TESSCO Technologies Inc (TESS) 2009 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter fiscal year 2009 Tessco earnings conference call. Today's call is being recorded and will be available for audio replay today at 12:00 PM Eastern standard Time. You can access the replay by calling 1-888-286-8010 and entering the confirmation number 75363963.

Today's call is also available via webcast at www.Tessco.com/go/pressroom. As in most presentations, the following discussions contains forward-looking statements and Tessco's results may differ materially from those discussed here. Additionally, 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. I would now like to turn the call over to over to Robert Barnhill. Please proceed sir.

Thank you and good morning. It is great to have the opportunity to talk with you today after the release of a strong set of numbers for Tessco.

Although the economic and market conditions were very difficult in the second half of our fiscal year 2009, we brought the year to successful close and turned in record earnings of $1.26 per share by increasing the value we delivered to our customers and manufacturers and by improving the productivity of every aspect of our business.

In the fourth quarter, earnings per share were $0.16 and our working capital management plan really swung into high gear. Compared to the third quarter, operating cash flow newly doubled as we maintained strong cash collections and reduced inventory 29% while maintaining excellent order completion and service levels to our customer, all of which is our primary value that we provide to these customers.

We also completely paid down our revolving line of credit and reduced Accounts Payable by over 22%. For the year, we generated over 3.6 times the cash that we did in our last fiscal year. I am very proud of the Tessco team which rose to the challenges presented by the global economic crisis with a high sense of urgency, new thinking, innovation, energy, alignment and great execution.

There is much excitement here at Tessco. At this point, I would like to ask David Young, our Chief Financial Officer, to walk us through a more in-depth look at our numbers.

After that, I will come back and give you an overview of our strategies, how we plan to obtain substantial growth and earnings through new innovations, new marketing and even better operational productivity. David?

Thanks Bob and good morning. As Bob said, we are very proud of our recent results in what continues to be a very difficult environment. And now I'm pleased to provide you a few more details.

For the fourth quarter, revenues totaled just over $98 million. That is a 23% decrease compared to last year's fourth quarter. But gross profit decline by only 8% and totaled $27.4 million.

As a result, gross margin grew by 320 basis points and reached nearly 28%. From the line of business perspective, our mobile devices and accessories revenues totaled $47 million, decreasing 32% mostly as a result of decreased sales of cellular accessories to our Tier 1 carrier and to a much lesser extent, other retailers and users.

Our Tier 1 carrier customer accounted for 37% of revenues in this line of business and that compares to just over 50% in last year's fourth quarter. Despite the large revenue decrease, quarterly gross profit was down only 14%. So gross margin in this line improved substantially from 21% last year to just under 27% this year.

While much of this improvement is due to product mix changes and sales to the large carrier, our margin on sales to other customers has also improved significantly this quarter. The number of buyers in this line of business declined by about 5% as we saw many smaller retailers cease operation recently and purchases per buyer excluding the Tier 1 carrier and consumers decreased by 6%.

On the network infrastructure side, revenues totaled $39 million. That's a decrease of 2% but gross profit increased by 7%.

Again, in this line we saw nice growth in gross margin. It increased to 29.1% from 26.7%. The number of buyers here decreased by about 6% but purchases per buyer increased by about 4%.

Installation, test the maintenance revenues were $12.5 million; a 36% decrease, while gross profit declined by about 25%. Gross profit margin increased here again to 27.5 from 23.2. Buyers declined by about 10% while purchases per buyer decreased by 29%.

The significant decreases here in revenues and purchases per buyer can both be largely attributed to changes in our agreement with our repair or replacement parts relationship. I will discuss that a little bit further in a minute.

This is the highest we have seen gross margins in quite a while. As I just stated, it is really a result of higher margins in all three lines of business compared to last year and this is driven by several things.

First and foremost, we have had some real success in our proprietary product line. In the quarter, they represented about 13% of total revenues.

The TeraWave business continues to be very strong and is driving margin improvement in our network infrastructure line. We have been successful with other aftermarket products as well, especially in the cell phone accessories and network power supply category and we are continuing to see a product mix shift in our large carrier relationship, where a higher percentage of sales are coming from our proprietary products as opposed to lower-margin OEMs.

Secondly, we're working much more closely with our manufacturers to make sure that their products are successful with our customers and we have seen some real nice pricing improvements from these manufacturers. Third, our model on the OEM repair and replacement components business has changed somewhat.

So since January, more of that business is being recorded as net fee-based revenue rather than the gross revenues with cost of sales. And this business really is becoming much less material to our consolidated revenues than in the past.

For the quarter, it represented only about 4% of our sales and for the fiscal year about 6%. And then lastly, we have also seen significant reductions in freight end costs as we continue to optimize our inbound logistics.

