TESSCO Technologies Inc (TESS) 2007 Q4 法說會逐字稿

Good morning, and welcome to TESSCO Technologies fourth quarter earnings conference call. Today's call is being recorded, and will be available for audio replay today at 12:00 p.m. Eastern time. You can access the replay by calling 888-286-8010 or 617-801-6888 and entering confirmation number 20585347. Today's call is also available via webcast at www.tessco.com/go/pressroom.

As with 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 Officer, and David Young, Senior Vice President and Chief Financial Officer of TESSCO, and will now turn the conference over to Robert Barnhill. Please go ahead, sir.

Good morning. Twenty-five years ago we began our journey as a two-way radio distributor startup. This fiscal year, which ended April 1, our 25th year, was extraordinary, with excellent financial results and outstanding advancement in our strategic positioning as your total source for virtually everything wireless.

During the year, we continued to diversify our business from reliance on the large contract relationships and from the public carrier network infrastructure build to selling a broad and deep product offering to many diverse customers. Today our product offering spans all wireless technologies to serve the exploding voice, data, video applications and the gateway to the -- the wireless gateway to the network.

We're doing this to the public carriers, self-maintained users, government agencies, retailers and resellers. Today we're selling over 30,000 different product items that we're configuring into solutions that we're selling to over 8,600 different commercial and government entities each and every month. During the year, we continued to strengthen and expand our operating platform to deliver what, where and when our customers require with extremely high reliability and productivity. Today we have the offerings and the capability to configure, fulfill and deliver our solutions profitably.

As we reflect on our successes, we are very committed to accelerating the speed of the execution of our initiatives to grow monthly buyers and the number of product categories they purchase and continuing to improve our productivity and profitability, but at a faster rate. The importance of accelerating these imperatives was highlighted in the fourth quarter and even into the first four weeks of our new fiscal year, as our growth in buyers and the growth in their dollars -- of their spend, the percentage of their spend, did not offset the overall industry slowness we experienced. And, as a result, the fourth quarter revenues, while up 32% over last year, were sequentially down compared to the third quarter, and we ended our series of 11 consecutive quarters of commercial revenue growth.

As we enter our new fiscal year, our goal is to leverage and scale on our market and customer successes and our operational strength. Our focus is to build relationships with a vast number of builders and users of wireless and to be known as the total source, delivering what you need when and where you need it. The dramatic expansion of our industry recognition and market share has just begun. We even say internally that as we move beyond our 25th year, "You ain't seen nothin' yet."

So now I'd like to just go through our various goals that we've been laying out each and every month and each and every quarter, and these are what we consider to be our success drivers and critical to achieving the thriving, enduring success and continued growth in earnings and shareowner value.

First is to increase quality revenues, selling more customers more product categories more often. Let's first compare the year over last year. Monthly buyers grew 12%, and the purchases per buyer, when you exclude our large relationship, grew 5%, but the average product categories continued to stay flat. Commercial revenues increased 43%. Now, for the quarter, monthly buyers grew 11%, but we saw, when you again exclude the large major relationship, the purchases per buyer decreased 5%, which was the challenge that we've been witnessing in this particular quarter -- or last quarter and this particular quarter. Total revenues increased 32%.

So our goal going forward is that how do we drive the number of buyers faster? And we drive buyers by repeat, getting the same buyers to buy one month over the next, and then the new customer relationships. But our biggest opportunity is the market share of that spend with a given customer of getting more of the product category they're buying from us, and then more product categories to sell into them.

The imperative, too, is to increase the diversification and reduce concentration risk. Today our largest customer, a large tier cellular carrier, represents 22% of our business. And we consider this business to be diverse because of the number of SKUs we sell and the number of outlets and how we're handling this particular relationship.

This is very important to kind of look at the results that we've enjoyed over the past couple of years. If you go back three years ago, we had 20% of our business was coming from the network infrastructure carriers and 41% of our business was from one particular customer that we have transitioned. And today we are at that 22%, and today we're only at 13% for the network infrastructure. So great progress has been made in reducing the concentration. We still have more to go.

