TESSCO Technologies Inc (TESS) 2009 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 73612358. 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 for TESSCO. Also, in order to facilitate dialogue, Ted Moreau of Cardinal Group, TESSCO's retained investor relations consultant, will also join the call during the question-and-answer period.

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

Good morning. Well, the excellent earnings growth momentum we were showing through Q2 was reversed this quarter by the very challenging economic and market conditions that we are all very well aware of, and reaching the $0.25 earnings per share this past quarter was a significant achievement, as our customers cut their purchases dramatically.

As we navigate in these uncharted waters, our fundamental business strategies are more focused than ever in three critical areas. First, building stronger value-based strategic partnerships with our customers and our vendors, continued intense inventory and receivable management, and increasing the productivity of all business-generation and operational resources, and eliminating nonproductive expenditures.

TESSCO is the leader in the expanding and converging world of mobile, fixed, and in-building wireless broadband systems. Our value proposition of being "your total source, delivering a broad and diverse product offering when and where required" resonates with a vast, diverse base of customers that build, operator, and use these systems.

It's really important to consider that our product solution offering goes well beyond cellular and mobile devices. We support two-way radio, local- and wide-area broadband networks -- WiLAN, WiMAX -- all infrastructure support, security, video surveillance, and VoIP.

Also, our customer base is vast and diverse. The private as well as the public system operators -- government, public safety, homeland defense, enterprise, energy, and transportation, and resellers. When customers partner with TESSCO, they have the guaranteed availability and online delivery, lowest total inventory and obsolescence, and the lowest total procurement in ownership costs.

Customers have leaned their inventories and delayed their products. Our ability to deliver what they need when and where they need it will serve us well in this economy and when we get to the other side of the valley. Customers can truly depend upon TESSCO to be able to serve them in these difficult times.

TESSCO has weathered difficult times in the past. We know what needs to be done to endure and position ourselves for success moving forward. Our value proposition, product solutions offerings, diverse customer base, business generation strategies, combined with our productive [operating] platform will help us and allow us to endure now and grow and thrive when the economy recovers.

The entire TESSCO team is very committed and confident in our strategies and execution in these difficult times, and will elevate -- this will elevate our market leadership when we ultimately get to the other side of the downturn we are all experiencing.

David will give you deeper insight into our results and what we're doing. Dave?

Thanks, Bob. And good morning.

The external market conditions obviously continue to be tough, but we believe we have navigated them well and posted a relatively strong quarter. I will give a brief rundown of the results. All comparisons here are to last year's third quarter unless I state otherwise.

So revenues declined 12% and totaled $119 million while gross profit declined by 4% and totaled $29 million. Nearly the entire revenue decline in the quarter came from our retail customers including our large tier one national customer.

Gross margins were 24.6% compared to 22.4%, largely as a result of change in product mix related to sales of our large accessory retail tier one customer, and -- but also continue to improve margins in our core, non-concentrated business. We are pleased to report that gross margins improved in every line of business and in every commercial market.

Operating expenses totaled $27 million. That's a 3% decrease resulting from decreased marketing, sales promotion, freight, and IT expenses, partially offset by the increased compensation costs in our business-generation area.

EBITDA for the quarter totaled $3.4 million; that's $0.70 per diluted share compared to $3.9 million, or $0.72 per diluted share. Net income was $1.2 million, or $0.25 a share, compared with $1.5 million, or $0.29 per diluted share.

Our inventory turns declined in the quarter to just under seven from about eight. That's driven by an increase in inventory plus the slowdown in sales. So since the beginning of last year -- we've been talking about this a lot -- we've been increasing our inventories to better meet the availability needs of our customers. But as sales have slowed over the last couple of months, our inventory balance requires some adjustments, and we're keenly focused on adjusting inventory levels to make them more closely track with the slower sales that we are experiencing.

