TESSCO Technologies Inc (TESS) 2008 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 and entering confirmation number 65747359. 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. Also in order to facilitate dialogue Ted Moreau of The Cardinal Group, TESSCO's retained Investor Relations consultant, will also join the call during the question answer period.

I will now turn the conference over to Robert Barnhill. Please go ahead, sir.

Thank you and good morning. I am very pleased with the overall results of this quarter. In a difficult economy we were able to achieve earnings that were comparable to last year, and sequential increases in margins and in earnings. Our plan is built around continued softness in our markets into the new fiscal year. The plan focuses on reducing the risk of concentration, growing monthly purchasing customers, cross-sell and productivity margins and managing expenses at all levels.

Despite the expected overall market slowness are opportunities to expand as the convergence of wireless voice, information and video networks and systems accelerate. TESSCO's value proposition and capabilities to serve existing and new customers and manufacturers is strong. We believe we're in a solid position to prevail in a weak economy, and to achieve accelerated revenue and profit growth when the economy strengthens.

Dave Young will give you details of the quarter. And then we will come up with some overview going forward.

Good morning. I will briefly go through the highlights of the quarter. It was a very strong quarter, and we're happy and pleased to report these results. Consolidated revenues were up 2% sequentially and 1% over last year's quarter. Consolidated gross profits were up 6% sequentially, but down 7.5% compared to last year's quarter. Gross margin was 22.4% compared to 21.6% in the previous quarter and 24.4% in last year's quarter. We're very pleased with the sequential gross margin growth.

We took some pricing and margin improvement actions during the third quarter that we expect to continue deliver improved margins in our core commercial business in the coming quarters. The year-over-year reduction in the margins is largely due to the change in our repair components business and product mix related to sales to our accessory retail Tier 1 carrier. Not including these two arrangements, our gross margin was 24% in the third quarter, compared to 23.8% in the second quarter and 24.1% in the third quarter of last year.

Operating expenses totaled $28 million, a 7% decrease from last year's quarter. To ensure that we would reach similar profitability levels as last year, we nearly offset the entire year-over-year gross profit decline with operating expense reductions, mostly coming from decreased marketing and sales promotions, freight expenses and bonus accruals. Per our plan we did however increase our people count, and therefore compensation in our business generation and fulfillment functions did increase. Expenses were up just 1% from last quarter.

Net income totaled $1.5 million, $0.29 per share, compared with $700,000 and $0.13 in the second quarter, and $1.8 million or $0.31 in last year's third quarter. Now on to the balance sheet.

Our inventory has increased since the beginning of the fiscal year, and we have purposely done this to better meet the availability needs of our customers. Over the past several quarters we have seen customers taking inventory of the channel. This does play very well into our value proposition, as availability is more important than ever. But it does require us to have the products our customers need when they need it.

Inventory turns have improved compared to last year's third quarter to 8% from -- 8 turns to 6.8 turns. That is driven largely by the repair components business with the large OEMs changing to its consignment model late last year.

Our DSOs increased from 33 to 36, partially due to the timing of sales and collections during the various quarters. At quarter end our net cash balance was $1.3 million, and the balance outstanding on our revolving line of credit was $6.1 million.

Now to give a little more detail from a line of business perspective, network infrastructure revenues totaled $45 million -- that is a decrease of less than 1% from last year's quarter -- as a result of lower sales of broadband product, partially offset by higher sales of RF propagation and site support product, which also carry higher gross margins than the broadband product. Accordingly, gross margin in this line of business increased from 24.2% to 25.8%. Buyers were essentially flat and purchases per buyer declined very slightly. Revenues and gross profits were up 6% and 9%, respectively, compared to the second quarter.

In our Mobile Devices and Accessories revenues totaled $69 million. That is an increase of 6% over the prior year quarter as a result of increases in sales of cellular accessories to resellers and users. The soft holiday season and the change in product mix we saw in our retail channel, including the national Tier 1 carrier, caused gross profit to decline in this line of business. We did grow the number of commercial customers in this line by about 4% compared to last year, but their monthly purchases decreased by 11%.