What's also very interesting as far as diversification is the TESSCO proprietary products that we've been talking about. These are the products that TESSCO designs, specs and then sources from contract manufacturers throughout the world, primarily from China at this particular point. Two years ago, or last year, rather, the volume of these products represented 4% of total revenues, and today it's up over 10% of total revenues, obviously on a bigger number. It's also important to note that the gross profit from these products in the last quarter was 45% of revenue, so very handsome gross profit. And so as we look at this year, the business grew 2.4 times, and we're looking for continued expansion in our proprietary products as we go forward.

Growing margins is a major imperative. The gross margin moved this year from 21.6% to 24%, and again this was driven primarily by the transition of the large, low margin affinity relationship that occurred in the second half of last quarter. Operating expenses as a result -- as a percent of gross profit declined from 92% to 90% this year, so we're driving productivity at the operating side. And then the net income after tax went from 1.1% last year to 1.4%. In this particular quarter, compared to last fourth quarter, the margin came down a bit because of mix, and David will talk more about that in a few minutes, and operating expense as a percent of gross profit again declined -- or went up slightly as we moved into the revenues coming down a bit.

So the opportunity, again, we have as we move forward, is a mix. How do we drive lower cost? How do we make sure we continue to maximize our pricing opportunities? And then obviously the operating productivity that we continue to drive.

Improving returns is our fourth imperative. This year we made extraordinary increases in our returns. The return on average assets went from 3.6% to 5.6. Return on average equity went from 8% to 12%. And a lot of that was driven by the stock purchase that David will talk about, but also from our -- just our overall profitability.

Cash flow was just extraordinary. We went from 3.8% cash from -- or $3.3 million from operations to $28 million, and our year-end cash balance went from $2.3 to $4.2 million while total debt decreased, and that was all on top of investing $17.7 million for the stock repurchase that we did this past year.

The fifth imperative is to recruit, train and develop exceptional leaders and contributors, and we ended the year with an extraordinary team of teams committed and prepared to continue to build the value to our customers, partners and to you, our shareowners. This coming year we'll be working on continuing to make sure that our operations is solid and we have the talent to contribute -- to continue to deliver the operating excellence that we have. But there'll be a major focus on expanding our sales and our product management talent.

So, bottom line, it was a great year. We really increased shareowner value. Commercial revenues up 43%, earnings per share up 46%, stock price after the split increased from $12 to over $27. And in the fourth quarter we still showed the 32%, and the earnings per share increased 65% over the fourth quarter, to $0.28. So it was a great year, and I'll let David give you some of the more details of our financial performance.

David?

Great. Thanks, Bob.

And, as Bob mentioned, it really was an extraordinary year for TESSCO, and I'll hit some of the highlights.

So revenues for the year totaled $492 million, a 3% increase over last year. And that, again, includes a 95% decrease in consumer revenues related to the transitioned affinity relationship, which was completely offset by a 43% increase in commercial sales.

Gross profits for the year totaled $121 million. That's an 18% increase. And, again, that's a 38% increase in commercial, which was somewhat offset by the 82% decrease in consumer gross profit.

Included in SG&A this year was stock compensation expense related to our performance share units, some restricted stock and stock options. The amount totals $2.1 million this year, or $0.21 a share, compared to $686,000 last year, or $0.07 a share.

Net income for '07 was $7 million, or $1.17 per share. That's compared to $5.1 million, or $0.80 per share, last year.

So within the commercial market, revenues from the self-maintained user, government and resellers channel grew 57% year over year, while revenues in the difficult public carrier network operator market declined by 9%. Commercial revenues in all three of our lines of business increased year over year. Network infrastructure, sales and gross profits increased by 11 and 16%, respectively. This growth was largely driven by sales of WLAN products as well as radio frequency products. The increases in WLAN were largely a result of the acquisition of TerraWave and GigaWave that we did back in April '06.

Mobile devices and accessory sales and gross profits to our commercial markets increased by 91% and 78%, respectively. That's primarily as a result of the increased sales of accessory products to carrier and independent resale customers. Mobile device and accessory sales in the consumer market, again, decreased 95% year over year, while gross profits decreased by 82%, both, again, as a result of transitioned affinity relationship.

Installation, test and maintenance sales and gross profits increased by 30% and 24%, respectively. This growth was largely driven by sales of the repair components business, especially during the first six months of the fiscal year.

