TESSCO Technologies Inc (TESS) 2006 Q3 法說會逐字稿

Good morning, and welcome to TESSCO Technologies Third Quarter Conference Call. Today's call is being recorded and will be available for audio replay today at 12 p.m. Eastern standard time. You can access the replay by dialing 888-286-8010 or, 617-801-6888 then enter the conference code 16398594. Again, those phone numbers are 888-286-8018 and 617-801-9888 then enter the confirmation code of 1639854. It will also be available via the webcast at www.tessco.com/go/pressroom.

I now would like to introduce Robert Barnhill, Chairman, President and CEO, and David Young, VP and Acting CFO of TESSCO. As in most presentations, the following discussion contains forward-looking statements, and TESSCO results may differ materially from those discussed here. Additional information concerning factors that may cause such a difference can be found in TESSCO's public disclosure, including TESSCO's most recent report on Form 10-K as well as prior, and subsequently filed reports.

I would now like to turn the conference over to Robert Barnhill. You may go ahead, sir.

Thank you. Good morning. Well David Young, and I are reporting today from our Nevada operation, where its 7:00 a.m., and it looks like we are going to have some more snow. There is a lot going on here in Reno, a great sales performance, and the launch of several new operational initiatives that I'll review shortly.

This was an excellent quarter. Earnings per share reached $0.26 as a result of a 35% core revenue growth, and reduced operating expenses. We achieved these results despite the anticipated significant revenue loss associated with the transition of a major consumer-direct affinity business relationship. This transition successfully transferred the business generated from the TESSCO's operating Web stores and order fulfillment back to the carrier. We have emerged strong and energized to continue our journey of building shareowner value.

David will now give you some of the highlights of this quarter.

Great, thanks Bob. As Bob mentioned this was our first full quarter since the transition of our large affinity relationship, and it really was a great quarter. We managed the transition effectively, and at the same time we experienced great momentum in our core commercial business. Let me give you some highlights. We continue to be very excited about our strong commercial business, which grew 35% year-over-year, and 17% sequentially. Our self-maintained user, government and reseller channel grew 43% year-over-year. And our public carriers and network operators channel grew 12% in the same period.

Revenues and gross profits in each of our commercial lines of business grew both year-over-year and sequentially. This growth was really led by commercial sales of our mobile devices and accessory line of business, which grew 79% year-over-year and 36% sequentially. This growth was largely a result of increased sales of accessory products to carrier and independent retail customers.

During the quarter, we began supplying product to several new wireless carrier customers, including one large Tier 1 national carrier. We are really excited about this retail business, and we feel that it's a -- it's a result of our enhanced OEM relationships, as well as our China sourcing initiatives, that has allowed us to be much more competitive in this market. Our China sourced sales, while still an immaterial percentage of total sales, nearly doubled this quarter compared to last quarter, and we are really excited about the momentum we are building here.

Our strong year-over-year growth and network infrastructure was primarily driven by fixed wireless broadband products, but also antennas and site support product sales were very strong. Installation, test and maintenance sales, gross profit growth was driven largely by our expanded major repair component relationship, but also by sales of test and bench equipment. Our commercial gross profit margin was essentially flat, year-over-year. The installation, test and maintenance gross profit margin increased substantially driven by this expanded repair relationship. A portion of which is recorded on a net basis.

The increase was offset by a decrease in margin for mobile devices and accessories, partially a result of product mix related to some of our new retail relationships. In the coming quarters, this margin could improve depending on our ability to increase the sales mix of our higher margin private label wireless products into this channel.

Our selling, general and administrative expenses increased 2% year-over-year, but decreased 14% sequentially. And the sequential growth was due to decreased freight and other operating expense reductions, including compensation all related to the consumer business transition. Our net income for the quarter was 1.1 million, and diluted earnings per share was $0.26.

During the quarter, we used cash from operations of $2.2 million. We finished the quarter with a balance on our revolving credit facility of about 3.5 million. Net operating cash outflow, it was really driven by increases in receivables and inventory, and then partially offset by an increase in accounts payable and accrued expenses.