Compared with the second quarter, Mobile Devices and Accessories revenues increased 2% and gross profits increased by 6%. Installation, Test and Maintenance revenues totaled $22 million. That is a 10% decrease from last year's quarter. Gross profit margin decreased from 21.8 -- to 21.8 from 24.7% as a result of the restructure relationship of the repair and components business as that business returned to historical levels, as we had previously advised.

The gross margin for the non repair portion of this line was 22.9% compared to 22.6. Buyers in this line of business were essentially flat, but their purchases did decrease by about 10%, again related to the restructure in repair and components relationship. Compared to the second quarter, Installation, Test and Maintenance revenues decreased 2% and gross profits decreased 1%.

Now on to the stock buyback. During the quarter we did not buy back any shares of common stock under the buyback program. Since the plan's inception in 2003, we have purchased 2.1 million shares at a total cost of about $28 million, or $13.20 per share. Under the current authorization we have about 255,000 shares available for repurchase. We expect to continue to buy back shares if and when we feel it is appropriate. Any purchases will continue to be funded from working capital or our credit facility, and no timetable has been set for the completion of this program. At the end of the quarter we had about 5.2 million shares of common stock outstanding.

Again just a very strong quarter. We are pleased with these results. We think we have laid some good groundwork for the coming quarters. And I'm going to turn it over to Bob now to discuss our business outlook.

The nature of our business is that we typically ship products within several weeks after booking the order, so this lack of an order backlog makes it inherently difficult to forecast future results. Given this and the market trends we continue to experience, we're going to maintain our guidance that we have given in the past of $0.63 to $0.73 for the fiscal year which ends in March 30, 2008.

What I would like to do now is just open it up for questions and see whether we can give you some more insight in terms of the quarter and what we see going forward.

(OPERATOR INSTRUCTIONS). Jonathan Ho, William Blair.

Can you guys talk a little bit about maybe the impact of the economy on the mobile and portable division and some of the trends that you're seeing there?

Sure. We were going pretty strong up until mid-December, and then it was like the lights went out for us with our channels. We think it was -- we saw that Verizon announced a good fourth quarter, but in general our experience was that it really slowed down in that December and continued slow as we went into January.

Are you seeing a continuation of those trends into the current quarter just from the visibility that you have in the current month?

Yes. It certainly picked up a little bit since the last part of December. I can't remember a December that it was this quiet as the last two weeks in December and the first two weeks in January. But the pace has not quickened as what we would like to see.

In terms the -- I guess the impact is it just purely in mobile and portable or are you seeing that across the board?

It is really across the board. Broadband, for example, where we're focused primarily on the private systems, broadband was down -- wireless Broadband systems were down in the fourth quarter, and that is where people were tentative in terms of building out these private systems. We have seen it across, as you can see from our numbers that we gave, softness in really all product segments of the business.

Do you think is this is a result of maybe slower enterpriser carrier CapEx spending? I guess from your salesforce what are you hearing in terms of the customers and why they are being a little bit more cautionary?

Our business has expanded beyond just the dependence on the carrier CapEx. And, yes, the carrier CapEx has hurt us as we have gone, but also the other pieces of our business, these private systems, the mobile devices -- the mobile devices and accessories, or the accessories, are geared towards subscriber adds and new phone launches. So all those things are adding up to an overall malaise in all of our markets.

This is pretty similar to what we're hearing out there as well. Just from a SG&A perspective, that seemed to be down quite a bit. How much of this was attributable to the new facilities and initiatives you guys have put in place? And can you breakdown where you saw cost savings and reductions in freight?

We saw -- we did see our occupancy cost going up a little bit related to the new facility. That is not a terribly material amount of money, but that was an increase this quarter. When we look at -- the majority of the decreases were in marketing where we're really trying to focus on using the knowledge tools that we have -- so our books, our publications, our website -- rather than sort of one-off types of marketing opportunity. So we are taking a good, hard look at marketing.

