TESSCO Technologies Inc (TESS) 2007 Q3 法說會逐字稿

Good morning and welcome to TESSCO Technologies' third-quarter earnings conference call. Today's call is being recorded and will be available for audio replay today at 12 PM Eastern time. You can access the replay by calling 888-286-8010 or 617-801-6888 and entering confirmation number 457 77970. Today's call is 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. I would now like to turn the call over to Robert Barnhill. Please go ahead, Sir.

Good morning. We had a outstanding quarter on many fronts. Our earnings grew 82% on a 42% revenue growth over last year's third quarter. Diluted earnings per share were $0.31 compared to $0.17 last year, all adjusted for the 3-for-2 stock split that we did last quarter.

What I'd like to do now is just go through and update you on the imperatives that we've outlined at the beginning of our fiscal year and kind of track our progress. First imperative is to increase quality revenues by selling more commercial and government customers more product categories (technical difficulties).

This was our 11th consecutive quarter (technical difficulties) financial commercial revenue growth. Total revenues grew 42% as we mentioned and it was driven by a 11% increase in monthly buyers and a 35% increase in purchases per customer.

Our second imperative is to continue to increase our diversification and reduce concentration. All of our products continue to drive all of our cellular accessories, repair components over last year and experience strong growth in the infrastructure as well as value-added resellers, technicians. So we continue to diversify amongst our customers. Sold 8500 different customers over 15,000 different items.

It is also interesting to note that the large carrier-dominated network infrastructure business has now only 14% of our total revenues, compared to 22% last year and over 40% just five years ago. We are also diversifying into our proprietary products which now are starting to become a substantial portion of our business.

Third imperative is to grow margins by executing flawlessly with high productivity. All of our gross margins increased with the exception of the insulation of test maintenance, primarily the repair parts, which David will address more in just a minute.

Our operating expenses as a percent of revenue decreased to 22% compared to 23% last year. And then our earnings, net earnings after-tax reached 1.3% compared to 1.2% last year. Our returns, we went on average assets of 4.9% compared to 3.6% last year; and return on average equity reached 13% compared to 7% which was then driven by 1., our performance but also our stock buyback program.

This imperative is to recruit, retain and develop exceptional leaders and contributors. Our business plan requires the flawless execution of a growing number of initiatives; and we require talent. We must hire right, and we must hire the best, and we must develop their skills and we are continuing to develop the programs that can bring us this talent that we need.

So what I'd like to do now is let David give you some more of the financial results and then I will come back and give you the guidance for the coming quarter.

Thanks Bob. As Bob mentioned, it was really another great quarter for us here at TESSCO. I will review quickly some highlights. And it is important to note that this is the first quarter we have had in quite a while where our revenue comparables are meaningful. There was no business from the transition consumer affinity relationship in our third quarter last year.

So this discussion should be a little more straightforward than in the past.

Revenues for the quarter totaled $135 million, a 42% increase over the prior year quarter. This was due to a 43% increase in commercial and government revenues, which was minimally offset by a small decrease in consumer revenues.

Gross profit for the quarter totaled 33 million, an increase of 37% over the prior year quarter. That is due to a 41% increase in commercial and government gross profits. Partially offset by a 38% decrease in the consumer gross profits.

Net income for the quarter was $1.8 million or $0.31 per diluted share compared with $1.1 million or $0.17 per diluted share for the third quarter of last fiscal year. These per share numbers all account for the 3-for-2 stock split in the form of the stock dividend that we completed in November 2006.

Within the commercial and government market, third-quarter revenues from self-maintained user, government, and reseller channels grew 58% year-over-year while revenues from the public carrier and network operator market showed a 7% decrease for the same period. Commercial revenues in all three of our lines of business increased year-over-year. Network infrastructure sales and gross profits increased in the third quarter year-over-year by 7 and 15%, respectively. That is primarily driven by sales of WiLAN products and of radio frequency products. The increases in WiLAN were largely driven by the TeraWave and GigaWave, the acquisition that we did last April.

This increase in the WiLAN business has also fueled the improved gross margins in this line of business, as many of those sales relate to higher margins of proprietary products.

Both devices and accessory products sales and gross profits in our commercial and government market increased year-over-year in the third quarter by 92% and 94%, respectively. This very strong growth is primarily the result of increased sales of accessory products to carrier and independent retail customers. We have been successful in this area in increasing proprietary products sold into these channels which has helped increase our margins here.

Mobile devices and accessory products sales and gross profit in our consumer market decreased 9% and 38%, respectively, as compared to the same quarter last year. Our installation test and maintenance product sales and gross profits increased year-over-year by 40% and 10%, respectively, primarily driven by sales and repair components related to the major repair components relationships that we have. And as we discussed last quarter we expected that revenues and gross profits from sales of these repair components would not continue in the third and fourth quarters at the levels we experienced in the first six months of the fiscal year. Although gross profits did decline consistent with our expectations, revenues were higher than we expected because of a mix where we accounted for more of those sales on a gross basis versus a net basis.

