 million, operating income of $2.2 million and after-tax income from continuing operations of $1.0 million or $0.11 per diluted share in the fourth quarter of fiscal '18.

For the fiscal year '19, the company generated record annual revenues of $72.5 million, earned record operating income of $14.3 million and after-tax income from continuing operations of $10.0 million or $1.11 per diluted share. This compares to revenues of $68.4 million, operating income of $9.0 million and after-tax income from continuing operations of $6.1 million or $0.70 per diluted share for fiscal '18.

The higher tax provision of this year's fourth quarter as compared to earlier quarters of the year reflects a noncash valuation allowance established against deferred tax assets in China due to the uncertainty of realization. Our tax payment rate continues to be about 25%.

The fourth quarter revenue increase of $2.7 million or 16% included increases of $1.7 million or 29% in cards and autographs and $0.9 million or 9% in coins. The cards and autographs increase represented record quarterly revenues for that business. The coin increase included an 8% increase in U.S. revenues, which included improved revenue from modern coins and trade shows. China coin revenues in Q4 increased by $0.5 million or 15% -- or 50% to about $1.4 million for the quarter.

The fiscal '19 revenue increase of $4.0 million or 6% included a $5.4 million or 2 point -- or 25% increase in cards and autographs and a $2.2 million or 7% increase in U.S. coin revenues partially offset by a $3.5 million decrease in China due to the previously discussed absence of any significant banking channel revenues in fiscal '19. The cards and autograph revenue increase represented record annual revenues of $26.4 million for that business. The U.S. coin revenues increase for the year included higher trade shows and modern revenues.

In China, the nonbanking channel revenues were up 14% in fiscal '19 as we continue to build our brands in that region. Despite a net decrease in our coin revenues and fiscal '19, our coin business represented 57% of revenues and reflects the continued importance of that business to our overall financial performance.

Our U.S. coin business rebounded in fiscal '19 with a 7% increase over fiscal '18, and we will continue our average to maximize revenue opportunities in that business. In China, we will continue to focus on growing our nonbanking...

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Operator [4]

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Just a moment, ladies and gentlemen. The speaker has unfortunately disconnected. I will try and redial back in.

(technical difficulty)

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Joseph J. Wallace, Collectors Universe, Inc. - CFO & SVP [5]

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Okay. It looks like we were disconnected, so I will just continue from where I think we got cut off, so there could be some duplication.

I will start off by counting further on revenue. The fourth quarter revenue increase of $2.7 million or 16% included increases of $1.7 million or 29% in cards and autographs and $0.9 million or 9% in coins. The cards and autographs increase represented record quarterly revenues for that business. The coin increase included an 8% increase in U.S. revenues, which included improved revenue from modern coins and trade shows. China coin revenues in Q4 increased by $0.5 million or 50% to about $1.4 million for the quarter.

The fiscal '19 revenue increase of $4.0 million or 6% included a $5.4 million or 25% increase in cards and autographs and a $2.2 million or 7% increase in U.S. coin revenues partially offset by a $3.5 million decrease in China due to the previously discussed absence of any significant banking channel revenues in fiscal '19. The cards and autograph revenues increase represented record annual revenues of $26.4 million for that business. The U.S. coin revenues increase for the year included higher trade shows and modern revenues.

In China, the nonbanking channel revenues were up 14% in fiscal '19 as we continue to build our brands in that region. Despite the net decrease in our coin revenues in fiscal '19, our coin business represented 57% of revenues and reflects the continued importance of that business to our overall financial performance.

Our U.S. coin business rebounded in fiscal '19 with a 7% increase over fiscal '18, and we will continue our efforts to maximize revenue opportunities in that business. In China, we will continue to focus on growing our nonbanking channel revenues. At this time, we do not expect to generate revenues from the banking channel in fiscal '20. With respect to our cards and autographs business, which ended in fiscal '19 with a backlog of cards to be authenticated and graded, we expect continued growth in fiscal '20 as we continue to increase grading capacity.

