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Edited Transcript of CLCT earnings conference call or presentation 1-Nov-18 8:30pm GMT

Q1 2019 Collectors Universe Inc Earnings Call

SANTA ANA Nov 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Collectors Universe Inc earnings conference call or presentation Thursday, November 1, 2018 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 & Director

* Joseph J. Wallace

Collectors Universe, Inc. - CFO

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Presentation

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Operator [1]

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Good afternoon, everyone. And thank you for joining us to discuss Collectors Universe's financial results for the first quarter ended September 30, 2018. 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 up the call 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 forecasts 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 conference is being recorded.

With that, I would now like to turn the call over to Joseph Orlando. Joe?

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

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Thank you, and welcome to today's first 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 second fiscal quarter of the year.

Q1 represented the strongest overall performance by Collectors Universe of the past four quarters. While service revenues in the first quarter were down year-over-year to $17.5 million from $19.8 million, an 11% decline from a year ago, several individual revenue records were set within PCGS and PSA. Our primary division showed a decline of 25% in our coin business, but an increase of 20% in our trading card and autograph business from the previous year. The decline in PCGS was primarily attributed to China, and the lack of banking channel revenue. In Q1 of last year, Shanghai produced slightly over $4 million in revenue, and roughly $3.7 million was derived from the banking channel. So outside of that significant, but relatively concentrated decline in our coin business, there were several positive performances inside of PCGS and PSA.

Let's start with a deeper look into our U.S. coin business. Our vintage service set a Q1 revenue record at $3.4 million, eclipsing last year's record of $3.3 million in the same quarter. PCGS show revenues were also up from last year, finishing over $1.8 million versus $1.4 million achieved in the previous Q1. The U.S. bulk coin business was down from last year's record performance, finishing at $2.1 million versus $2.9 million, but was up from the previous quarter, Q4, fiscal 2018, which ended with $1.8 million in revenues.

Getting back to the international portion of our coin business, outside of our Shanghai year-over-year decline in banking channel revenue, the non-banking channel business performed well, as it was up approximately $0.7 million from the previous year. This is the portion of the business that is best described as traditional activity from collectors and dealers in the hobby. In addition, our Hong Kong office produced a Q1 record of their own with $0.5 million in service revenues. Our Paris office, ended Q1 with only 78,000 in revenue versus $0.3 million last year, but it is important to note that this decline was mostly a product of grading events scheduling. In Paris, most of our revenue each quarter is generated by PCGS grading events. In Q1, no event took place, due to some scheduling conflicts. As a result, Q2 will now have 2 events scheduled during the same quarter.

Our PSA and PSA/DNA divisions finished Q1 with another record top line and bottom line performance. The Q1 revenue figure of $6.1 million, represented an all-time quarterly record for the division, surpassing last year's quarterly performance of slightly less than $5.1 million. PSA's record-setting quarter, included a new all-time quarterly high for units shipped at 572,000 collectibles. The strong finish for PSA helped the division achieve its ninth consecutive Q1 of year-over-year top line and bottom line growth for the quarter.

While our unit shipped totals raised the bar once again, the incoming submission pace continues to be unprecedented. New backlog records were also reached in Q1, which means our focus on adding capacity continues. Returning to our overall business gross profit margins were 59% for the quarter, which was down from 62% a year ago. Our operating income for Q1, after stock-based compensation, was $2.8 million, compared to $4.5 million the previous year. Income from continuing operations was $2.1 million, for the fourth quarter of fiscal 2019, or $0.24 per diluted share, down from $0.41 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 Q1. Joe?

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

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Thank you, Joe. I'll now give a brief overview of the financial results for the first quarter of fiscal '19.

For the first quarter, the company generated revenues of $17.5 million, earned operating income of $2.8 million, and after-tax income from continuing operations of $2.1 million or $0.24 per diluted share. This compares to the record quarterly revenues of $19.8 million, operating income of $4.5 million, and after-tax income from continuing operations of $3.6 million or $0.41 per diluted share for the first quarter of fiscal '18. The lower revenues, in this year's first quarter, were primarily driven by an increase of $1.0 million or 20% in cards and autograph revenues, offset by a $3.0 million decrease in China coin revenues.