Just to quickly highlights results for the nine months -- for the first nine months of the fiscal year, revenues totaled $365 million. That is down 4% over the first nine months of last year. Our consumer revenues have decreased 96% related to the transition of the Affinity relationship but that decrease was largely offset by a 47% increase in commercial and government sales. Notwithstanding the decrease in revenues, total gross profits for the first nine months grew by 16% over the prior year; and gross profits in commercial and consumer -- or commercial and government, excuse me -- increased 43% while gross profits from consumers decreased 86%.

And finally net income for the first nine months was $5.5 million or $0.89 a share compared to $4.1 million or $0.63 per share for the same period last year. And, again, all these per share numbers account for the 3-for-2 stock split.

Now on to the stock activity. The end of November, we issued a stock dividend in order to affect the 3-for-2 stock split. The record date was November 15th and the additional shares were actually issued on November 29th. We are really excited about this transaction and we think that it was a real positive for our shareholders.

Also during the quarter and prior to the stock split, we repurchased 54,000 shares of stock, at approximately $1.7 million. No shares were repurchased during the quarter after the stock split, and all purchases were funded through cash from operations and borrowings under our revolving credit facility. On a split-adjusted basis, we now have up to 155,000 shares that are available for repurchase under our program. The total cost of the buybacks since its inception is about $23.5 million or just over $13 a share on a split-adjusted basis. At the end of the quarter we had approximately 5.3 million shares outstanding.

So in summary of all this, I'm really pleased with our performance this quarter and during the first nine months and I really believe we are positioning ourselves well, as we continue to strive to continually enhance shareholder value. I'll turn it back to Bob now for our business outlook.

Thanks, Dave.

Our previous guidance was for earnings to be for this fiscal year, which end in -- the end of March to be in the $1.07 to $1.17 range; and based upon our nine months earnings and our current outlook, we are raising that guidance for the entire fiscal year to $1.15 to $1.22.

Now, TESSCO has positioned itself as your total source for wireless in an ever-expanding and exciting technology-driven market. The convergence of data, audio, video -- all transmitted through the air -- is creating incredible solutions for business and pleasure.

The recent iPhone announcement by Apple and Cingular is just one example and we already have proprietary accessory products under development to coincide with the summer launch of a wireless phone capable of playing stereo music.

Just want to summarize what we know are the drivers of our revenue opportunity. One, just the broadband technology and applications. Wi-Fi, WiMax, Bluetooth, [cellular] -- all of these are driving opportunities for TESSCO. Second is just the carrier CapEx as they expand their cellular systems and go into the WiMax systems.

Third is the subscribers that are on the public networks. Subscribers continue to grow but, more importantly, they continue to change their phones more often, thus driving the demands for accessories. We are seeing a tremendous growth in what we call the private enterprise systems at the railroads and the enterprise, drive an opportunity for us. Government wireless systems, the Homeland Security and with our GSA contracts we are going into these markets.

Then all of this product -- whether it be on the infrastructure side or the mobile and portable side -- drive the requirement for installation test and maintenance and also for training and knowledge.

Lastly, as we all know in our daily lives that our -- we want immediate availability and delivery. But we still want a very productive supply chain and lowest total cost. And our value proposition of being the source for the product, plus the supply chain solution, is really allowing customers to have what and where and when needed at the lowest total cost. This is becoming increasingly compelling to consumers, resellers, corporations, governments and carriers.

Our product solution continues to expand with all the various technology and the world-class choices from major brands as well as TESSCO proprietary brands. And naturally supporting this market opportunity is a very strong operating system that allows us to provide the knowledge, product configuration and delivery, and the control systems on a very vast scale with increasing productivity and profitability.

As we finish our 25th year, we believe we are well-positioned in this exciting world of wireless to continue to grow earnings and shareowner value over the months and years to come. So with that I will open it up for any questions.

(OPERATOR INSTRUCTIONS) Bill Benton with William Blair.

Good morning and congratulations on this current quarter. Just a couple of quick ones. The mobile and portable margins -- and I apologize if I missed this, but they were up big sequentially. And I know you talked about more on the test and maintenance side, the margins, more business being done on a gross rather than a net basis. So could you just walk me through what might be happening with those two items? What may be driving those two?

Yes. I think that on the mobile devices and accessory side that margin has come up really because we have been able to introduce our proprietary products into more of our channels, and we have had some success there. So that's something we are really focused on; and I think we hope that kind of margin improvement can continue.

On the [insulation] test and maintenance, this quarter is lower than I think what we were expecting going forward. There were some things that happened -- kind of one-time things this quarter -- where I think that from a gross profit dollar standpoint we are about where we expected to be, but the margins were lower. I think going forward we will see those margins get back to where they typically have been.