We also brought down our bonus accruals pretty substantially this quarter as well. But we also did, as I said before, we continue to invest in our business generation teams. We're going to continue to add account managers and salespeople, but keep a real close eye on the other lines.

The other area we're focusing on is transaction profitability, and really focused on finding ways to make sure that that transaction is profitable, and renegotiating with customers, changing policy so that we continue to build that profitability at the gross profit level, which would include, we call it, throughput profit which includes freight out as well as all the other variable costs.

With the new facility it has allowed us to get some increased productivity out of our Nevada operation and Maryland operation, because we have taken that finishing function and put into this new facility. Also you will see that the startup in the new facility last quarter had a lot of temporary and continued contractors, which we eliminated this quarter.

Should we expect SG&A to remain around these levels and maybe absolute dollars or in terms of a percentage of revenue?

I think in absolute dollars I think you're going to see some growth related to the business generation initiatives that we have got bringing more salespeople. But as a percentage of revenue, we sure hope that that number is going down.

It is the margins that really count. Remember in our SG&A that we've got all of the sales expense and the freight out expense, so the freight out is obviously a variable with sales.

I guess in terms of the decrease in some of your marketing expenses, how does that tie with the China sourcing initiative and private branding? Is there any impact on that side, or can you give us an update of what is happening there?

It is a question of effectiveness and productivity. We have increased effectiveness with our marketing, and we focused all of our marketing spend on our primary tools, which are TESSCO.com, our guide, the bulletins, and our wireless update, and moving more towards electronic other than print.

A lot of the spend that we had were what David called earlier one-off expenditures where a product business unit leader or a market leader wanted to do something special, and it wasn't integrated with the entire marketing. So the spend for proprietary products is going to continue. The branding effort, you're going to see some exciting things come into this new next quarter in terms of new branding. Total new innovation as far as new product coming out of our entire design. We're attempting to serve our large carrier customers, as well as our independent channel with some exciting new product.

And in all areas you notice we're using the battle cry, if you will, of voice, video and information. And this is all about that convergence. And whether it be Bluetooth headsets, stereo headsets, or whether it be Bluetooth mobile phones, phone adapters, I mean this is the area that we're really, really focusing on. So our reduction in marketing is a reduction -- getting rid of the waste, if you will, and the ineffective programs rather than reducing our contacts with our customers.

Definitely we have seen that impact this quarter, and that is pretty exciting stuff. Awesome. Do we again expect seasonality in Q1 for the infrastructure division, just if we're looking forward a little bit?

Q1 is always -- it is the cold months, a lot of the networks spend. But again the network spend right now is being driven more towards the hesitancy of the carriers rather than seasonality. So the private systems we think that this particular quarter will continue. And this is all laid up against the overall economy and this presidential campaign, so we're really, we call it internally, a very wobbling economy and we're just going to have to deal with it.

Last question for me is, can you talk a little bit about the situation at Brightpoint, and have they updated the situation with you guys at all?

There is really -- everybody has the 13D that they filed and that is the only -- we haven't had any contact with them since they filed the 13D, so we know what everybody else knows.

Ted Moreau, The Cardinal Group.

Great quarter. Let me just ask a couple of macro questions that would impact not only '08 but maybe going beyond. First, despite the slowdown and the hesitancy on the carriers, it seems to me, number one, your network infrastructure business actually, the last couple of quarters last year, seems to have bottomed out and it is holding pretty well considering the spending environment. With the wireless auctions going on right now, and the fact that AT&T Cingular is held back because of the merger the last couple of years, might we see an uptick in wireless spending in the infrastructure business, maybe as we get out beyond the first quarter? What is your sense from your customers there?

I think the first point is that our focus on the network infrastructure, what you're talking about the primary voice -- and the data channels from the public carriers -- we are really focusing on that maintenance side of the business. That is what is holding our business in there, where we're supporting the existing sites, which are always going through storm damage and slight enhancements. And so we're focused there, while at the same time we're prepared for the buildout when it comes.