The gross profit margins were 59% and 58% this year's fourth quarter and fiscal '19 as compared to 55% and 57% in the same periods of the prior year. Those percentages reflect higher gross profit margins for both our coins and cards and autographs divisions due to the mix of collectibles authenticated and graded and higher fees charged for certain services. In addition, we achieved higher operating leverage for cards due to the higher number of cards authenticated and graded. 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 a quarterly basis during the 3 years ended June '19, our gross profit margins vary between 54% and 64%.

Selling and marketing expenses were 13% and 14% of revenues in this year's fourth quarter and fiscal '19 as compared to 14% and 15% in the same periods of fiscal '18. In dollar terms, selling and marketing expenses were substantially unchanged and included higher costs in our growing cards and autographs business, for the most part offset by savings in other parts of the business.

G&A expenses represented about 23% and 24% of revenues in this year's fourth quarter and fiscal '19 as compared to about 28% and 29% in last year's fourth quarter and fiscal '18. The dollar savings of $2.3 million in fiscal '19 primarily reflected: one, lower payroll-related costs of $0.8 million, arising from staff reductions in the fourth quarter of fiscal '18 and management changes in the company's coin division that occurred in the first half of the year partially offset by increased management incentives due to the improved performances of our business in fiscal '19; two, the nonrecurrence this year of moving and lease exit costs and the prelitigation settlement for a combined savings of $0.9 million; and three, lower nonstock-based compensation expense of $0.4 million.

The resulting operating income of $4.5 million in this year's fourth quarter represented an operating margin of 23%, and the $14.3 million for the year represented an operating margin of 20%. Adjusting for noncash stock-based compensation expense, the operating margins were about 24% in the quarter and 21% in fiscal '19.

Turning to our balance sheet, the company's cash position was $19.2 million at June '19 as compared to $10.6 million at June '18 and $15.7 million at March '19. Net cash generated of $8.6 million in fiscal '19 included cash generated from continuing operations of $17.5 million partially offset by cash dividends paid to stockholders of $6.5 million, $1.8 million used for capital expenditures and capitalized software costs and $0.6 million used to pay down the company's term loan. On July 23, '19, we announced our quarterly cash dividend of $0.175 per share, which will be paid on August 30 to stockholders of record on August 16.

Just a brief comment on the new accounting rule that will impact us. As disclosed in our 10-K that was filed with the SEC today, the new accounting rules for leases will require us to capitalize on our balance sheet effective July 1, '19, right-of-use assets of about $10 million and a corresponding liability for the same amount, of which about $2.3 million will be classified as a current liability. The leases are mostly real estate related, and we don't expect any material effect on our income statement. These assets and liabilities will appear on our published balance sheet at September 30, 2019, and future quarters.

With that, I'd like to thank you for your attention.

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [6]

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Thanks, Joe. Before we conclude, I would like to make a few comments about the close of Q4 and the outlook moving forward into our first quarter of the fiscal year.

In a year of transition, fiscal 2019 proved successful as Collectors Universe set a new annual revenue record. The achievement was driven primarily by a strong back half of the year. 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. In June, the company followed that strong performance with another one, setting a new all-time high for quarterly revenue and a Q4 operating income record.

During the same month, Collectors Universe also reached a new milestone, eclipsing 75 million total items certified since inception. Reaching the 75 million collectibles certified milestone is a testament to the entire staff, both current and former employees, in addition to the unparalleled power of our brands. Of course, none of these would be possible without the unwavering support of our customer base. This is as much their achievement as it is ours, and we can't thank them enough for helping us build this company.

As we look to the future and head towards the 100 million mark, our team is committed to not only enhancing the wonderful foundation that it's taken us this far but to also seek new ways of expanding our services to further the ultimate vision of what Collectors Universe can be.

Over the past year, our management team made the decision to refocus and reinvest in the core of our business, from our Set Registry program to customer service. This will continue into fiscal 2020. In the coming months, we are making a concerted effort to increase our operational efficiency and improve our grading system, which includes enhancing our products and services with new technology.