As Bob said, we're really, really pleased with our cash flows for the year. Cash from operations reached $28 million this year, and during the fourth quarter, if you look at the balance sheet, you'll see a large decrease in inventory. And so during the fourth quarter, we extended and amended our repair component business relationship with a large OEM. So what we do that hasn't changed -- we continue to manage all the marketing, sales and distribution for that OEM. But now we maintain the inventory on a consigned basis. So this switch to consigned inventory, combined with our ongoing inventory rationalization initiative, as well as really strong cash collections, drove the significantly increased cash flows during the year. So we're really, really proud of that and really focused on continuing those trends.

And then to quickly look at the results for the fourth quarter, revenues for the quarter totaled $127 million. That's a 32% increase over the prior year. Gross profits totaled $30 million, a 23% increase over the prior year. And net income for the quarter was $1.6 million, or $0.28 per share, compared to $1.1 million and $0.17 per share last year.

So now on to the stock activity. During the fourth quarter, we did not repurchase any shares under our stock buyback program. But as of the end of the year we had bought 1.95 million -- 1.95 million shares had been authorized, 1.8 million had been repurchased. So we've got about 150,000 shares remaining available for repurchase. The total cost of the program to date has been $23.5 million. That's about $13 -- a little over $13 per share on a split adjusted basis. On April -- at the end of the quarter, we had approximately 5.3 million shares outstanding.

So as we look into '08, I'm really excited about having some clean comps as well as all this other stuff. But I'll never have to say "the transitioned affinity business" again. So really looking forward to that. And we're just -- we're really pleased with our '07 performance and the balance sheet and the platform that we've built to fuel our business going forward. It really was an outstanding year.

I'll turn it back to Bob now for our business outlook.

Thanks, Dave.

Based upon our commitment to leverage our foundation and successes, and also with the recognition of the slowness we experienced in the fourth quarter and its continuation in the first four weeks -- and when I use the word "slowness" it's that we're really looking at the slowness in terms of the purchase per customer. If you look, we continue to grow our customers, but their spend has reduced. And we see the same amount of transactions, but the spend per transaction is what has us focused right now in terms of how do we move that spend percentage up from a given customer.

So based upon all that is that we're giving the guidance of $1.25 to $1.55 for this coming fiscal year. And obviously the guidance assumes that the trends we're experiencing will pick up. And also we well recognize that it's a wide range. And it really reflects our possibilities as far as the industry growth continuing to the pace we saw in the first part of last fiscal year and the accelerated execution of our growth and productivity initiatives.

We're very confident in our plan. We're very confident in the opportunities we have. And execution and speed of execution of our plan is key as we go forward.

So, with that having been said, I'd now turn it over to any questions you might have.

Thank you.

[OPERATOR INSTRUCTIONS]

And your first question is from the line of Jonathan Ho, with William Blair. Please proceed.

Hi, guys. I just have a couple of questions. First, with regard to the gross margins in the test and maintenance segment, when we take a look at these margins, we had kind of been expecting a return to the historic levels, and we were just wondering, can you give us kind of a sense of timing for that, or what's been happening, just some additional color in terms of what's been happening on the OGM side for T&M?

Yes, sure. That -- the gross margin in that line of business is really difficult for us to forecast because of this new arrangement. And it's really dependent upon the mix of product. So the way -- just maybe this'll help -- the way that we look at this is really more on a dollar standpoint, gross profit dollars. And we expect that number to stay about where it is right now for that test and -- for the repair components business. But the margin is really difficult to forecast. I think that looking forward, I wouldn't expect it to move a lot from where it is, but you're going to have some noise going forward.

Also, the other part, as we grow the tools and shop supplies, the margin there is very handsome, and it'll start to bring it up, whereas the margin on test equipment is relatively low. So you definitely, as David says, we really focus on the gross profit line as far as growing that, and there will be some dance in terms of the margins from the revenue to the gross profit side.

I see. I see. Just stepping back and taking a look at the overall gross margin, one question that we had was, was there any seasonality effect that affected this quarter? And also when can we kind of expect additional improvements coming out of the proprietary resourcing to further impact the gross margins? I mean, given that you guys said that it's 45%, it's substantially higher than the corporate average. And so just looking for some trends here.