Sales late in the quarter were very strong, which led to some of the increase in receivables, and the majority of the inventory increase related to the expanded repair components business. Also the overall cash flow was impacted by obviously the major reduction in consumer business, which included a high percentage of credit cards sales, which obviously provides significant positive cash flow. We are very focused on improving our operating cash flow, and we believe that we have the initiatives in place, that should help us improve in this area. These initiatives are inventory rationalization. I think we talked a little bit about that last time. And also optimizing our vendor supply chain, and then other productivity improvement projects we have underway.

Also during the quarter, net cash was impacted as we purchased about 102,000 shares of our common stock under our stock buyback program. The cost of those shares was about 1.6 million. Under the program we've got about 400,000 shares remaining available for repurchase. For the nine months, year-to-date revenues were up 5%, and include a 22% increase in commercial sales. That's obviously offset by a 16% decrease in consumer sales. Net income totaled 4.1 million, and earnings per share were $0.95 for the first nine months.

I am very proud of the way that we managed the transition of this large affinity relationship, and frankly I am glad it's behind us. Our focus on driving our core commercial business has never been stronger, and we really look forward to keeping this momentum going.

I'll turn it back to Bob now, who'll discuss some of our key objectives and budgets.

Thanks Dave. As evidenced by the strong growth we had in each of our lines of business, and each of our core markets, I believe this quarter really demonstrates our ability to execute our value proposition and initiatives to build share in this diverse wireless market that we serve. TESSCO's goal is to be the total source of the product plus the supply chain solutions, required to build, maintain or use mobile and fixed wireless systems.

Our objective is to drive significant increases in five key areas. First, we are working diligently to significantly increase our base of monthly buying customers within our carrier, self-maintained user, government and reseller markets. Second, we are working to drive a significant increase in cross-sell of our existing and new product solution areas with each customer. In other words we want to get the same customer to make TESSCO their total source for all of their needs.

Third, we are driving to increase profit margins, to pricing, purchasing, operating at much greater levels of productivity. Four, we are looking to increase returns on inventory receivables and other assets, and shareowner equity, by achieving better turn in these assets in addition to improving the margins. And lastly, five, we are looking to increase our share price by building consistently growing earnings.

To achieve these objectives, we've developed, as we have talked about in the past specific marketing, sales and operational initiatives, and we are executing these very aggressively. So here in Reno, we are looking outside, the sun's almost up, but we are preparing for the launch of the Configuration, Fulfillment and Delivery order processing system, which we launched and enhanced in our Maryland operation over the past year. Through this system, we have seen productivity improvements in the second half of the fiscal year -- of this fiscal year, and are really excited about bringing both of our distributions on to the same platform. Our availability of complete on-time delivery will be greatly enhanced, and as a result, customer satisfaction taken to even a higher level.

Also, the Reno facility will become an excellent center for the packaging and fulfillment of China sourced product. And this will give us great cost savings for both inbound, as we bring it in from China, and also outbound as we deliver to our local or our West Coast customers. It will also allows to reduce our inventories, because of the lead times, and then improve the speed of delivery to the customer. So great things are happening at both of our facility, and we are very excited about the momentum.

Let me give you a little -- let me give you our business outlook right now. And considering the progress that we have made this past quarter and assuming that these trends continue, we estimate for the fourth quarter which ends in March, that earnings will be in range of $0.20 to $0.25. And since that's our fourth quarter that will put our earnings for this fiscal year to be in the range of $1.15 to a $1.20.

So at this point, I would like to answer any questions you might have.

[OPERATOR INSTRUCTIONS]

And the first question comes from Bill Benton from William Blair. You may go ahead, Bill.

Good morning guys. Congratulations on a very nice transition in the business. Obviously everything went very well it appears?

We are doing well, thank you Bill.

A couple of questions here. Just in terms of the top line, obviously we are a lot stronger than we were looking for this quarter and -- with the transition. So, I am trying to get a kind of maybe your view on the sustainability of that top line, and then particularly I guess in the mobile and accessories side? And kind of, your confidence on -- you have a lot of programs here coming on, we don't have the granularity of those. And I'm just kind of curious how you see those in terms of where they are at, in the point of development, and how that gives you some confidence on in terms of the outlook?

