TESSCO Technologies Inc (TESS) 2009 Q2 法說會逐字稿

Good morning and welcome to TESSCO Technologies second-quarter conference call. Today's call is being recorded and will be available for audio replay today at 12.00 p.m. Eastern Standard Time. You can access the replay by calling 888-286-8010 and entering the confirmation number 72706588. 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 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, 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-and-answer period.

I would now like to turn the conference over to Robert Barnhill. Please proceed, sir.

Good morning. I am very excited to review with you this morning our third consecutive quarter of record results. Our performance was excellent in what we all know is a very difficult economic environment. Let me just quickly review the highlights.

The earnings per share grew 246%, reaching $0.45 for the quarter and it drove trailing earnings per share to $1.44. If you look at yesterday's closing price of $11.94, we are selling it just at a little over 8 times multiple. EBITDA reached $1 and trailing EBITDA came in at $3.20 putting our multiple at 3.7. So there's a lot of opportunity there in terms of being undervalued.

Our operating margins more than doubled reaching 2.7%. We believe our success is a function of our industry, the value proposition, strategy, and our execution.

Let me just highlight each of the elements of our success and future opportunity. First, we are a leader in the expanding and converging world of mobile, fixed, and in building wireless broadband systems, well beyond where we started in two-way radio and then cellular. Our value proposition of being your total source, delivering everything where and when required is resonating with our customers that build, operate, and use these systems.

By assuring guaranteed availability and delivery, we continue to expand our customer base and the products they purchase from us. Then our focus on pricing strategies, procurement costs, and our proprietary products has grown gross margins and this growth combined with our operational productivity has dramatically improved our bottom-line margins.

Dave Young will now give us a little deeper insight into our results. David?

Thanks, Bob, and good morning. As Bob said, it was a very strong quarter for us and we are pleased to report these results. And all comparisons that I talk about will be against last year's second quarter unless I say otherwise.

Our revenues grew by 8%, reached $144 million while gross profit grew by 19% and totaled $34 million. Gross margin was up and it totaled 23.8% compared to 21.6%. That is largely a result of the change in product mix related to the sales of accessory products to our retail tier one carrier as well as continued improved margins in our core non-concentrated businesses. We are very pleased with this margin growth and it really is a result of delivering value and solutions to the market.

Our operating expenses totaled $30 million. That's an 11% increase resulting from increased business generation comp expenses as we continue to focus on increasing our sales organization plus an increased bonus accrual this quarter.

Increasing the capability of our sales teams has been a focus for us over the last 12 months as we look to further penetrate our existing customers as well as significantly increase the number of customers with whom we do business. We believe we have managed other operating expenses very well as this 11% SG&A growth was on a 19% gross profit increase.

EBITDA doubled this quarter, totaling $5 million, or as Bob said, an even $1 per share. That compares to $2.5 million or $0.46 per diluted share in the second quarter. Net income more than tripled totaling $2.2 million, $0.45 a share compared to $700,000 or $0.13 a share last year.

Inventory turns declined a little bit from 8.8 to 8.4, driven by an increase in inventory. When we look at the inventory balance compared to the beginning of the year, we've grown about $5 million. That's largely a result of growth in accessories related to the upcoming holiday season but we are still managing through our availability initiative and I think as we get through that process, you may see inventory continue to be up especially in this economy as we are taking on more inventories to meet the needs -- the immediate availability needs of our customers.

Days sales outstanding decreased slightly from 38 to 33. That is partly due to the timing of sales and collections during the various quarters. Given this current economic and credit situation, we are even more focused on these balance sheet items and so far we haven't seen any material changes in our write-offs.

During the quarter, we generated about $2.6 million in cash flow from operations. And to get just a little more detail on the line of businesses, network infrastructure revenues totaled $48 million. That's a 13% increase as a result of higher sales of RF propagation and site support products. That's partially offset by slightly lower sales of broadband products. Those broadband products typically carry lower gross margins than the RF propagation in site support products.

The broadband sales did come back sequentially, so we are pleased with that and really this entire line of business has had a great start to the year. Gross margin in this line of business increased from just under 25% to just over 27%. That is due to the mix change I just described as well as strong performance from our proprietary products in this line. Buyers in this line of business increased 6% and purchases per buyer increased 7%. So really nice network infrastructure results.

It was another strong quarter for mobile devices and accessories. Revenues totaled $73 million. That's an 8% increase primarily as a result of increased sales of cellular accessories to resellers and users. Gross profit in this line of business increased 23% primarily as a result of changes in the product mix to the tier one carrier, as well as significantly improved margins to our other retail customers.