At PCGS, after reacquiring the PCGS Currency name in Q3 of fiscal 2019, the company recently announced that we intend to get back into the domestic grading business early next calendar year. In the meantime, we will continue to provide international grading services but under a new name, PCGS [Banknotes], the name that will also be used when the service is relaunched domestically in the second half of fiscal 2020. Not only will this help clear up any confusion around banknote grading in the marketplace, including the international business, this service will serve as a logical complement once again to PCGS's existing coin-grading brand.

At PSA, the momentum continues. The market for PSA-certified items is very strong as numerous record prices have been paid in recent months for high-quality collectibles. This includes everything from a Lou Gehrig-signed photo and scribe to Babe Ruth, which sold for a record $480,000, to a complete set of 1915 Cracker Jack baseball cards, which sold for $1.4 million. Earlier this month, PSA attended the National Sports Collectors Convention in Chicago, which is the single-largest showcase for the industry. It turned out to be a blockbuster for the company, and it helped produce a record week for PSA. The PSA backlog, as expected, remains at record levels as well.

While the domestic PSA business continues to grow, PSA international is just beginning. With very modest investments, PSA recorded its best-single month this past June in Japan as our brand continues to enjoy increased visibility in the region. We will continue to approach the international part of our business in a very disciplined manner as we build our brand overseas.

Since launching Phase 1 and 2 of our Set Registry achievement program for PCGS and PSA over the past several months, our annual growth rates for new members and sets have both nearly doubled. Needless to say, the response from existing users and new ones has been excellent. The Set Registry plays such a key role in submission generation and the development of brand loyalty. The more we improve the user experience, the more activity and commerce it creates.

Looking ahead to fiscal 2020, the management team is committed to improving our company by reinvesting in our core businesses, from operations to customer service to technology, while continuing to search for new potential revenue streams that could enhance our ability to grow in the years to come. 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) I'll take our first question from [Ewan Gunn] as a private investor.

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Unidentified Participant, [2]

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Congratulations on a great quarter. I noticed the gross margin had improved since last time to kind of the high 50s. Do you think you will be able to get that back into this? I noticed it was sort of in the low 60s a couple of years ago. Do you think that's the level that you'll be targeting return to? And do you think that you have the pricing power and the brand strength to be able to do that?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [3]

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Yes. I mean to answer that question, absolutely, we are definitely shooting for that range of gross margin. And I think we do have -- I think you've raised a really good point. I think we can leverage our brand power a little bit better in certain areas of our company in relation to certain services that we offer, and that's something that we're going to explore over the next fiscal year. But that would be the goal. Joe, do you have anything to add to that?

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Joseph J. Wallace, Collectors Universe, Inc. - CFO & SVP [4]

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No. I think Joe's comments are correct. I mean traditionally, our PSA cards and autograph businesses had a lower gross profit margin, but that actually gross profit margin is improving over time, and we're getting operating leverage in that business. So yes, we're committed to the -- to 60% or 60%-plus over time. But the lower than 60%, although based upon the higher record revenues, would reflect a mix issue that we're currently experiencing. But longer term, yes, we are committed to the 60% or 60%-plus gross profit margin.

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Unidentified Participant, [5]

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Okay. Do you have a plan for kind of revenue growth management or to optimize the value that the brand brings? Or how do you think about that?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [6]

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How do I -- if you don't mind reasking the question. You mean, what is our plan moving forward? Or are you talking specifically about price or...

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Unidentified Participant, [7]

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Yes. Well, I think -- yes, I think you've got a super strong brand. And it's just how do you think about -- how do you optimize the pricing to make sure that you're getting the value you deserve out of that?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [8]

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Yes, it's a great question. So there's -- of course, there is no magic answer to this. But what we've seen with PSA, for example -- and PSA has gone through a pretty significant sort of growth trajectory over the past, almost decade now. Over the past 9 years, where we've had 9 consecutive years of top and bottom line growth in the division, we have raised prices and raised the ASP every year for 9 consecutive years, yet we have the biggest backlog in the history of our company. So there's never -- it's not an exact science, but obviously, it's up to us to find that perfect balance between price increases and of course, not pushing it too hard in any one given year.