Well, first of all, the marketing initiatives we've talked about in the past are getting great traction. You know our ease of using our website, we are growing customers at a much faster rate than we've done in the past. And these customers as they start to buy, they start to increase their purchases. So from a statistical point of view, we've got a good base that we are building on.

Then to your point, there are some major initiatives that we are working on, and these appear to be accelerating. As we look across, lot of the sales that were driven from the Tier 1 carrier that we talked about were primarily the OEM product and a lot of our China after-market product is not really kicked in yet, which will kick in with the launch. We have several other carriers that we are bringing these programs on as well as the independents. As you look at the other marketplaces or other markets, the carrier market especially in the contractor market is starting to get a lot more traction for us. The government market is starting to get more traction. And then our broadband initiatives through our network, VARs is driving tractions. So all of that being said, we've got a lot of diversified initiatives going, and we feel very comfortable, as we move forward to sustain these growth rates.

Is there anything that's not going as well as you had expected, I mean, on top it sounds like a -- I mean it seems like you have kind of things going all in the right direction right now. I'm just trying to get a sense of it.

Really the two areas that we are not, well, three areas that I would say that we are not happy with the growth rate is one, the carrier on the infrastructure product.

Right.

And the major program managers. As I mentioned that we're driving most of the increases there with the independent contractors that are supporting the carriers. But we are working on getting more of the carrier-direct business. Number two, the sales rate coming off of our GSA contract is slowed. And we are working hard to rejuvenate that based upon the massive number of buying entities we have. We've been doing more of a deal-to-deal if you will, or major contracts, and we need to go after this broad base of customers.

And then lastly the -- in this particular market, the VAR marketplace really was, was slow. And we're there -- we're looking -- we're recruiting new market development leaders, that we can drive that business. So those are the three areas that if we could get those moving at the same rates as the other part of the business, it would be very, very, strong.

Okay and then, I think you mentioned obviously the impact from the China source really haven't been felt yet. And the growth, when do you expect those to be felt, and what kind of impact do you think could be possible in terms of the gross margin? I mean when do you historically you guys are around maybe 26/27% gross margins before the consumer affinity business got mixed in there. So when would you expect to me to get back to those levels? I know you are pretty close now but --.

Yes, the -- number one, the China sourcing has really opened up doors for us because of our overall pricing competitiveness. As we've talked in the past this China sourcing was an imperative, not a luxury in terms of really staying competitive in this market. So, this is going to -- it's allowing us to attract new customers, both the carriers as well as the independent dealers, as well as going across the VAR channel and even the self- maintained user channel.

We are -- one other things we are developing here in Reno, and as well as Baltimore is a fabulous packaging capability. We are bringing in all the product in bulk, from China. And we will be actually building to order, including printing the art cards that go into the blister package, and/or to the box. We can get quick cycle times, keep lower inventories, and be able to respond to the market.

So as we, in this next quarter those products will be gaining tremendous traction. And also not that -- not only are we sourcing accessories from China, but shop supplies, tools, and other products that we are moving into where we are already doing business, and will be substituting a lot of the current sales rate with this much more profitable product. So we look at the private brands, which right now are being sourced primarily from China as being very strong as we move into the new fiscal year.

Okay. And you expect that to ultimately reduce some of -- maybe the overall pricing pressure in some areas, and maybe improve the gross margin even from current levels?

Exactly. Its really it's a -- it's a two-sided equation. As one, it allows us to be more competitive in the marketplace. Two, it allows us to build margin. And right now, the major focus is the supply chain costs. Is how do you bring the product in from a seamless point of view. As I mentioned that we are going to be bringing in a lot of the product in, in to Reno, which is obviously a lot closer to China than Maryland is. And just from an inbound freight point of view, it's much less expensive. And then this build-order capability where we are not --. We private label this product. One for our brands, and then two for the various customers. And so you got to keep the product at the lowest common denominator, until you get an order for it. And so you don't have to tear apart, build the inventory they don't take it because you -- somebody else will take it, is the beauty of the system that we are building.

Right. And can you just give us a little bit of color on what you may exactly be doing for this new Tier 1 carrier in terms of the mobile accessory stuff?

Yes. It's basically is it we are filling their channel with the accessories. So that we are looking at a certain portion of their needs.