And a lot of this again was driven by an expansion of our sales and proprietary products. Buyers and their monthly purchases excluding the tier one carrier remained flat.

For the test and maintenance, our revenues were $23 million. That is a 3% increase. Gross profit remained flat and buyers in this line just slightly declined but their purchases increased by about 6%.

Onto the stock buyback program, during the second quarter, we repurchased 539,000 shares. Of these number of shares, 69,000 were in the near daily systematic purchases under our stock buyback program. The average price for these purchases was $14.74. Also recall that early in the quarter we bought 470,000 shares in a privately negotiated transaction for $13.64 a share.

Under the current buyback authorization, we've got 185,000 shares that remain available for repurchase from time to time in the open market or by a block purchase or through negotiated transactions. Purchases are funded by working capital in our revolving line of credit and no timetable has been set for the completion of this program.

So in summary, we are really pleased. We feel that the strong results were basically across the board and especially given the economic environment we have been operating in. We do as Bob said, expect it to remain tough, but we believe we've got a great team of people and that we are very well positioned to continue our success.

I will now turn it back to Bob to talk about the business outlook.

Thank you, Dave. Let me just summarize where we are. We ended the quarter with outstanding growth in profits, excellent momentum in all areas, minimal debt, and significant credit availability and the preparedness for what we know will be a continued difficult marketplace. So in light of all this, we are reaffirming the fiscal year guidance that we gave of $1.35 to $1.50 per share.

So at this point, I would just like to open it up for any questions and we will see whether we can give you the answers you're looking for. Operator, we are ready to take questions.

(Operator Instructions) Ted Moreau.

Good morning, great quarter, great results. It's good to see the stock responding. A couple of things. First, and then I will turn it back to the audience, but Bob and Dave, if you can talk a little bit about the operating margin levels where you are, what is going to drive the operating margins going ahead and including the proprietary product initiatives that you have in place and the impact that might have.

Let's separate it in two pieces, one the gross margin and then our operating productivity. The gross margins are -- historically they all depend upon a mix of product, but we are being very systematic in terms of making sure that we are rewarded by our customers for the value that we deliver of constantly looking at pricing in all areas. Our pricing has held, it is not improved. And this is unique as we look at a lot of our competitors and are using pricing as a strategy to try to build business in these times.

But we are using our value, and as David mentioned, availability of being able to deliver what our customers need when they need it. So we are helping them reduce their inventories, reduce their total costs and we are providing them that quick, quick response.

Proprietary products, we are developing in all areas not just accessories. We are looking at the network infrastructure product, the Installation, Test, and Maintenance product and we have some very exciting programs there that give the customer enhanced value, increased innovation in certain product areas as well as obviously giving us better margins.

So we can -- and also in the gross margins just how we are managing our delivery costs, is again helping us maintain and improve those gross margins.

On the operating side, the productivity that we are driving as far as the productivity of the configuration, fulfillment, and delivery continues to grow. We have our facilities in place that have considerable amount of headroom in terms of capacity, so we don't see the necessity to be adding infrastructure as we continue to grow the top line and grow our overall level of sales.

So what we see and we are obviously staying very lean, continue to staying lean which we have over this past year to improve that level of operating margins. As I mentioned is that we do have a great plan as we go forward to make sure that we can handle anything that this economy and marketplace throws at us.

So we feel very good about as we go forward maintaining the gross margins, enhancing the gross margins, and enhancing that operating productivity.

Great. Bob, can you just spend a moment on the proprietary products, what percent of sales are they and how do those margins compare to the traditional business?

We are looking at the overall sales ramp, 10% of revenues growing and margins all in when you look at the supply-chain costs, the manufacturing cost is considerably better than our corporate average of gross margin. So it is exciting and as I mentioned, it is exciting from the customer's perspective as well as our perspective is that we are giving the customer enhanced value as it relates to product innovation as well as list price and as well as margins to them.

And where do you think proprietary products can ultimately develop in terms of percent of your business?

Well, our strategy again is to make sure that we offer our customers a choice, so we will continue to enhance our branded product sales. But we definitely want to grow proprietary products much greater than the 10%. So -- but it's a balance. We have today here in Baltimore 110 manufacturers are presenting their products to our entire sales force. So we have very close relationships with all of our various brands and manufacturers. So it's a balance of where proprietary products will fill in the voids as well as leverage the opportunities we have.