Now on the PCGS side of the business, I think we've learned a lot from the PSA division. And I guess the way I would sum it up is as long as you're doing everything else well, if your service is great, the quality of your product is excellent, the marketing is going well, all of the other things are going well, I think you can ask for a little bit more. I think in the past, we've been a little bit reluctant to utilize that leverage. And so looking forward, I think it's time for maybe one of our divisions to learn from the other in terms of leveraging that brand power because that's something that, look, PCGS has been around for 33 years; PSA, 28, we were so entrenched in our markets, and our products sell for such a premium price. As long as we do it thoughtfully, I don't think there's anything wrong with asking for a little bit more where appropriate. So there are certain services that we offer where price is a real issue, especially as it relates to the lower dollar coins and cards. You have to be very careful not to price yourself out of those markets, but there are other areas of our company where we're talking about higher-end, high-value items, vintage items where I think we could leverage our brand a little bit more. So that's something that we're really looking at as we move forward next year.

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Operator [9]

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And I'll take our first -- next question from [Paul Saferstein] at First New York.

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Unidentified Analyst, [10]

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Just first of all, a couple of questions. A follow-up on the capacity increase you just mentioned. Can you just give a little more color as to number of heads or other metrics of like what type of percentage increase you are expecting this year and in the midterm to your grading capacity? And I think you might be also implementing some sort of technology around improving and enhancing the authentication and grading process, and it kind of goes back to the gross margin question. But can you guys just talk about how margins evolve relative to the capacity increase both technology and/or headcount? That's question 1. Other 2 questions are just kind of around the revenue concentration in all the investigations that are going on with PWCC. If you can kind of just point to potential risks associated with the investigation and any other type of commentary you have around that. And are there any implications to warranty reserves on the balance sheet?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [11]

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Got you. So I'll take a stab at question 1. I think, quite frankly, and I'll let Joe Wallace chime in here as well, I think it's probably a little too early to predict what impact some of our upcoming operational projects will have long term on margins. This is sort of we're at the beginning stages of trying to figure out if we can incorporate certain kinds of technology at certain stages in the grading process. And I guess figuring out how successful we are, I guess, is to be determined. So it's a little early for us to, I think, speculate as to exactly how successful we will be there. Certainly, there is room for improvement. We completely believe that. And when we look at our -- we're moving so many millions of units through the facility every year. Any little gain you can make in terms of efficiency will really help a company, especially one of our size. We're a relatively small company overall, even though we are processing millions of units a year. So there's no doubt in our minds that there are gains to be made. But at this stage, I think it would be improper for me or Joe or anybody here to guess exactly how much that would impact our company.

I will say this, over the past year or so, what we have done is gotten rid of the silo or the silos that we had inside of our organization where, for example, PCGS had their own operation and PCGS had a separate operation, so this includes everything from receivers to sealers and so forth. And what we've done over the past year is blended the operation together with the exception of grading, of course, like the actual expertizing. So now we can move. We're a lot more flexible. If one part of the business gets hot, whether that's -- cards happens to be very hot right now. At certain times of the year, as Joe mentioned, there's a seasonality. Sometimes modern bulk and coins is very, very busy. We can move those people to one side or the other based on the demand. So we believe we are getting some benefit there, but in terms of looking forward, I think it's a little premature to predict a percentage sort of benefit.

As far as the other question that you had in regards to this investigation of the auction here in our industry, I can answer it very short and sweet. We don't believe that there is anything of a material nature for our company to be concerned with. Of course, any negative publicity that our industries receive or have to deal with is not something that we like to see, but it's sort of a part of, I'm sure, every industry that there's going to be a negative news from time to time. But I think if you look at the last 4 months or so, which is about at the time that this sort of new story broke on this company, I mean, our receiving has actually gone up. The prices for PSA-certified items remains terrific, and the demand is there. So we don't anticipate anything of any meaning as a result to this.

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Unidentified Analyst, [12]

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Got it. And just reading through the 10-K and understanding the warranty and provisioning process, is there any type of risk associated with historical grading and kind of, I guess, the kind of the questionable practices that the FBI is looking at?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [13]

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Questionable practices as it relates to outside submitters?

