TESSCO Technologies Inc (TESS) 2007 Q1 法說會逐字稿

Good morning, and welcome to TESSCO Technologies first-quarter earnings conference call. Today's call is being recorded and will be available for audio replay today at 12 PM Eastern standard time. You can access the replay by calling 888-286-8010 or 617-801-6888 and enter confirmation number 80330303. Today's call is also available via webcast at www.TESSCO.com/go/pressroom. 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 am pleased to introduce Robert Barnhill, Chairman, President and Chief Executive Officer and David Young, Senior Vice President and Chief Financial Officer of TESSCO. And we will now turn the conference over to Robert Barnhill. Please go ahead, sir.

Good morning. We started TESSCO's 25th year strong, making great excellent progress on the achievement of our imperatives for this fiscal year. I am very pleased with this quarter's performance, and more importantly the momentum and opportunities that we have developed for delivering reliable revenue and profit growth in the future. We are positioned very well in the exploding world of wireless; strong value proposition, productive operating platform, outstanding leadership and team member talent and financial strength. And as we continue our journey as I said in the past, we are well-positioned and committed to achieving thriving enduring success by growing the value that we deliver to our customers, our suppliers, team members and shareowners.

In the annual report letter I outlined the five imperatives that are critical. We made great progress on each imperative which resulted in earnings per share of $0.43 this quarter. Let me try to highlight the progress we made toward each initiative or each imperative. Imperative number one we said that we were driving to increase quality revenues by selling more customers more products more often. We made excellent progress in this quarter. Core revenues grew 50% compared to last year, and this was driven by a 12% increase in our monthly buyers and their purchases grew 32%, again compared to last year.

Qualified leads in target accounts grew significantly. Also new product offerings, including the major expansion of our WLAN offering through the acquisition of TerraWave and GigaWave were added and expanded. The second imperative is to increase the diversification and reduce concentration risk by reducing the dependence on any one customer, supplier, facility and/or individual. Although our cellular accessory and repair component programs drove a large portion of the growth during this quarter, which David will talk more about in a minute, we continued to be focused on diversifying our overall business. We are less dependent upon the large cellular carrier dominated infrastructure capital expenditures. This has been a program that has been underway for over three plus years, and we are really getting to where we want to be. We are now at a position where much of our growth is coming from product areas where we can truly build demand and seize market share. We moved to a position where our vendors and suppliers are much more diverse, and the growth of these vendor relationships and the proprietary products not only will improve gross margins, but they will reduce the dependency upon any one supplier.

In addition to reduce our operational risks, we are intensely focused on strengthening our analytical based decision processes throughout the organization. We are continuing to build our integrated disaster recovery programs, and we are really focused on team member development and succession planning.

Our third imperative was to grow margins by executing flawlessly with a high degree of productivity. And our net income as a percentage of revenue reached 1.7% compared to less than 1% last year.

Our fourth imperative was to improve returns on assets and equity. Return on assets moved to 5.6% compared to last year's 3.2%. Return on equity was 11%, over 11% compared to 8% last year. We are very happy with cash flow from operations; it was a positive $6.4 million. Now we used 3.8 of that for the initial cash payment for the acquisition of the TerraWave GigaWave, and thus we ended the quarter with a cash balance of $3.6 million and no outstanding borrowings on our evolving line of credit.

And our last imperative was to recruit, retain and develop exceptional leaders and contributors. And today we continue to build on our programs to build the talent that we need today and tomorrow to create and execute on our initiatives. Bottom line, we made great progress on all fronts. So Dave will give you some more of the financial details.

Thanks, Bob. As Bob mentioned, it was another great quarter for TESSCO and I will quickly review some of the highlights. Revenue for the quarter totaled $112 million, which is down 25% compared to the prior year quarter, which is due to the 98% decrease in consumer revenues related to the transition to affinity relationship. But that decline was largely offset by a 50% increase in our commercial and government sales.

Gross profit for the quarter totaled $28 million. Now that is an 8% increase compared to the first-quarter last year. Again, that increase was -- included in that increase was a large decrease, 89% in consumer gross revenues and was offset by the 45% increase in commercial and government's gross profits. Net income for the quarter was $1.9 million or $0.43 per share compared with $1.2 million and $0.29 a share for last year's first quarter.