Our days sales outstanding increased slightly from 36 to 37, partially due to the timing of sales and collections during the various quarters. Given the current economic and credit situation, we have seen bad debts rise some, but we still had a very solid cash collection quarter.

Due largely to the reduction in accounts payable during the quarter, we used approximately $2.2 million in operating cash flows for the quarter. However, for the year we have generated $8.5 million of positive cash flow from operations.

Year to date, our revenues are down about 2%, but gross profit is up over 8%, which results in a nice gross profit margin growth. Our operating margin for the year is 2.6% compared to 1.4% last year, and our diluted earnings per share have reached $1.09 this fiscal year compared to $0.56 last year.

Now to talk a little bit in more detail about -- from a line of business perspective for the third quarter. Our network infrastructure revenues totaled $44 million, decreasing 2.0% primarily as the result of lower sales of broadband products, slightly offset by higher sales of RF propagation and site support products.

Accordingly, gross margin in this line of business increased from 25.8% to 26.3%, and buyers in this line of business declined by 1.5%, and purchases per buyer decreased by less than 1%.

In the mobile devices and accessory line, revenues totaled $55 million, decreasing 20%, primarily as a result of the decreased sales of accessories to the tier one carrier, and also to a lesser extent to other resellers and users.

Gross profit margin in this line of business increased from 20.4% to 23.6%. That's the result of the change in product mix to the large carrier, but as well as improved margins to other retail customers. Buyers in this line of business declined by 6%, and here's where we saw the largest decrease in dollars per buyer, where they decreased by about 11%.

Installation, test, and maintenance. In that line revenues totaled $20 million. That's a 9% decrease. Gross profit margin increased here again though from 21.8% to 23.9% primarily due to product mix exchanges. But buyers in this line of business declined by 14%. But their purchases increased by 6%.

So now to the stock buyback program. During the third quarter, just over 71,000 shares of common stock were repurchased for an average of about $10.62 per share. Under our buyback program, at the end of the quarter we had approximately 114,000 shares remaining available for repurchase. And purchases here are funded by our working capital and our revolver. No timetable has been set for the completion.

So in summary, we're pleased with these results, especially given the market environment that we are operating in. We continue to expect 2009 to be a difficult year. But we believe that we've got the best group of people in the industry. We believe that we'll be able to deal with these difficult times better than our competitors so that when the climate does turn, we're going to continue to be very well positioned.

I'll now turn it back to Bob to discuss the business outlook.

Thank you, David.

Yes, we believe that our commercial customers' current purchasing hesitancy has been driven by a level of fear, the delay of many of the projects, and the desire to reduce or eliminate their inventory. The good news is, we continue to see a high level of customer activity and order flow. Our order volume has not declined. It's just the dollars per order that has declined.

The pipeline of opportunities is growing with customers and vendors both large and small, existing and new; and it's very exciting and encouraging. However, given the current environment, it's just very difficult to tell when these customers' spend will accelerate. The wireless world continues to expand even in these difficult times, but we think it's going to be bumpy throughout the calendar year.

Last quarter we were talking to you -- 90 days ago -- and we raised our guidance. But we now feel that we must revise it downward to earnings per share for the fiscal year which ended March being in the range of $1.10 to $1.20.

Going forward, we know that growing revenues in this current market condition will demand increasing share with our customers and expanding the customers we serve. Our strategy is to expand both the value for our customers and our product solutions offerings to allow us to accomplish the growth of customers and the product categories they purchase.

Our marketing and sales initiatives to encourage customers to consolidate their purchases and lower their total cost -- and we call it "experience the power of one" -- is going to roll out in February and should really make some exciting things happen.

So with that I'll open it up and take any questions you might have.

(Operator Instructions). Anil Doradla, William [& Blair Company].

A couple of questions. You talked about the inventory situation. Can you give little bit more color. What are you seeing? Is that really by technology, by region? Is that really more mobile operator inventory draw-downs, or is it more handset vendor inventory draw-downs?

Okay. You mean from the customers' perspective?