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Unidentified Analyst, [14]

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Well, I mean, when you read through kind of the blogs of what some collectors are speculating. And I'm not a collector by any means. I'm just kind of reading kind of all the news involved. There's a question of whether or not -- or basically, who's kind of breaking into the boxes, changing the card, upgrading the cards kind of for a better grade and then resubmitting and potentially getting a higher grade, and I think it's associated with higher-value cards to a certain extent. So I'm just wondering whether or not the warrantying -- the warranty associated with that could potentially be something where your auditors are kind of requiring higher provisioning.

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [15]

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To answer the question, this is what I would say is that with PCGS, of course, I mentioned earlier, they've been around for 33 years, with PSA 28 years now, and we've graded, of course, over 75 million combined items, there is nothing what I would describe as unique to this investigation of this auction here. This is the same exact battle that we deal with every day. So there's -- I guess the way I would characterize this is none of these is really new news. It's not news to us. It's not news to the industry that these types of things go on. So there's nothing really out of the ordinary from that perspective about the investigation versus any other year in our history. So I -- again, Joe Wallace is welcome to chime in here if he has something to add, but we don't view this as a special sort of a warranty issue versus any other day in the lives of Collectors Universe.

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Unidentified Analyst, [16]

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Great. That's great to hear. So just kind of just wrap it up. So when you talk about revenue concentration, I think it's 11% of sales. Is PWCC 1 of the top 5 customers in that number? And is their business turning down because of this investigation?

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Joseph J. Wallace, Collectors Universe, Inc. - CFO & SVP [17]

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Well, they're certainly not willing to larger customers in that top 5 customer base, that's correct.

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Operator [18]

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I'll take our next question from [Tyler Johnson] as a private investor.

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Unidentified Participant, [19]

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My question is in regards to -- are you aware that 2 former PSA employees have [implicated fraud and are referring to] your company regarding the trimmed cards that have been graded higher than they should be?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [20]

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I couldn't understand the question. Could you please repeat the question?

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Joseph J. Wallace, Collectors Universe, Inc. - CFO & SVP [21]

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You broke up there for a moment. We couldn't understand the question.

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Unidentified Participant, [22]

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Yes. My question is about the 2 former PSA employees that were implicated in the investigation for the trimmed cards that are graded higher than they should be. Are you aware of that?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [23]

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I'm not aware of anything you're talking about here.

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Unidentified Participant, [24]

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So you're not aware of the PSA employees that have been implicated in the investigation, the trimmed cards, that we get a card you guys mentioned before. Are you not aware of any of that information?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [25]

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We would ask the moderator to please move on from this caller. Thank you.

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Operator [26]

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And I'll take our next question from [Ken Suchoski] as a private investor.

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Unidentified Participant, [27]

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Maybe I'll just try it another way. I'm just wondering if you could disclose what percentage of your card business is sports card related, just because it seems like a lot of the fraud was concentrated there. So if people are trying to handicap what the risk is around grading in the sports card area, I think that would be helpful for investors.

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [28]

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Well, if you listened to our call, we disclosed in every detail the exact percentage of our last fiscal year between coins and cards and all of our divisions. So I think we covered all of that. So if you have another question, we're happy to answer it.

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Unidentified Participant, [29]

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Well, I was thinking because you guys do nonsports-related cards as well. So presumably, if a collector is focusing on cards, it's going to be -- there's obviously like Pokémon and other stuff, and then you have sports cards. So I was just wondering, within the 90% of trading cards and autographs that's card related, how much is sports cards specifically?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [30]

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We don't break it out by percentage of genre, if that's what you're getting at. And I'm sorry, I misunderstood your question from before. But we do grade a tremendous amount of nonsports card as well. Over the past 12 months, we have graded several hundred thousand Pokémon, Magic: The Gathering and that sort of -- and those sorts of things. And then PSA last year, we -- in total, and most of this is cards, some of it is autographs, some of it is tickets, original photos and other things that we provide services for, we processed in the neighborhood of 2.5 million items. I would say several hundred thousand of that was of the nonsports variety, but we don't literally break it out by genre in our detail here.