The 20% increase in cards and autograph revenues to $6.1 million for the quarter, represented record quarterly revenues for that business, which has achieved quarter-over-quarter revenue growth in 32 out of the last 33 quarters.

The China revenue decrease, reflected the absence of revenues from the banking channel in China, partially offset by an increase of $0.7 million in non-banking channel revenues, as we continue to build brand awareness in that region for the long-term success. Revenues from our U.S. coin business were substantially unchanged, and reflected improved show and vintage revenues, offset by lower modern coin revenues. Our coin business represented 58% 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 United States, due to the winter holidays that occur in that quarter, and we expect that trend to continue in this year's second quarter. Consistent with our commentary in the fourth quarter of fiscal '18, we're seeing improved revenues generated out of domestic coin shows, and the level of the U.S. vintage revenues have stabilized. Therefore, our current expectation is, that those parts of the U.S. coin business will continue to perform well in this year's second quarter.

There continues to be uncertainty as to the level of modern revenues we can expect to generate, and this will probably be in the third quarter of fiscal '19 before we see an improvement in the overall activity in that part of the U.S. coin market. With respect to China, our current expectation is that we will continue to see stability in our non-banking channel revenues in this year's second quarter. At this time, we do not expect to generate revenues from the banking channel in the second quarter, whereas we generated approximately $0.25 million in revenues in last year's second quarter.

The gross profit margin was 59% in the first quarter as compared to 62% in last year's first quarter, and 55% in the fourth quarter of fiscal '18. The decrease in gross profit margin this year's first quarter, as compared to last year's first quarter, reflected the revenue decrease in the quarter. On a quarterly basis, during fiscal '18, our gross profit margin vary between 54% and 62%.

Selling and marketing expenses were 16% of revenues, in the quarter, as compared to 14% in the first quarter of fiscal '18. The dollars were substantially unchanged in the quarter, and included higher costs in our growing cards and autographs business, mostly offset by cost savings in other parts of the business.

G&A expenses represented about 27% of revenues in the quarter, as compared to about 26% in the first quarter of fiscal '18. The decrease in dollar terms of $0.4 million, reflected lower payroll-related costs and recruitment costs. The payroll reductions included lower performance-based incentives, due to the lower operating results in the quarter, and staff reductions implemented in the fourth quarter of fiscal '18. Those cost reductions were partially offset by increased depreciation expense, related to tenant improvements and other assets capitalized as part of the company's new facility, and higher amortization costs for capitalized software projects.

The tax rate in this year's first quarter, reflects an ongoing federal tax rate of 21%, as compared to 35% in the last year's first quarter. Both periods were adjusted for excess tax benefits or deficiencies, related to the vesting of restricted stock, which are recognized in the period, in which they arise.

Turning to our balance sheet, the company's cash position was $12.2 million at September 30, 2018 as compared to $10.6 million in June '18. Net cash generated of $1.6 million in the quarter included cash generated from continuing operations of $3.9 million, partially offset by dividends paid to stockholders of $1.8 million, and $0.5 million used for capital expenditures and capitalized software costs.

On October 23, we announced our quarterly cash dividend of $0.175 per share, which will be paid on November 30, to stockholders of record on November 16, 2018.

So in summary, this year's first quarter performance, despite the China revenue decline, represented a solid performance by the business in terms of profitability and cash generation.

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

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Joseph J. Orlando, Collectors Universe, Inc. - CEO & Director [4]

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Thanks, Joe. Before we conclude, I would like to make a few comments about the close of Q1, and the outlook moving forward. In Q1, Collectors Universe showcased some strong performances in our authentication and grading business, especially in the U.S. In fact this included a few quarterly and all-time revenue records. While the Chinese market continues to be volatile from a quarter-to-quarter perspective, the long-term goals set by our coin management team remain unchanged. PCGS will continue to build this brand in that market.

The non-banking channel business continues to grow, especially in vintage coins. This is where any third-party authentication and grading service gains, most of its credibility within the collecting community. In other words, if PCGS is the preferred choice to grade a $50,000 coin, then it is certainly easier to convince those who own $50 coins that PCGS is the right choice for them as well.