Yes, yes. Is inventory in the channels?

Yes. And it's really in all areas. There's two sides, one where especially our resellers and even our enterprise -- their projects have been postponed, so that eliminated the new buy; but then in the resale market and the retail market, everybody is just very focused. I mean, they almost -- between the middle of -- starting in the middle of December just stopped buying to replenish, and they're draining their inventories down. And now we're getting calls -- I need it, I need it, I need it -- which is good, but we're seeing that real contraction of those purchases to keep their buffer stocks, their inventory levels high.

David, do you have any other flavor on that?

No. I think we have seen it kind of across the board, so it's not -- I don't know that we could identify really one market or one product line.

Have you ever seen inventory levels at these levels that we're currently seeing? There's a severe contraction. Have you ever seen it in the past?

Not this -- we haven't -- we certainly haven't seen the contraction at this level as quickly as it happened. You know, just as I said, 90 days ago we were revised our forecast upwards because of what we saw, and it started to slow in November, and then the December -- it just -- it was like nobody was home. But now there -- everybody is -- hurry up, hurry up, I need it, I need it. But still not at the levels that we have enjoyed in the past.

So if I look over -- like over the next couple of months, what's your outlook? Not a longer-term but short-term like February or March. Do you think things are going to be on the uptick, or do you think that we still have to see the bottom here?

We are very optimistic, especially with the activity level that we see, that we're going to see an uptick sooner rather than later, and we even expect it in this quarter, but we're certainly not guiding to that. We feel it, but -- and especially when you look at these various projects that are going on, in all markets we feel that it is going to start moving up because they've -- everybody has taking it down to the bottom at this particular point, and they've got -- no matter how -- there's still business being done, and they're going to need product to fulfill on their contracts and their customer demand.

Right. So switching gears a little bit, Bob, the mobile division had like $52-plus million. Kind of -- we saw a steep decline there. How much of that was inventory-related versus weakness?

That's a kind of difficult question for us to answer. I think that it's probably -- if I had a guess, I would say it's maybe half and half I think, that -- the sell-through clearly was down for the quarter. And so there just wasn't as much replenishment. But I think that too, from what we've seen, that people are holding less inventory, as well. So that would be my guess.

Yes. And the other side, you take the government market, which has always been a growing, strong market for us. With the end of the fiscal year, with the new President coming in, it just was paralyzed. Nobody was doing anything. Their projects were delayed, put on hold. But now they are starting to come back. People just froze in the marketplace in terms of doing anything proactive. We see the level of positiveness starting to grow.

And it's interesting that our sales team is busier than ever in terms of talking to and answering the customer and customers' need. And as I mentioned, our order flow is the same and -- if not building. But it's just that the dollars are just so much smaller than what they should be.

So going forward, I mean if we look forward for next quarter and over the next couple of quarters, from a product-mix point of view, do you think one segment versus the other is going to pick up? Any thoughts on that?

Yes. I mean I think as we look at this, our -- the March quarter is always a typically slow infrastructure quarter. So I don't know that that's going to -- we're going to see a lot of growth there, but I think mobile devices and accessories -- I think that's probably where we would expect to see some growth early. And then I think as we get into the warmer months, into the spring and the summer, that's when we're thinking that some of these CapEx budgets just have to break and that we'll see some infrastructure growth there as well as test and maintenance.

So if the product mix is shifting towards infrastructure, would that start taking a toll on the margins, or do you think margins are going to kind of be stabilized?

I think margins will be good. The other interesting thing is, the first real tick-up that we saw moving into January was the retail consumer accessories business, which showed that they -- in December they just emptied their inventories out. And it really perked back up.

The other thing that we see is in the WiLAN area and our commercial-grade WiMAX. These systems offer customers the opportunity to lower fixed costs, and what they save is much greater than the cost of the system. So our TeraWave product line for an example -- that are WiLAN accessories -- has been extraordinarily strong during this period of time. So those are the areas as we diversify.