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Unidentified Participant, [31]

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Okay. Okay. That's helpful. And then just another follow-up. I guess when you think about this whole trimming scandal, I mean, what do you think is missing in your grading and authentication process that prevented the graders from actually identifying these trimmed cards? And I guess, what, if anything, can you do to address the loopholes that certain collectors are taking advantage of today?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [32]

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Well, we don't view this as being any loophole on our end. And we think that in the overall scheme of our business that some of this has been blown way out of proportion. But we are very confident in the services that we provide and very confident in the grading staff that we have, and so is the public. As I mentioned, over the past several months, our business, if anything, has increased. So it kind of tells you what the overall marketplace thinks of our grading services and the quality of our product.

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Unidentified Participant, [33]

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Right. Okay. And then if I can just sneak one last one here. You guys continue to generate a lot of cash flow. So if you look at the increase in cash over the last 2 quarters, it's about $3 million -- over $3 million in each of the last 2 quarters, and it's obviously been pretty strong. So can you talk about what your capital allocation plans are for the company going forward? And if you're planning on using some of that cash to invest internationally, what are some of the milestones that you're trying to hit, say, over the next 3 to 5 years?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [34]

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Well, we don't have -- I wouldn't say that we have any defined milestones as it relates to cash. And I think our capital allocation has been pretty consistent over the last few years. We are looking -- since we did have a very positive year in terms of cash generation, and we have a very strong cash position right now, we are looking at some new verticals. We are looking at expanding some of our services internally, some of our core businesses, and we're looking very hard at that over the next fiscal year. And depending on where we decide to spend the money, we'll also dictate how we view our current dividend and the level that it sits at. But we are in the process of determining what to do with some of the cash if indeed we determine that it's excess. But we don't have a defined number that we say, well, it's -- if it's under this or over this, we can or cannot do anything. So we're taking a good hard look at that. We think it's time to start thinking about where Collectors Universe -- or what it looks like 5, 8, 10 years down the road. So we're -- it's something that's -- it's very fresh on our minds.

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Unidentified Participant, [35]

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Great. Okay. And then if can sneak one last one here. Within the coin segment, you guys had some nice unit growth in the quarter. It's actually up 9% versus negative for the prior 6 quarters. So I was wondering if you can just talk about where you see the unit growth going over the next, call it, 3 to 5 years because if you just look over the last 10 years or so, you guys have had decent unit growth over time. So I was wondering if that's sustainable over the medium to long term.

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [36]

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It is very hard to predict unit growth over a 3- to 5-year period. But what I can say is this that the opportunity in the U.S. is on modern coins because that's where literally the volume is. And so what you've seen over the past couple of quarters certainly in fiscal '19 versus fiscal '18 is some improvements in that area. So when you look at PCGS and their performance in Q3 and Q4, a lot of that success was an improvement in the modern bulk coin area. So that -- when it comes to modern bulk coins, we have some control over the packaging and presentation of those coins. So the more creative we can get, the more our product appeals to the ultimate consumer, the better we can do. We are also on some level at the mercy of what the Mint produces. And if they produce a coin that resonates with collectors, we have a better opportunity to capitalize on that.

From an international perspective, if your -- if you remove a couple of quarters, I guess it would have been Q1 of fiscal '18, I believe, and Q2 of fiscal '17, those where we had a very big surges in international coin growth because of the banking channel revenue that we've discussed in the past where they're more like into isolated projects than a sustainable sort of business, so we had these big surges of revenue in those 2 quarters. But the base business seems to be gaining more traction, and that's more of the traditional collecting community versus banking channel revenue. So the real opportunity domestically for coins is in modern. If people have vintage coins to grade, we will receive them. It's much like on the PSA side of our business. If somebody has a high-end Babe Ruth item, whether it's an autograph, a card, something like that, at this point because of our brand strength, we don't have to go out and ask for those types of submissions. They sort of naturally come to us. But you do have to be very competitive on modern, and modern is where the volume is. So we're making a concerted effort on the coin side to build that domestic modern business as best we can. And then on the international side, as Joe Wallace commented on earlier, while we don't anticipate any banking channel revenue anytime soon, we are trying to build the base business up as much as we can.