We have all seen the Verizon announcements and all the new programs that they're doing, but we really haven't seen the major spend come through. The answer it is, yes, we're going to continue to really focus on that maintenance, get in deeper and deeper and deeper into the people that are maintaining these systems, and then be prepared for the -- when and where they happen.

I don't know if all investors have focused on what I consider to be some significant -- not just carrier, but overall changes in the nature of the accessory and the handset market and that is, number one, Google entering the space and these wireless auctions, and promoting a nonproprietary concept. And the fact that Verizon came out and announced their long-term evolution network and open access, meaning you don't need proprietary devices in their network, it seems to me to be a major, major change and possible inflection point somewhere here that would really accelerate growth in new wireless devices, maybe beyond even some of the things we have conceptualized so far.

You're absolutely right. This openness, if you will, has been long time coming. The United States is the only country in the world that has a closed system in that the phone has to be approved by the carrier in order to be sold. So your phone offering is relatively limited. If you go to China, if you go to Europe, you can buy any phone and then activate it on the appropriate system.

So this openness in terms of these various devices -- these new handsets will give us just increased potential for accessories. Proprietary products is going to be really enhanced, and where we can bring product that is being sold in the European or the Asian markets into the United States it wasn't sold because of the closeness of the marketplace.

And then this openness in terms of being able to carry all the various communications into your handset is going to create this long-term opportunity for backhaul, the whole WiMAX, video surveillance. So it is an exciting time. Navigating through, we have done a good job of building the foundation to take advantage of these trends, but it is going to be very exciting as we go. And it is not going to be a light switch. It is not going to happen overnight, but it is going to be a trend that we're definitely playing in.

That's great. They've had the consumer electronics show earlier in the year, and it is probably too soon to see any new devices, but it seems to me there is a lot of talk about a lot of new accessory devices coming on the market. Are we actually seeing the beginning of this already?

The consumer electronics show was louder, higher style, more Bluetooth connectivity and not really any big step functions that we saw. But it is a continued -- when you walk through the show you're just totally continue to be compressed by this convergence that we are seeing, the concept of having video and voice and information on that one device. And that is where we have talked before that the iPhone has created just huge buzz. And there's a lot of copycat devices that are out there. There's a whole ecosystem of accessories coming through. Again, we're playing in those accessories, both from an OEM branded, as well as our proprietary product brand and accessories.

Without beating a dead horse here, but I do think this is an important issue, but do you have the customer relationships and product initiatives to benefit from this or are you -- I'm sure you do. But I would expect that there's a lot of new entrants into this business and a lot of new perhaps manufacturers as well.

Our core base -- our primary goal is to drive monthly buyers at a much faster rate than we have been doing, and that comes from just driving repeat, but then also customer acquisition. You're right with the -- take security, for example, video surveillance. Historically we haven't done business with a lot of security resellers, a major target area where new people come in -- and the whole network VARs. We have done primarily business with the wireless dealers and wireless VARs, but we're going after the network VARs.

At the same time is that the self-maintained user, the utility companies, the transportation companies, mining companies, they are all becoming much more self-maintained and buying this equipment and these accessories on a direct basis. So we've got the core customer to take up with the product and certainly give us an early indication of the success of product. But then at the same time we're adding customers, and want to be adding customers at a much faster rate than we have done in the past.

That is where this innovation comes in. And innovation -- innovative product is going to help us attract these new customers as we go forward. We spend a lot of time talking about accessories, but we're looking at wireless broadband, point-to-point, point to multipoint, Wi-Fi, WiMAX. All of these areas are all converging -- Voice over IP are converging into huge opportunities.

Would Google be an example of a prospective new customer?

Google is another device. It is a question -- I see them probably being more of an opportunity to partner with from fulfillment arrangements or to use their channel to sell our product and support our resellers.

They are going to come out with a phone, and I believe this strategy is very similar to what Apple did with the iPhone, where they've got a very user-friendly phone that you can do YouTube, you can do weather, you can do stock quotes, you can do your email all wrapped in to the Google navigational system. I don't know whether any of you have experienced the new Google Maps that they have for iPhone. It is incredible. They are even using the position of the cell sites to give you first cut GPS of showing where you are in terms of where you're trying to go. These are -- so Google did that for iPhone, and they will certainly do it for themselves, probably with a more robust feature set.