They are retail channels?

They are retail channels.

Not the -- obviously the indirects?

Well, we have -- through this relationship, we have the indirect, a portion of the indirect business as well as now we are fulfilling for their direct stores.

Okay. And it's a all -- what type of -- ?

It's primarily the -- what we call the fancy phone accessories. We are looking at the Bluetooth, and the high-end accessories for the higher end phones, which is great.

Okay, okay. Well great guys, congratulations on a very nice quarter.

Thank you, Bill.

Thanks Bill.

And your next question comes from [Ted Moroux] from Cardinal Group. You may go ahead, Ted.

Hi guys.

Good morning Ted.

Bob, a couple of thoughts here. One, in terms of the mobile and accessory business where do you think you are on the 3G curve? You've got all these new handsets out, which obviously would drive the accessory business. But I would think that the, infrastructure may well be in place and the carriers would be ramping pretty aggressively here. But how much do you think that was the factor in your current business and going forward? Are we just looking at still continued trends there or, is it going to slow to moderate a little bit?

Well, all the new phones are driving demand. But the strongest thing this past quarter was just Bluetooth. Bluetooth is extremely successful, and exciting for the marketplace. Everything from not only the Bluetooth head -- headset for the cellular phone, but for the tie-in with iPods, and tying -- I mean our iPod accessory business is starting to get some traction. So, part of what we've done with these relationships that David was talking about is, we are getting very, very fast speed to market now, from both the OEM product as well as with our after-market product.

And so, we can get the new phones. We can get the new products, and we continue to be one of the fastest in the marketplace in terms of the speed to market as these new phones come out. One of the things we've developed, and China is very fast cycle times, low [bat] sizes, that you can bring in product quickly, that serves a certain phone.

Also, that we have because of the relationships we are developing with the carriers, we've got pretty good insight in terms of what new phones are going to be launched. So, it's a -- it's a very exciting area, and then whether be 3G or whether be Bluetooth, or whether be whatever, we are going to be there with the accessories that the customer needs.

Right. So it's the applications that are surrounding the new devices either the phones or, maybe ultimately the laptop computers as well, is really the driver for the accessory business.

Yes, the, I mean, you take right now you can have iTunes on your computer, and you can get a Bluetooth USB device that plugs in that you can stream your sound to your headset. And if you get a phone call, you can interrupt your music to take your call. So, yes, these are -- these are all - and I was talking to the sales group last night here, and I said that if you would have asked me three years ago would we be in the iPod accessory business. And I would say, you know, our customers they are in the two-way communications business. But they are not, they are -- they have expanded into the -- it's really its wireless audio, as well as videos as well as data.

Whatever drives the traffic?

Absolutely. And that kind of ties into with what's happening in broadband. I mean it's the same thing with the Wi-Fi systems, the in-building systems, I mean this entire conversions is becoming very, very exciting, as you look. Its not only voice but you've got Voice-over-IP. You got data. You got video. And all these devices are trying to gather both from the network infrastructure side, as well as from the mobile device, and accessory side.

Right. Bob, one other question, a little bit more ambiguous probably. But in the T-Mobile relationship, were there any platforms that you were able to transition over any learning curves from that relationship, that you've been able to leverage other relationships with? Or is it just starting all over? And are you completely done with the cost issues on the transition as well?

Well, we are completely done with the cost issues. And I do want to congratulate David and his team, in terms of the flawless transition as we went through. I mean you can imagine that the numbers of skews we had. The dollars of inventory, the dollars of receivables, the credit card transactions. I mean it was totally a seamless transition, both for us as well as for the customer.

We have re-purposed everything that we learned and we developed, over the years. We have incorporated all the various modules into TESSCO.com. We have our own consumer-direct site, Your Wireless Source, where we learned tremendous -- or as far as just the tremendously as far as on the, on Web, and driving Web traffic, and the credit card fraud, consumer credit card. More of our customers today are using credit card. And we learned a lot in terms of handling those credit card transactions, seamlessly and really protecting ourselves against fraud. So this is -- everything that we've learned is really been re-purposed and is serving us well. And everything we invested in is being re-purposed and serving us well.

And did you replace or -- did you -- were you able to place a lot of the personnel into other initiatives or not?