Right. And maybe one other question on profitability and then I will turn it back and then I've got some other market questions. But the 2.7% operating margin, how does that compare to kind of the high-end and the low ends over the last let's say several years?

We are certainly at the high end of where we've been recently. But as Bob said, we believe that we've got a lot of operating leverage and our internal targets are to significantly improve that. (multiple speakers)

And as long -- as we drive those throughput profits, the gross profit and less all the variable expenses, we see our fixed expenses not increasing. The only real fixed expense that we have been growing is our sales team and in this marketplace we are starting to temper that growth as we move forward and make sure that we get the new people that we've added really grounded and productive before we expand that.

So as we can grow those gross profits, it pretty much prints through to the bottom line. The operating leverage really kicks in.

Great, I've got some other questions, but I think I will turn it over to the floor to see if there's other questions.

Anil Doradla.

Good morning. It's actually Brian for Anil. Just wanted to drill down a little bit more maybe if we can on the operating margins. And you talked about pricing strategies for [procurement] costs, proprietary products, etc. and I realize it might be difficult, but can you --? Are you able to quantify how much of those factors drove the improvement year-over-year when we look at 170 basis points? Or maybe at least qualitatively which ones are the most important as we look at the outlook?

I think that I would say that mix probably is the biggest piece of the growth. So some of the successes we've had in network infrastructure we are selling a lot of cable and the lot of RF propagation type stuff. That certainly drives those margins up.

Our proprietary line in the network infrastructure, the TerraWave product that we acquired a few years ago, that has been having a lot of success recently. So those drive margins as well. I think what we've been able to do in the major tier one customer, you can see that we have been able to significantly grow those margins through getting more of the proprietary aftermarket products in there as opposed to more of the OEM Bluetooth products.

So it's kind of -- I think it's mixed but a lot of it is driven by the proprietary line as well as sort of the better pricing strategies that we have put in place just across the board.

Pricing strategies are -- we are obviously remaining our competitiveness in the marketplace and continuing to give our customers value but when you look at the pricing, when you look at the 32,000 products with varying velocities of fast velocities, with slow velocities to companion products, we continue to get more and more sophisticated as it relates to those pricing strategies of assuring that we are competitive but at the same time being faced with the value that we deliver.

So it's also -- it's helping us the pricing strategies in this particular marketplace where it's so easy to start to use price as a tool, but we have had just very strong discipline to make sure that we don't go there, but also assuring that we can deliver to the customer what they need when they need it.

Great, thanks. And then on gross margin being down quarter-over-quarter, are we to assume that that's sort of a Bluetooth rebound there that was a little bit lower margin but obviously still positive for the gross profit dollars?

Yes, that's right. You can see the large growth in revenues and mobile devices and accessories, a large chunk of that was related to some Bluetooth initiatives we did with the major carrier early in the quarter.

Yes, and so if you look out a little next couple of quarters, do you feel like there's a lot of pent-up demand? I know we talked about some of the legislation in California, etc. and so should we be expecting Bluetooth to continue kind of building on this momentum from the current quarter?

Our projections show that the demand from that major carrier are going to soften some throughout the second half of the year. So I don't think I would expect that sort of level of Bluetooth.

Is also interesting just an aside, this hands-free it's obviously becoming a very big initiative for states, but hands-free or corded kits as well as Bluetooth and as well as car kits, and so we really expanded our line and a corded headset offers the customer much, much lower pricing, but then that is where our proprietary products kick in on those corded headsets whereas our branded Bluetooth product carries a very low-margin. So we're working with those kind of strategies as well as serving the market, where we are offering alternative products that give the customer a better value but also give us better margins.

Great, in terms of the tier one customer, can you just give from a higher level was kind of attach rates you are seeing in the iPhone relative to a lower end phone? And then sort of how you figure into those attach rates in terms of are you just benefiting from the generally higher attached rates or sheer volumes of the iPhone or do you think you are gaining share in the accessory world at AT&T?

We are probably growing share. We started with a pretty low share of the iPhone accessories as they brought in -- as Apple brought in their incumbents, if you will. And so we didn't enjoy a whole lot of that business but at the carrier, but from the independent channel, that business is growing very, very handsomely as we are looking at the overall iPhone product. I mean it is very exciting and whether it be cases or headsets or whatever, the user of that phone wants to protect the phone. And as we see more and more of these high-end phones come out, we are very excited about the attach rate for accessories through the independent channel as well as with the carrier.