Within the commercial and government market revenues from the self maintained user, government and reseller channels grew 71% year-over-year, while revenues from the public carrier network operator market showed an 11% decrease for the same period. Commercial revenues in all three of our lines of business increased. Network infrastructure sales and gross profits increased year-over-year by 8% and 9%, respectively, primarily driven by sales of broadband and WLAN products. These increases were largely a result of the acquisition of TerraWave and GigaWave in late April.

Sales in gross profits in mobile devices and accessories to our commercial markets increased year-over-year by 79% and 46%, respectively. Primarily as a result of increased sales of accessory products to carriers and independent retailers. Installations, test and maintenance sales and gross profit increased year-over-year by 100% and 111%, respectively. This significant increase in revenues, gross profits and gross margin was primarily driven by the large sale -- by large sales of our repair components business early in the quarter related again to the expanded major repair component relationship. This unexpectedly strong performance in the quarter -- it was unexpected strong performance in the quarter, and going forward we expect that the revenues and gross profits from this repair components business will not continue at this level. And that they will return to levels more consistent with what we experienced last year.

Our overall gross profit margin was just over 25% this quarter compared to 17.5% the same quarter last year. Last year's first-quarter gross margin was impacted by the high-volume, low margin consumer business. Commercial gross margin decreased slightly to 24.7% compared with 25.5% for the same quarter last year. This overall gross margin decline decreased slightly due to the product mix changes within the mobile devices and accessories line of business related to the large retail relationships that we've established during the second half of last fiscal year. But gross margins in both of the other lines of business increased.

As I briefly mentioned earlier, our acquisition at TerraWave and GigaWave was completed at the end of April, so we had two months of their activity in this first quarter. The first phase of the integration has gone very well, and this new business did contribute positive earnings in the quarter. We are looking forward to further integrating particularly the sales efforts of TerraWave and GigaWave and realizing some considerable synergy in the coming quarters.

Now on to the stock buyback. During the first quarter we continued our stock buyback program, and we purchased about 9000 shares. We continue to believe that the current share price does not accurately reflect the value and future prospects of TESSCO, and we feel that the repurchase of shares when appropriate, is an excellent use of funds to enhance long-term shareholder value while potentially providing increased liquidity to shareowners. Earlier this week our Board of Directors authorized the purchase of an additional 400,000 shares of our common stock as part of this buyback program. With this increase approximately 790,000 shares are now available for repurchase from time to time. In the open market by block purchase or through negotiated transactions or possibly other transactions managed by broker-dealers. As in the past, any purchases are funded from working capital and/or our revolving credit facility. We've set no timetable for the completion of this program.

So to date we've purchased approximately 510,000 shares under the program at a cost of about $5.9 million, and the average price of $11.59 per share. Currently there are approximately 4.2 million shares of our common stock outstanding. So in summary, I am very pleased with our performance and I believe that our focus on the future growth of our core commercial business has never been stronger. We are looking forward to keeping this momentum going and are enthusiastic about the opportunities for the remainder of 2007. I will now turn it back over to Bob to discuss our business outlook.

Thanks, Dave. At this time we expect the positive momentum we saw this quarter to continue in all lines of business with the exception of installation, test and maintenance. As David discussed, repair components business is expected to return to the more of the historical levels and not continue at the level we saw this past quarter. Our current guidance that is in place is $1.20 to $1.40 per share in this fiscal year and considering these results for the first quarter, and our current business outlook, we now believe that earnings will be in the range of $1.35 to $1.55 per share this year.

So with that, we will open it up and try to answer any questions you might have.

(OPERATOR INSTRUCTIONS) Bill Benton, William Blair.

Congratulations on a strong quarter. Just a couple questions. First on the test and maintenance side, that has been strong I guess for two quarters now, exceptionally strong. When you say return to levels more consistent with last year, I mean last year when I look at kind of the mid to upper teens in terms of revenue, is that what you're referring to? And if it were to return to those types of levels, why exactly did some business come in that was not on a recurring basis, or is something else changed there?