Turning to our second largest division, the momentum hasn't let us, even as we head into what is usually PSA's slowest quarter of the fiscal year. With incoming submissions at record levels, new service is being introduced recently, such as our Jumbo Holder and the very beginning of international expansion taking place. Our biggest immediate concern is operational capacity.

PSA continues to make progress in this area, which is something we have touched on in recent earnings calls, and that improvement has resulted in another record pace, in a long line of record years for the division in fiscal 2019. During the last earnings call, I discussed the beginning of PSA's international expansion, which started with a new partnership in China, and establishing a legal entity in Japan over the summer. This month, PSA will officially launch its Japanese website, and begin taking in our first test submissions from Japan, under what we call our Tokyo Express Service.

In addition, PSA representatives just returned from the Shanghai Comic Con show, where our partner Shanghai Ruika, help spread awareness about the benefits of PSA services to attendees at the big event. This is all part of the education process, as we build our brand overseas.

Finally, later this quarter, we will be injecting what many people refer to as game of vacation into our incredibly powerful Set Registry program for PCGS and PSA. For those of you listening, who may not be familiar with this part of our website, the Set Registry is the single most powerful tool, our company uses to stimulate submission activity and build brand loyalty. This website venue is home to well over 200,000 registered sets of coins, trading cards, autographs and more.

Here, hobbies from all over the world share and compete with one another, to see how their price collections stack up, against the best in the business. Each collection is ranked in its specific category by attributes, like completion percentage and GPA amongst other things. While joining the registry is free to users, the only way one can play is, to have their collectibles certified by our company. It's a very simple formula. The more engaged the collector is on the site, the more likely they are to be active. The more active a collector is, the more likely they are to buy. The more they buy, the more dealers will submit to us, in order to satisfy that demand, which leads me to the introduction of gamification.

The whole purpose behind the use of gamification in any setting, is to promote engagement. As an example, the concept is utilized quite well in the wildly popular fantasy sports world. There, no matter if you are in first place or last place, they find ways of keeping you engaged and active through their websites or mobile apps. That is the same goal here at Collectors Universe. Through gamification, participants will be able to earn points, digital awards, and be recognized for their accomplishments as they build and improve their collections. Details about this new feature, which is best described as placing a game within a game, will be unveiled later this quarter. We are excited to add another layer of fun to this critical element of our submission and branding machine.

As we have stated many times before, Collectors Universe has a terrific foundation. But that doesn't mean we can't improve. We will not rest on our laurels. From communication to customer service, from operations to innovation, we will always search for ways to enhance our products and services, so we can provide better returns for shareholders. 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) And we will go ahead and take our first question from (inaudible).

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Unidentified Analyst, [2]

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It looks like another great quarter, and was very cash generative. Could you maybe talk a little bit about your capital allocation strategy, and how you're thinking about stock buybacks?

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

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In terms of our capital allocation policy, as you're probably familiar, we reduced our dividend in February of 2018. I think, our current plan at this point is to see how the business performs over the next couple of quarters. Obviously, in terms of forecast, we ended on our balance sheet will determine what our dividend policy will be going forward. But one of the things we want to put in place, back in February was to ensure that we had a sustainable dividend that there'll be no possibility of reduction, and that's still our goal. And I think, it's becoming probably clear that, that dividend level is sustainable by the business. After a couple of quarters, and depending where we -- maybe we get to in the third or fourth quarter of next year, and we see how the business is performing, we look at our dividend policy and our capital allocation policy on an ongoing basis, but it's probably premature to have any update at this point, based on where we are today.

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Operator [4]

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(Operator Instructions) And it appears that we have no further questions at this time. So I will turn the call back to our speakers' for any additional remark.

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Joseph J. Orlando, Collectors Universe, Inc. - CEO & Director [5]

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We want to thank everyone for listening today, and look forward to speaking with everyone next quarter.

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Joseph J. Wallace, Collectors Universe, Inc. - CFO [6]

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Thank you.

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Operator [7]

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This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.