We also feel that the government market is going to pick up in the next month or so as people get their feet back on the ground after looking at this transition, that a lot of these infrastructure spends are going to help us. So we're looking at the -- all areas of the business.

This "power of one" that I indicated is (technical difficulty) our biggest -- we have 27 product categories, and the average customer is buying about three of the product categories. And we have a incentive that we're going out to our customers and saying, here, what you're buying from TESSCO, here's what you're not buying from TESSCO. Let me show you the "power of one." In other words, how you can lower your costs and still have that availability by consolidating your purchases with TESSCO.

And there's tremendous alignment around this program, and the people we've tested on -- the customers -- are very, very receptive to consolidating their purchases with us, because we know that in this period of time any one product category, the dollar spend is going to be lower. So the growth is going to come from us getting more product categories that a certain customer is purchasing. And it looks very good and very promising.

Guys, you also talked about RF [prediction] tool sales increased during the quarter -- if I got that right. Was that tied into more cellular 3G build-outs or -- I mean you give us some color as to what that was?

I think that was primarily related to private the networks, so it was a lot of the WiLAN, the cable and the antennas that go with those types of products. So it wasn't necessarily the public network CapEx that drove those numbers.

Any thoughts on the CapEx going forward over the next couple of quarters?

Well, we've seen -- you know, the carriers are still talking about doing the build-out, just overlays that they're doing, but it's -- but they are dragging their feet now in terms of really turning that on. We are experiencing some of that business. It's coming in today, but it's a much lower rate than we originally anticipated.

But again, I really feel that the level of positiveness is starting to come back, and everybody was like deer in the headlights in terms of just frozen here as we looked at mid December.

Ted Moreau, Cardinal Group.

I thought I would shift gears a little bit and not focus as much on the near term, but some macro drivers here and just would like to get your comments. The first thing would be, is the Obama broadband stimulus plan -- would that be of any benefit to you I guess primarily on the infrastructure side, but I think that would drive accessories as well.

Oh yes, absolutely. And all the awareness, as I mentioned earlier, is that -- our WiMAX offering is not the municipal offering, but it could be for smaller municipalities. It's smaller system. It's a fixed system, not a mobile system. But we believe that that incentive -- and we're already all over those spending dollars that are coming out. We are meeting with our congress -- congressmen and getting into those various areas.

And as we mentioned before, we have that proprietary offering, that WiMAX offering, that has been doing very well in this economy. It's still just getting off the ground, so the dollars are still relatively low.

We are also looking at education, K-1 through K-12. We're looking at the 911 markets, so there's a lot of opportunity there. And so all of this from a broadband perspective, as far as Obama, is great. One thing that is a little disappointing is that he is postponing this digital TV, which frees up the 700 megahertz frequencies for this other broadband. Qualcomm has made a major investment in that, and so that's a type of uncertainty that we're seeing, is that if that was on track -- and now it's going to be delayed six or seven months -- that would've really helped us in terms of -- in that particular new market build-out.

Secondly, getting back to the network infrastructure question, the -- you look at the wireless traffic growth and wireless capacity, and these networks are running hot. They're trying to squeeze as much as they can out of the existing network, but it just seems like that can't last too long based on the traffic that's driven by the iPhone and a lot of these 3G launches that have come out. Is that your sense at all in your infrastructure people that while the first quarter might start out slow based on what the carriers have been saying in their earnings calls, I don't see how the wireless network infrastructure spend can really be deferred too long.

Well you know, we've been saying that now for quite a while, and I totally agree with you. We've talked about just the iPhone in terms of how the performance continues to decline. If you look at Verizon's and AT&T's releases, they are both depending upon wireless to fuel their growth. So absolutely is that that infrastructure has got to be enhanced as we go forward, and they've got to do it sooner rather than later.