Why were you doing more business on a gross basis than a net basis?

It's just a mix of who we are selling to.

Okay. Then in terms of the proprietary products, there was -- unless I'm doing my calculation wrong -- it looks like there was a 340 basis point sequential increase in mobile gross margins. So just trying to understand what percentage of the business may be that this proprietary products made up in the third quarter that may have increased, relative to the second quarter in terms of mix.

It is also overall product mix too, is that the -- a lot of the Bluetooth headsets even on the branded products, we have diversified the product portfolio that our customers are buying and then also the proprietary products that are really starting to kick in. So it is a mix of type of product as well as TESSCO proprietary products.

And could you just give us any sort of color in terms of what kind of products might have higher margins and what percentage of the business is proprietary now?

Right now, the proprietary business is still under 10% of our total revenues. But it is getting closer to 10%. And I think, primarily, right now it's in the mobile devices and accessories line. But then we've also got this stuff that we have done with WiLAN through the acquisition.

Right and then the higher margin may be accessory products that helped this quarter?

That's right.

I'm just curious what other -- beyond the proprietary products, what other types of products might be in that margin in the quarter? Is that -- I guess what I'm trying to get at is there a seasonal aspect to that that I should be thinking about, going forward, that might not benefit future quarters in terms of the mobile portable margins?

It is not really seasonal. It's just the expansion of the product portfolio and also the expansion of customers. If it were driving in to more and more of the independent channel and while the major carriers are still very important and growing nicely is that we are expanding into the other channels.

Then just in terms of the business being I think you said the AR was up because of the back half. It got quite a bit stronger in the business. Can you talk to maybe why the back half of the quarter might have been stronger and how that has sustained itself toward the early part of this year?

Yes. I think that typically right around the holiday season, especially in the accessories business, that heats up right before the end of the year. So that's primarily where it was. But we also saw some of our training initiatives really took off late in the quarter. December was a really strong quarter for that, for month for that. So it was really -- there were certain pockets of it but it was pretty much across the board, I think.

We have seen so far, I think, that our fourth fiscal quarter included the week between Christmas and New Year's, which is always a little bit soft. But since the beginning of the year we have seen some pretty good continuation.

In terms of the -- can you talk to the revenue contribution from Tera and Giga? Is that still -- I'm doing this off the back of -- the top of my head. Was it about 2.5 million a quarter?

Roughly. Yes.

So that was kind of consistent? Should we think about that this quarter?

Yes. This quarter, this third quarter, was their best quarter. They've really started to -- we are starting to really see some synergies involved here and between our customers and their product offering and vice versa. So I think that we are really starting to see that number pick up. But it is still a relatively small amount but it has got some nice growth.

And just for everybody's benefit is the TeraWave and GigaWave was the acquisition we did seven, eight months ago and TeraWave is proprietary products in the WiLAN space; and then GigaWave is the training company that is Cisco's primary wireless training. And so as David said we are really starting to get the synergisms now with the TESSCO marketing and sales machine of taking their products and services to the market.

Thanks, guys, and congratulations, again.

Thank you.

Thanks, Bill.

(OPERATOR INSTRUCTIONS) Andrew Spinola from Needham & Co.

Thanks. Good morning. Just wanted to follow up on some of those questions. Gross margin for the fourth quarter. I guess you are essentially implying that there were some one-time items that impacted [insulation]. Would it be reasonable to expect the gross margin to tick up a little bit and the fourth quarter? It's embedded in your guidance.

Yes.

One last simple question, actually. I'm just looking at my model and looking at the tax rate. And it seems to have come down in fiscal '07 versus fiscal '06 and wondering where that's trending and what you think it is for fiscal '07 as a whole?

Yes. I think that our tax rate and effective rate will be probably for the year close to 38%. It's just we've had some permanent differences and some other things that have kind of fallen off [suggests] taking all of it down this quarter but I think 38 going forward (technical difficulties) we've all got FIN 48 on our mind for next year so we will see. See what that does to us, but -- .

Thanks. That's helpful. Congratulations.

There are no further audio questions at this time.

All right. In closing, we're obviously very pleased with the results that we demonstrated this quarter. And they really reflect the effectiveness of the strategies that we've created and are executing; and thus we are building a lot of momentum for delivering the reliable revenue and profit growth as we go forward. As I mentioned earlier as we continue our journey, we are very well-positioned and we are very committed to achieving, driving enduring success by growing the value we deliver to our customers, our suppliers, our team members and shareowners.

I look forward to the final quarter in this fiscal year. On the next call, we will be laying out our new imperatives for the coming fiscal year, as well as giving the annual guidance as we have done in the past. So sincerely appreciate your support and look forward to reporting as we go along. Have a great day.

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