Yes, we -- the biggest area where we had to do some reshaping was in the technology area. We had major launches on a high frequency basis. So our QA was very high and our development was high. So some of these people have been transitioned into other opportunities. And we've also, we transitioned a lot of the people into new opportunities outside of TESSCO. So it was a win-win work for us. And you can just see by this expense reduction sequentially that we really did what we had to do to make sure we didn't have redundant expenses or unnecessary expenses.

Well, great, thanks Bob. Congratulations on making this transition. I know it wasn't easy.

Thanks, Ted.

Great.

And your next question comes from [Casey Alexander] from Alexander Asset Advisors. You may go ahead, Casey.

Hi, good morning.

Good morning.

First of all, great quarter. But can you kind of, wipe the window for me, and give me an idea of how this quarter would sort of, pro forma versus last year if you took out the consumer business?

Basically it pro forma'd as far as the 35% growth in that core business and taking it out, and was more profitable than we would have been last year.

Okay.

Had we done that. So this was very, very strong that we've replaced a portion of the very low margin. The affinity business was running with 7 --?

... Yes 7/8%.

7/8% margin. And when you are replacing it with 25% margin it takes a lot less dollars. The productivity is improving across the board. We are spending more money, on business development, in business generation initiatives than we were this time last year. But we weren't growing this quickly last year. So we are accelerating that top line.

But that's one of the things we are going to be very careful going forward it's the comps at the revenue line are going to be very difficult. And we are going to make sure that we do what you are asking for as far as pro forma where we would have been had we not had that big consumer relationship.

Yes. In the businesses that you have remaining now, what type of seasonality is there to the business?

In the retail business, there is a fair amount of seasonality as it goes from the late December to late January time period. In the network infrastructure business, there is seasonality. When it gets cold, in most of the parts of the United States, where people are not climbing towers and installing. There is a little bit of seasonality in the government business.

What we are working on though, is making sure that as move into those areas, our business initiatives are more aggressive, and so we can grab market share. In all of our markets, our market share is very low. So we are looking at modulating that seasonality with just grabbing market share.

It almost sounds like they're at such at different points in time that to a certain extent, maybe they are balancing themselves off a little bit?

Absolutely. You take the spring, the network infrastructure, they start building sites. And maybe that's where the accessory business slows a bit. We are hoping though that again, we'll offset that by the new opportunities we bring in. But that's what we found is that due to the diversity, if you go across our product line and go across our markets, there is great diversity. And, our biggest battle cry internally is how do we sure that we continue to reduce the concentration of any one customer, any one product in any one market.

Right. Okay, great, it looks terrific. Congratulations.

Thank you.

[OPERATOR INSTRUCTIONS]

And your next question comes from Mr. [Abraham Field]. I do apologize if I pronounced that wrong sir. You may go ahead.

Hi, it's Abraham Field calling from Claris Capital. Congratulations on a terrific quarter. I was just wondering if you could just give us a little color in terms of what you are anticipating for the next quarter. I know you gave some EPS guidance which was down from this quarter. Could you give us a sense for what you are anticipating from a top-line perspective as well?

Sure. This kind of ties -- part of the answer ties into, a little bit of the seasonality. In this particular quarter the network infrastructure is usually slow. And also that in this particular quarter, if you look at the quarter end we ended on Christmas day. So we ended up with two holidays, well really three with Martin Luther King's day in this particular quarter. So you basically lose almost a week of business.

So we are looking at probably a flat top line, compared to this past quarter with all of those things. And looking at -- that's we are saying we are essentially going to come in to where we were this particular quarter. And then really looking for the first quarter our new fiscal year, to start to dramatically accelerate.

Terrific. We have some other questions, which we will follow-up with you offline.

Okay great.

And at this time sir, you have no further questions.

Okay again, thank you very much. Going forward, hopefully you can sense through this conference call we are all energized and excited, and the momentum of delivering everything from a wireless to a very broad and diverse and expanding base of customers is really accelerating. And we are -- we will continue to remain very focused on our journey of building share value. We appreciate your support and look forward to answering any questions you might have, as this quarter goes on and talking to you next quarter. So, thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.

Thank you.