Also, on kind of let's say a near-term basis, some of the key drivers in the handset market, Qualcomm providing the proprietary chips -- and of course Nokia -- have said that the downturn might even worsen. And I think they were really looking into this quarter. But then they're talking about the upturn could be driven by a lot of key factors.

And I just wondered what you thought about some of these drivers. You're talking about mobile Internet devices. Obviously the advanced chip technology, the movement to LTE and 4G, are these all the things that you would see as drivers here that could bring the handset market back since the inventories have been driven down so low?

Now, you've got the handset market with the enhanced phones and the high-end phones, and I think that the market has emerged into -- there's two sides to it. There's one, the high-end; and then the low-end real low-cost phone. If you look at AT&T's results, they talked about how the iPhone is really what they were selling. That's a high-end phone and drives a lot of high-end accessories.

The other really interesting thing that we see developing is all these converged devices -- they call it. Cameras, GPS, laptops -- all going over their network, so we see huge new opportunities in terms of us moving into new devices that the carriers are going to sell, and that's going to drive accessories as well as possible fulfillment opportunities for us into these areas.

Right.

Just go back to your infrastructure just for a minute. The other areas that we're seeing the strength in -- strength in people exploring -- not necessarily the businesses coming through, but all the backhaul. We have a very exciting backhaul offering, and this is where they are using wireless to backhaul the signal rather than using hard-lined phone lines that they've got to pay the monthly toll charge on.

Right. No, I know when you talk to the vendors, the wireless backhaul -- mobile backhaul market is probably the strongest market in the equipment segment for those that address it.

Bob, maybe to wind up on a point you just alluded, because Verizon on their earnings call mentioned that they are now ready to move forward to start providing a number of non-handset devices onto their network as part of their open network plan. I guess there's 29 devices going on. And it seems to me to be a huge market. I've seen projections were non-handset devices may be $90 billion in operator revenues over the next five years, driven by laptops, gaming, ATMs, and all kinds of other what they call machine-to-machine applications. Is that what you were referring to on these new devices?

Absolutely. The monitoring services, the machine-to-machine, the data acquisition -- these are all part of those converged devices that are coming out. So it's going well beyond just as we know a mobile phone -- that these are going to be fixed devices, security devices. We see a lot of this happening in the gas and pipeline and utility business. And this is a very exciting area, and the carriers are very anxious to get these devices converged as they ride on their network, rather than people building private systems for it.

But we've got both ends. We can help them build a private network, the [SKATA] systems, the machine-to-machine, but at the same time we will have the converged devices that allow them to put it over the public networks.

Right. It just seems to me to be a major opportunity, and you would be a beneficiary of that.

Maybe I'll just wind up real quick and then turn it over. The other development that's happened with the carriers over the past week or two, Vodafone came out and talked about the need to standardize headsets, and they were -- or handsets. And they were going to reduce the number of handsets that they use -- and maybe handset vendors.

But what they were really looking for is not as many handsets out on the market, but those that have much more -- are feature-rich and capabilities, and they were looking to standardize that. And that would seem to me to be a key point as well, because the more applications and features on the handset, the more bandwidth would be required and the more capabilities that it would offer.

Yes. That's what I was referring to earlier is just that that market is strong. The iPhone market, what we call the fancy phones, if you will, continue to be strong, and they also drive a lot of upscale accessories.

But at the same time, is again with the economy, there's a real need and desire to have a low-end phone to get the new entrants in. They are seeing a lot of the landline phones canceled. People want to use the cellphone as their only phone in their home -- and in their business in some of the smaller businesses. So you've got -- but the middle market is just not there. So you can't be a little bit of a -- it's got to go all the way and be an iPhone-type quality or just be really down and dirty in terms of a low-end cost phone.

Let's hope the next quarter you'll have better news on order rates and demand inputs here that we're not really seeing. But it sounds like they're starting to slowly work themselves back into hopefully a more normal situation.