Okay. Obviously the first quarter you had a lot of seasonality baked in. One, we had a miserable weather quarter. And from a -- from climbing towers to being on rooftops, from our -- on our network side, there was some slowdown there.

Then the biggest seasonality is obviously in the cellular world. And fourth quarter is always big because of the holidays, and then fourth quarter is always slow. And, but to give you some -- AT&T, which obviously represents the large opportunity and the large relationship we have, their subscriber ads were 50% down over fourth quarter in the first quarter. Verizon is an example that we don't do much with. Their subscriber ads were down 25% in the first quarter over the second quarter.

So it's -- then also as you look at the mix of product in the gross margins, we continue to sell a large percentage as Bluetooth at the present time, and the Bluetooth margin is low compared to the proprietary products. We have major initiatives on the Bluetooth -- I mean, excuse me, the proprietary products.

One of the things that we're moving into, and it'll be a part of our capital, which will not be that great, but we are expanding our manufacturing, assembly and packaging processing to allow us to do more custom packaging for customers, but then more importantly to continue to handle the proprietary products that we're expecting a major increase as we move into the fiscal year.

So all that being said is between all the initiatives that we are looking at, between purchasing proprietary products, different product mix, we're looking to improve our margins as we move into this fiscal year.

Fantastic. Can you give us a little bit of additional color in terms of the visibility that you guys have in terms of causing the guidance to be a little bit lower? I know you had kind of given a wide range in the different scenarios. Maybe just a little bit of color on how you see that playing out.

Our pipeline looks very good. But at the same is that we're seeing, as we mentioned in the fourth -- four weeks into the quarter, we haven't seen the nose of the plane really pick up. So we are being conservative. We are being cautious. And we wanted to communicate that we have our work cut out for us as we look at this particular quarter, but we are still extraordinarily confident with the opportunities we have in place.

Fantastic. The last question that I have is, in terms of the iPhone and the opportunity that's there, can you give us a little bit of color in terms of what you see as an opportunity?

Absolutely. First of all, the iPhone, to us, and to many others, is really a symbol of what's happening in our industry in terms of the total conversions that we're seeing from voice to data and to video, and the ability to download music and to stream video, and this all takes that wireless gateway to the network we've been talking about.

As far as the iPhone is concerned, it's still priced at a premium level. It's going to be very interesting to see what the adoption rate is. But we have accessory products in development right now that we will be able to have when the product rolls out. And, again, the relationship we have with AT&T, which will be the exclusive provider, should play into that quite well.

But it's -- in terms of -- I don't view it as being a step function, if you will. It's going to be attractive business, but, more importantly, it's the symbol and the symptom of all the new exciting product that is coming into this marketplace, and it's going to drive the accessory side as well as the network side and all the wireless technologies we're involved in.

Fantastic. Thank you, guys.

Thanks, Jonathan.

Thank you.

[OPERATOR INSTRUCTIONS]

And there are no further questions in the queue, gentlemen.

Great. Again, we're always available for questions if any of you have questions as we go forward. But in closing, it was just a great year, and we're very pleased and energized. And as we enter the new year, we're dedicated and focused on the imperatives and initiatives that we have in place and we believe will dramatically increase, as we've been saying throughout this whole conference call, our base of monthly purchasing customers and the breadth and dollars of purchases that they make on an average month, and our overall productivity. And thus that will reduce -- or increase revenues and profits.

We have the offer. We're involved, as I said, in every technology from two-way to cellular to WiFi to WiMAX. We've got the network infrastructure, from cellular to wireless gateway to the Internet and to the internal network. We've got the mobile devices and accessories for the subscriber and the user device. And then we've got the installation, test, maintenance and training to make it all work. And then we've got the capacity, the capability, and, as I continue to mention, is execution and speed of execution of our initiatives is the major opportunity that we have.

So I'd like to take this opportunity to thank our customers, thank our manufacturers, our professionals, and just an incredible team of teams that we have here at TESSCO, and to thank you, our shareowners, for your continued support and contribution.

So we'll talk to you next quarter. It's going to be a great quarter. And we look forward to speaking with you either before or in 90 days. Thank you.

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