Yes, I think where we are seeing most -- what is benefiting us I think the most, we benefit from all those attach rates. But the case attach rate has been really pretty beneficial to us. We've got a really neat line of cases that we've been selling and there is a lot of -- there's a pretty high attach rates when you are spending that much money on a phone, you want to protect it. So we are seeing attach rates on the cases as being pretty high.

It's also interesting that a lot of the new iPhone's, the 3G phone were sold to people that had the original phone and that it was great that the form factor was changed so the old case didn't work with the new phones. So I think that's what we're going to see going forward with all of these new phones come out. Once you get a new phone, you need a whole new lineup of accessories.

Yes, that's interesting. That's actually what I was going to ask is when you look at the product roadmap, do you see this sort of the unsustainable when you look at some of the iPhone competitors, if you will. Similarly high attach rates and then your share continuing to sort of either maintain or grow in the next product refreshes.

Yes, I think that the -- our share is -- most of our competitors are really smaller, much smaller independent companies and the fact that we have the total source and we have the breadth and choice of product is really becoming much more important as we move into the market and with the diversity of customers that we are selling.

So it's -- accessories are going to be -- continue to be very strong, but not to overshadow the other sides of our business in terms of the network infrastructure, the fixed broadband, installation tests, training. That's one of the things that's really helping us today is and will continue to fuel our growth is the diversity of customers and the diversity of products.

So when you look at cross-selling opportunities or initiatives, is there a way that you can quantify the amount of your book that existing customers are purchasing today? I mean is there a metric that you are tracking? And then whatever it is, where do you think it is today relative to where it could be over the next two to five years?

Yes, we obviously track it in depth and our tenured customers, the cross-sell is very high. And so our marketing opportunity is how do we get our newer customers to accelerate that cross-sell? If we can take our tenured customer and get the same cross-sell across the entire -- I mean the upside is just gigantic. And not only does it become much more strategically healthy to have a high level of cross-sell because the customer is looking for you -- looking to us for all their needs, but it dramatically obviously improves sales. But the margin improvement, the operating margin improvement is again high because you are putting more in one box and it just all prints through.

So that is our major initiative as we breadth -- as we go into the different markets, cross-sell is everybody's metrics. It's on their performance value share payment. The sales team is compensated for so that is our primary initiative driver today is how do we get that cross-sell?

Great, then you mentioned there were some positive results out of TerraWave and GigaWave. I mean I was just wondering if you can give a little bit more color on that and what are the drivers there in that business?

Yes, the TerraWave business especially -- GigaWave had a good quarter and as the training, the whole training line did. But we are really seeing some strong results in TerraWave. That business we've been doing a good job over the last few quarters of more fully integrating it, spending, having the TerraWave product people spend more time with our sales people and really strengthening that. So they have had a couple of just really strong quarters in a row.

And we are looking at expanding the types of products, so they are mostly Wi-LAN accessories right now. So they are getting into lots of different areas all across network infrastructure. So we really expect that business to continue to be really strong. That's been a very accretive, positive acquisition for us.

Great, and then in terms of just overall infrastructure spending environment, I know there's somewhat of the trade-off on sort of macro issues versus data consumption still rising. Just wondering if you can give your outlook there as far as what you are seeing. Is it deteriorating or just kind of holding steady from an already cautious view?

I think it's holding steady. I believe that this current turmoil is probably retarded it a little bit in terms of the public system infrastructure spend. I think those of us that are heavy users really recognize the carrier has to improve the capacity, their systems which will certainly drive our overall business.

One of -- the area that we are most excited about are the private systems, the WiMAX systems [point to point to point] to multipoint, where enterprises can reduce their phone bills, what they are paying the phone company for that access and for the last mile. So we have some great WiMAX products, private systems in the 3.65 gigahertz area that we launched a couple weeks ago. And the bookings are starting to really grow for that.

So the overall what we call infrastructure includes all the support products, power, steel, cable, antennas, but also is into the Wi-LAN, the wide-area networks as well as the local area networks.

All right. Thanks a lot, guys.

You have no further questions -- you have another question from Ted Moreau.

(technical difficulty) on the discussion on the iPhone, but --

Ted, we missed your first part. You cut out.

Can you hear me now?

We've got you now.