No, Bill. There was some non-recurring business early in the quarter related to -- one of our customers got a big contract with one of the national carriers. And that changed some dynamics of our sales to between different parts of the market. So that really was a onetime thing in the beginning of the quarter. But yes, we are referring to -- the fourth quarter is always a pretty strong quarter in that business. So we do expect that to come back. Also coming up, the volumes -- part of what is going to drive that back down to historical levels is some of the pricing has changed, so our volumes will remain strong. But some of the pricing -- there has been pricing pressure so that will bring that down as well.

So I should be thinking kind of mid to upper teens in terms of that business for the next couple quarters at least?

Yes, I think that is probably about right.

Okay, in terms of dollar amounts, right?

Yes.

Okay. And then in terms of the acquired revenue, it sounds like you had two months, should we assume that you reported about $2 million of acquired revenue in infrastructure this quarter?

That would be about their run rate prior to the quarter, so yes, that is about right. We were able to maintain that, and as I said before, we are pleased with the results, but haven't yet realized all the synergies. So yes, it is about that.

Okay, and in terms of -- did that bring along some inventory, as well maybe? Some shift along the balance sheet, that would have been -- any sort of increase on the balance sheet or shifts was probably due to the acquisition more than anything else?

Probably, yes. The spare parts program did increase inventory levels. That inventory growth was not -- some of it was related to the acquisition, but the majority of it was related to spare parts business.

Spare parts business?

Yes.

And in terms of the gross margin trend, how should we think about that? I know you guys were looking at the China sourcing, which I think would particularly impact the mobile and portable margins going forward, and that is where I think we've seen some degradation over the last year or so. How should we think about the gross margins in the mobile and portable business kind of going forward?

I think what happened this quarter was there was a lot of the Bluetooth activity, so that is the higher end accessories that are at a little bit lower margins.

That are not China sourced.

Right, that is OEM products. Right. So the mix of that kind of product and then our aftermarket stuff is going to drive those margins one way or the other. So as that high-end Bluetooth increases, you might see a little bit more margin decline. But we are hoping to be able to offset that decline with more sales of our proprietary products.

And that is really growing, but the Bluetooth is such a high dollar value per unit it kind of hides what is going on underneath the China sourced and proprietary product area. So we feel very good about margins as we go forward with the overall sourcing, the TerraWave product is showing some very attractive margins as our proprietary products. And then when you get beyond a lot of the OEM products we're talking about, we are showing better and better margins in all areas.

I know the infrastructure margins have improved. Is that because of TerraWave and GigaWave sequentially at least a little bit?

Yes, part of that is, yes.

And then on the test and maintenance side if you guys are expecting that to kind of drop-off, obviously before the pick up, the margins were also in these kind of 30, 30%, 31% range. Should there be any change in the margin profile?

No, it may come down a little bit as this -- because some of this IPMs, some of this test and maintenance business with the spare parts component is fee-based, and that was a chunk of this growth this quarter, so it may come down a little bit. But it should remain relatively stable.

In most cases where prices have either gone down or gone up, we've maintained our margin, and because when prices go down our costs get better, and prices go up we cover ourselves very well. Especially in the network infrastructure, we've really been looking at major surcharges due to copper and some of the other materials which have been significant. But we've done a very good job in terms of covering ourselves on those surcharges and maintaining margins.

Just a quick follow-up on that. The gross margin on the mobile side, would you expect to be able to maintain kind of 20% margins in there, or is it just too hard to say with the mix uncertainty there?

Yes, I think they will stay right in that zone and hopefully as the mix of our proprietary products grows you might see some upward movement.

Okay, great guys. Thanks again. Nice quarter.

(OPERATOR INSTRUCTIONS) There are no additional questions at this time.

Thank you, and we feel very good about this quarter. As I mentioned, there is a lot of momentum, a lot of energy, a lot of excitement. And when you see the results demonstrated this quarter, they really reflect the effectiveness of the strategies that we've created and we are executing. As we are your total resource for wireless to this broad and diverse customer base, we truly believe at this point that TESSCO will continue to show excellent revenue growth over the long run. And that our initiatives for operational excellence are driving productivity, which should allow us to grow earnings at an even faster rate than our revenue growth. So we really look forward to this quarter that we're in today and the quarters behind and sharing our successes with you as we go forward.

So thank you very much for your support, and we are always available for questions if anybody has any as we move forward. So thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.