One more question and I'll turn it back. Getting back to the proprietary productline, did you disclose what percent of revenue that is and what is the rough margin contribution, especially with China outsourcing?

That remains at about roughly 10% of our consolidated revenues. And the margins there are nearly double our OEM margin.

Do you have a target as to where you would like the proprietary business to be down the road or just keep growing it, or can it be a series of --?

Absolutely keep growing it. Our business is to give our customers the innovative products at the price points that they need. So we're going to continue to grow our branded product, our OEM product. And where we see opportunities of giving the customer increased innovation or better pricing, or better margins for TESSCO, we will continue to do that. It is going to be -- there the primary growth has been in the accessories. We do have wireless broadband products. We do have test and maintenance products. But those are very small percentage compared to the accessory business. We're going to be growing the proprietary products against all product business units, so we can have that level of innovation and pricing in each and every one of our product business units.

Thanks, Bob. Nice quarter. Let me turn it back to the floor.

(OPERATOR INSTRUCTIONS). Randy Saluck, Mortar Rock.

Most of my questions have been answered. I just had two quick ones, and I don't think they have been asked. What is the holdup on the stock buyback? And we had talked about this on the last call, but in terms of management's selling it seems to be sort of a conflicting message with the buyback in place, and the Chairman of the Board of the Company is selling stock at a decent amount. I was just wondering should we infer anything from that?

I will take the first question about our buyback. We really view the buyback is an opportunistic way to support our shareholders. This last quarter our share price has remained in the $17, $18 range and our overall buyback average is in the $13.

I understand. So up here it is not as good of an investment.

And also we're looking at the capital requirements as we move into the new year with proprietary products, and the buildout of our new innovation center, and making sure that we have the capital to grow the business as we want.

That's understandable. Okay.

Then in terms of my 10B-15, is --.

That is a big chunk. We're talking about much bigger numbers than in the past now -- the recent filing.

The recent filing, yes, you're looking at about 30,000 shares in the quarter. It is certainly not an inference. A lot of great angst and planning has been into that. The program was set in place earlier in terms of with my estate planners. And to pull it up and pull it down and to do the things we would like to do really defeats the 10B-15. If I had my druthers, I would pull it down, but then at the same time the estate planners are saying that, no, I should continue where I am.

My point is, which I believe I made on the last call, is I'm a shareholder, and when a Chairman of the Company, who has much better view on the prospects than I do, is selling a decent chunk of their position, I just get worried. So it is nice to hear that it is just a 10B-5.

Absolutely. I am well aware, as I said in the last call, of your feeling and other people's feeling, and it is not that. I am more confident than anyone in terms of our future outlook, and want to find a way to accrete more shares rather than less shares.

I understand that, and with all due respect, actions speak louder than words. Would this be your last sale or your last filing, or does the plan continue for a while?

The plan continues I think for another three or four quarters.

At this magnitude? I see on the tape 102,000 shares here. I don't mean to beat this into the ground, but it does disturb me.

(inaudible) shares sold. It is all priced here. And quarter was 30,000 shares.

I see, so it is 30,000 a quarter roughly?

That's correct. Depending upon where the price in the stock, it shifts.

And then the plan terminates?

The plan terminates in another three or four quarters.

That is really what I wanted to understand. Thank you very much for taking my call.

(OPERATOR INSTRUCTIONS). Ted Moreau.

Just one other point, since that maybe hasn't been addressed in the questions. But, one, I think Dave alluded to it a little bit on the training business. Just bring us up-to-date there, because that was an area where you made several acquisitions, as I understand. So what impact is that having?

Then second, you might just address the overall acquisition possibilities here, especially given the fact your stock has held up very well in a very difficult market.