Okay, I just wanted to get one final question in here on an issue that I think is really going to drive your business and I would like to get your comments. It takes a little editorializing here, but apparently the head of AT&T who was involved with the Apple iPhone deal is talking about working on introducing wireless links and devices other than cell phones. He is going to head up an organization to promote the inclusion of cellular links in everything from computers and digital cameras to car navigation and entertainment systems. Can you still hear me? (multiple speakers)

So -- and the idea is that Google apparently has stimulated a need to open the networks by AT&T and also Verizon, Sprint, and Vodafone have all talked about having open networks. And the idea is that -- to drive the growth in cellular, they are talking about potentially hundreds of different types of devices, many different models, and other items besides cell phones.

It just seems to me that with the framework that you have for distribution of cellular accessories, that you are well positioned to be able to distribute these other proliferation of devices that I think are going to come on the market. I would just like your comment on that.

I think, Ted, you are really giving a great example of this expansion in convergence that we are seeing in the world of wireless. And what AT&T was talking about in their press release is exactly where the industry is going. It's how do you use wireless as the primary access to every possible consumer appliance that's out there, whether it be a computer, whether it be a cell phone, as you mentioned camera, car navigation, video surveillance, which is a big area that we are expanding into.

And it's what AT&T is talking about is how do they get these products riding on their network and then also what we are seeing is how do you get these devices riding on the private networks as well? And just as you've seen with the iPhone, you can ride on AT&T's network or you can go into a Wi-Fi where you are riding on your private network.

So there is again, two pieces to answer your question in this. We are going to be there and we are there as far as the accessories for these devices, whether it be the Google device or the new Motorola android that they just announced or these --. So we are looking at the device accessory, but we are also looking at the device as we get into some others other than the phones whether it be computer chips or we are selling tons of memory now that is going into these systems.

So and then the other piece once you get beyond the device and the device accessory, it's just the infrastructure that is going to drive these things. So it is very exciting.

When I opened today is in terms of we are well beyond where we started in two-way radio and I think it's important that we all acknowledge that last week was the 25th anniversary of cellular. 25 years ago they turned on the system in Chicago and then six weeks later they turned the system on in Baltimore. So where 25 years later we are looking at this exciting convergence is just laden with opportunity for us.

I really find this an interesting development -- I think this is sooner rather than later. It looks like now that they are setting up a division and I think they are going to start to begin next year to start a drive some of these devices over the network. So you think you will be involved with not only the accessory and support and infrastructure, but it may well be the devices themselves.

Yes, we are obviously looking at the device. I mean the biggest problem, the reason we've never been in the phone business is just the margin structure with the subsidies, with phones; it just is not a profitable business. But if we look -- we are selling today GPS. We're selling the --we are not into cameras yet, but certainly from an entertainment system point of view, there's still the speaker systems rather than the device itself. But we continue to look at those opportunities.

Right, and so won't it be the consumer electronics show or we should be looking for a lot of introduction of a lot of these new initiatives?

Well, you are going to see with our inventive product line, you are going to see some of these new products here in the next several weeks that we are going to be introducing that are certainly -- they attach to the iPhone and the other products that are out there.

Great, well it will be very interesting to see how this plays out because I find this not just talk but when you are setting up a division and the head guy that's driven the iPhone positioning with AT&T is going to be driving these other devices into the open networks, it could be very interesting.

And also just one last thought on these new devices is that it's going to help drive the fundamental access with phone access. So if I am looking and I've got a landline at home, and then I've got this opportunity that where I can converge all my computers and digital cameras over to the network, you know I just might terminate my landline at home and just think what that's going to do to the overall expansion of cellular. You know, we have already seen with younger people today they don't have a landline. They are using their cell phones as their primary line and I think in today's economy, it is going to be driven in that direction as well, which is again going to drive accessories. It's going to drive phones and it's going to drive infrastructure spend.

And it's sort of a self-fulfilling prophecy because it will drive traffic and that will have all kinds of ancillary benefits.

Absolutely, and we are in a good place.

Great, thanks, Bob.

You have no further questions at this time.

Great, it's good -- great questions. We certainly appreciated the opportunity and I just want to again reiterate that as we look forward we believe we are in a very strong position to prevail in the weak market and obviously capitalize when the market strengthens and when these new opportunities emerge that we've been talking about.

We are going to continue to aggressively expand our industry leadership in delivering this total source offering when and where our customers need it. And our fundamental goal remains to create enduring superior value for our customers, our manufacturers, our team members, and our shareowners.

So I look forward to talking to you in 90 days and it's going to be an interesting time for all of us but we feel very, very positive about where we are. So thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This now concludes your call. You may now disconnect. Good day.