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Operator [37]

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(Operator Instructions) We'll now take our last question from Bobby Nouredini from BBN Management.

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Bobby Nouredini;BBN Management, LLC, [38]

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Real quick about this PWCC and trimming scandal. It wasn't clear to me based on the answers to earlier questions. Have you guys noticed the drop-off in business from that auction house in particular?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [39]

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How do we know that there's a -- I'm not following. How do we know that there's a drop-off from that auction house that gives us...

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Bobby Nouredini;BBN Management, LLC, [40]

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No, no, no. I don't think you heard me properly. Has there been a drop-off in business from PWCC since end of May, beginning of June?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [41]

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We could certainly look at the records, but I would say that certainly, over the last couple of months, there been, I would say, virtually no business, and I'll leave it at that.

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Bobby Nouredini;BBN Management, LLC, [42]

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Got it. So I think because they were -- go ahead.

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Joseph J. Wallace, Collectors Universe, Inc. - CFO & SVP [43]

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I'm sorry. Let me just go ahead and try to close this issue. I mean as Joe has said earlier, the level of submissions that we continue to see at the PSA cards business is -- continues to be very, very [strong], and in fact, our backlog is actually higher now than it was back in June. In terms of our warranty, we take a very conservative view in terms of the warranty and what our expectation is in terms of our balance sheet. So I think this whole trimming issue that we spent a lot of time talking about today is really something that we don't consider material to our business. And we'd probably just like to leave it at that in terms of any additional questions on the subject.

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Bobby Nouredini;BBN Management, LLC, [44]

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Okay. Well, let me just kind of dance around a little bit. The -- if the card grading business continues to grow and then one of these formerly large customers is basically gone to 0 revenue, who's picking that up? Is it individual collectors or other dealers? I mean where is the growth coming from when you have this kind of vacuum created by one of your large customers?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [45]

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Well, I think that that's -- maybe the issue is that there is an idea, I guess, at least coming from your question, that in some ways that whether it's the PWCC company that you're referring to, or really, any other company, they make up such a large percentage of submissions that we should be concerned. One thing that is very interesting about the PSA business, and it's a little bit different than the PCGS business in this way, is that the submissions are spread out quite a bit. We do have some larger customers. I don't think I would define PWCC as being -- I mean Joe has already commented on it earlier in the call. They don't fit into that what we would consider, at Collectors Universe, a large customer anyway. But there is -- so we don't anticipate any impact whatsoever from PWCC whether -- no matter what happens to them as part of this investigation, we're not concerned about it. And like Joe said, our current backlog is at record levels and continues to be at record levels regardless of PWCC's personal business. So our submissions are spread out in such a way that we are not dependent on one submitter or another for our -- for the PSA business to grow in the future, which I think is what you were getting to. Are we concerned about our ability to grow minus a customer or 2 or 3? And the answer is no.

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Bobby Nouredini;BBN Management, LLC, [46]

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Got it. So the -- and I don't want to bother you guys with this too much, but it seems like some kind of change needs to happen in regards to ensuring that trimmed cards don't get authenticated. I think you touched on it a little bit earlier in terms of employing some new technologies. Can you talk a little bit about -- I mean one of the things that's kind of being discussed on how message boards is computerized grading and how humans are inherently flawed in that sense where it's hard to maybe pick up on some of the minutia. Especially, according to my calculations, the graders, the card graders get about 75 seconds to grade each card, right? So -- and I might be wrong with that. It's just rough -- a rough calculation. Are -- what kind of technologies are you looking at going forward in terms of -- and are you eventually going to try to take this out of human hands and computerized the card grading specifically?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [47]

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We have no plans on taking grading out of human hands.

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Operator [48]

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It appears there are no further questions at this time. I'd like to turn the conference back to the presenters.

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [49]

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We would like to thank everyone for joining us today for the call and look forward to speaking with you in next quarter.

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Joseph J. Wallace, Collectors Universe, Inc. - CFO & SVP [50]

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Thank you.

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Joseph J. Orlando, Collectors Universe, Inc. - CEO, President & Director [51]

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Thank you.