Thanks, Ted. We just have so many great things going on, and -- but it's just -- the challenge is to be able to capture it and predict it as we go forward. We feel very, very positive about where we are in this marketplace, the product offering, how we're serving, and then our operational capability, and it all has to tie together.

And one of the things that David said, we have a strongest team on all levels than we've ever had. And just to show the level of commitment, all Officers have taken a pay reduction in this marketplace. And we even had some of our rank-and-file team members, after they heard what the Leadership did, which the Officers of the Company did -- and we're talking about a bunch of people. But then we had the rank-and-file offer a salary reduction on their end.

So there's a high level of commitment, obviously focus on cost and really staying in a mean, lean position as we move forward in this economy, but at the same time making sure that we can emerge on the other end with a new level of leadership in the industry.

(Operator Instructions). Joey Kumar.

A couple of quick questions. First one is, your guidance tells me that you're going to make a penny or $0.10 in last quarter, but what do you think about your revenues? Is it going to drop drastically, or is it going to still stay the same?

Yes, we're looking at a decline in revenues. We expect our margins, our gross margins to stay about flat, maybe even a little bit higher, so it's -- much of that reduction is coming from the revenue line.

And I will say that we're tempering our expectations based upon what we saw in the first two weeks of January. Now, January is always a slow month for us. This was a lot slower, but at the same time, we just wanted to make sure that we were being very conservative in terms of what we are seeing, so we essentially extrapolated out where we've been tracking in this particular quarter.

And we are expecting the core business to not contribute that much to that revenue decline. So what we're looking at is the concentrated business with the two large relationships, that that's where we're going to see some revenue decline. That's what we're expecting.

Okay. Because I was just listening to you guys talking about how people are trying to scramble to increase their inventories, and maybe you guys might probably in the next month or two coming into spring might see a better outlook for this quarter. Just thinking of how your revenues are going to be affected by that, because with December being pretty much dead, you guys have got pretty good numbers here. So just -- you've got another two-and-a-half months. So I was just wondering if anything is going to change in terms of earnings, you know?

You know, you are reading our minds in terms of what -- because as I say, we're taking the mid December and 1st of January as kind of the indicator and being very, very conservative on that. But in a lot of these areas we can't see how they can continue not buying.

Yes, that's true. The next question is, do you guys are foreseeing any possibilities of buying out any small guys in the market?

Yes, absolutely. If you look at the cellular accessories tree, there's hundreds of suppliers, and they are all starting to hurt. Their service levels are going down, they can't serve the customers. That's why we are emerging as that reliable, dependable supplier.

We've always been so, but more and more new people are coming to us. And the trick with the new people is we have to watch the credit side making sure they are coming to us for -- not because somebody else won't sell them, which again goes back to our focus on not only the inventory but the receivable side of the business more intensely.

But yes, I believe there's going to be a lot of opportunities for us to consolidate on the vendor side as well as get our customers to consolidate the with us on the purchasing side.

And your $3.5 million long-term debt, that's the -- you got any other debts other than that?

Just the revolving credit facility.

[The revolving credit]?

Yes. It's about $6 million. That's up in the current line.

At this time, there are no additional questions in queue. I would now like to turn the call back over to Mr. Robert Barnhill, for any closing remarks.

All right. Well, thank you very much for the questions -- and they were some great questions. And it allowed us to give you a little bit more flavor in terms of what we're thinking and what we're doing.

And in closing, I just want to reiterate that we remain intensely focused on improving earnings, growing earnings, and by driving the gross profit dollars with lower inventories and lower fixed costs.

As we look forward, we believe we are in a very strong position to prevail in this weak market and certainly to capitalize when the market strengthens and these new opportunities emerge. And we continue to expand this -- the industry leadership in delivering our total source offering when and where the market needs it.

And we just again strengthen that our fundamental goal is to create enduring superior value for customers, manufacturers, team members, and you -- our share owners. So appreciate the support and look forward to reporting some exciting news next quarter. So thank you very much.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you, and have a good day.