I will let David give me the details in terms of the results of training, but I will tell you from an overall point of view, training is a major focus of ours. As we look at this convergence, as we have mentioned in the past, is the wireless people are not that versed with IP, Internet protocol, data and vice versa. We see this huge opportunity for training on this convergence.

We also see a huge opportunity of training in the retail market, especially down at the store level, and is helping these salespeople with making sale of accessories and devices as the device becomes more and more complex. So we are committed to training and growing it at a much faster rate than we have done in the past. David, you want to --?

Yes, if you think -- our training division is really sort of two-pronged. First is the GigaWave acquisition that we did in 2006, and that is the Cisco wireless certification. And that business has been very good. It has been strong and it has been a positive contributor to our earnings.

The NetForce acquisition that we did earlier in this fiscal year had a little bit of a slow start. A couple of their customers with the economy and whatnot have scaled back their training efforts. But now that they are fully integrated, and our salespeople are really sort of getting the message and learning how to sell this training, we are seeing some really interesting opportunities, as Barny said with this convergence in all areas of our markets and products.

Our thought right now is well it hasn't necessarily been a big material benefit to the bottom line yet, that our idea that the product and the training can be very closely aligned, that thought has been validated through a lot of the conversations we're having with customers. We continue to be really excited about this training business.

Maybe a wrap up question here. The training acquisitions were not all that large, so even it it grew organically, it probably wouldn't be a meaningful part as of yet. So are you seeing a lot of opportunities to grow -- to acquire similar type businesses, number one? And secondly, are you just seeing general opportunities in the whole wireless accessory marketplace to maybe do some further acquisition to grow your business?

I think, given our focus on proprietary products and expanding other customer lines and productlines, we are starting to see a better pipeline that we have seen in the past. So we expect to remain active on the acquisition front going forward.

We're looking in a pretty narrow sort of focus. We want to make sure that whatever we do is accretive right out of the box. We want to make sure that it gives us products and customers that we don't necessarily have access to right now. And that we can take the back end and plug it into our logistics engine and just realize operating synergies right out of the get go.

Just to highlight that you are right, we need the ability to scale the training opportunity through new course material and then also new delivery methods. Today we are primarily delivered -- delivery is instruction in classroom. How do we augment that with Web-based training and other tools? As David said, our pipeline for overall acquisitions as they cut across all opportunities for adding customers and adding product niches and adding product areas, is the largest it has ever been. The key is to make sure that we are acquiring customers, products and talent, and not acquiring bricks and mortar and cultures and whatever that we need to integrate into the great things that we are doing internally at TESSCO.

Thanks. Excellent quarter.

There are no further questions at this time.

Thank you very much. I appreciate you being on the call and appreciate the comments. I just to highlight that we are navigating in a wobbling economy and marketplace. And in so doing this navigation, we remain intensely focused on growing earnings through gross profit enhancement and operating productivity. Hopefully the results you have seen this quarter are going to continue, but at a faster rate. Our primary goals continue to be to growing customers and their monthly purchases of more of our expanding production and solution offering, while reducing the risk of concentration and improving margins and returns.

Just to reiterate TESSCO's mission is to be what we call Your Total Source, delivering what you need, when you need it to build operating news, voice, video and information networks and systems. As David mentioned earlier, is that in this economy this value proposition is resonating even more so as our customers empty out their inventories.

The components we have built, or this knowledge configuration delivering control system, which the primary focus is to help our customers reduce the number of suppliers, their inventories, supply chain cost and investor total cost. We want to be the supplier, delivering the complete product offering in a reliable, productive and a fast way of doing business.

In closing, we're building an enduring corporation by leveraging and expanding our value proposition, the capabilities and resources to deliver earnings growth and success for our customers, manufacturers, team members and you, our shareowners. We really look forward to prevailing in the current market conditions, and then preparing to capitalize when the markets rebound. We believe that our strategic and operating plans will build superior shareowner value in the intermediate as well as long term.

Again, I appreciate your support, and look forward to updating you as we go along the way in next quarter. Thank you very much.

That concludes the presentation. You may now disconnect. And have a great day.