So, now onto SG&A. I think we've done a really nice job in controlling expenses during the the fourth quarter. They totaled about $26 million.

That is down over $1.1 million or 4% compared to last year's fourth quarter. It is largely a result of lower freight out, better utilization of our marketing spend and reductions in some corporate overhead costs.

These reductions are partially offset though by increased people cost, primarily in our sales teams. So, while we have made certain prudent position eliminations over the last several months, we've been able to maintain our strong team and we believe this positions us very well compared to others in our industry.

All of this results in operating income of $1.4 million and EBITDA of about $2.4 million for the quarter. Our net income totaled $800,000 or $0.16 per diluted share.

For the year, as Barney mentioned, it was a record year for us in terms of earnings. Our revenues for the year totaled $483 million.

Our EBITDA was $15.4 million or just over $3.00 per share and our EPS came in at $1.26. Now I will spend a little bit of time on the balance sheet where we were able to drive some real improvements during fourth quarter.

As we discussed on the last call, our main focus this quarter was inventory. We were able to get inventory back in line and in fact we reduced it by about $15 million or 29% since December; again, all while maintaining solid service levels to our customers.

Inventory turns were 6.4 for the quarter, but we expect that number to increase as long as inventory levels remain in line. The lower number, the 6.4, is the result of higher inventories and lower sales early in the quarter.

Our cash collections remain strong. Day sales outstanding were flat at about 41 compared to last year's fourth quarter.

Given the current economic and credit situation, we're doing our very best to stay on top of these balance sheet items and so far I would say we have done well. It continues to be a very difficult job.

As a result of these things, we generated about $6.6 million in cash flow from operations this quarter. Again, this will allow us to completely pay down our revolving credit facility and purchase about $300,000 of treasury stock during the quarter.

Just a few more details on the stock buyback program. During the quarter, we repurchased about 30,000 shares.

The average price of these shares was about $9.50. And under our buyback authorization, 84,000 shares remain available for repurchase.

And as a reminder, purchases are funded by working capital and our revolving line of credit. And we have set no timetable for the completion of this program.

So, to summarize all of this, we feel that we fared very well in an extremely difficult environment and we're pleased with the work we did on the balance sheet this quarter, lowering inventories and paying back all of the operating debt. We know it is going to be difficult but we look forward to the challenges ahead of us in fiscal 2010. I will now turn it back to Bob.

Thanks Dave. Good numbers, good results. Obviously, today's economy remains difficult and market conditions remain tough.

But we are confident that we are developing a winning strategy and that we can keep building on our successful performance in this new year. We are very well positioned to capitalize on the exploding world of wireless with estimated mobile broadband users that are expected to grow from about 10 million to over 300 million subscribers by 2020 -- and this is again global.

And as this wireless, data and Internet technologies converge, we see wireless broadband networks, services and devices flourishing as there are more applications and more technologies to developed to serve these applications. Today we support a wide range of wireless applications including cellular, two-way radio, WiLAN, WiMAX, security and surveillance, data collection and many others.

These wireless deployments extend far beyond the traditional public health comm and government systems into the private enterprise, transportation, mining, energy and utility organizations. We have been expanding our marketing and sales focus aggressively into these channels.

There are also sizable stimulus programs on the horizon that we believe we will benefit over the long-term such as President Obama's rural broadband plan for extending broadband reach into the underserved areas in the United States, the Smart Grid utility program for better energy and conservation management and even the authorization of the United States communication system providers to enter into agreements with Cuba to establish telecommunications to link the United States and Cuba. Again, these are all on the horizon, but we are tracking them very, very closely.

To grow our business in this new fiscal year, we are very focused on increasing our share of our customers' business as well as expanding the number of customers and markets we serve. We are doing this by saving our customers time and money and by expanding our product solution offering.

Let me give you one example of a strategic initiative that is really rolling out very well. It is what we call the Power of One program, which aggressively communicates to our customers our value proposition of lowering customers' total cost and streamlining their supply chain process by consolidating their purchases with us.

We communicate with our customers, make Tessco your total source and experience the power of one; one source for expert knowledge, service and assistance; one supplier with the availability of everything needed; one purchase order receipt and invoice; one point of contact for extraordinary problem resolution returns and warranty; and one dependable partner for their credit, financing required and the control of the complete supply chain.

So far the response of this program has been great with virtually all of our customers enrolling in the program, indicating their commitment to expand their relationship with Tessco. We are now in the process of targeting organizations that are not already our customers for enrollment.

Our guarantee of product availability and complete on-time delivery are the important differentiators that are driving this program adoption and should help us drive topline growth. While we strive to drive topline growth, we remain intensely focused on improving margins, productivity and cash flow.

We plan to continue to lower landed product cost while managing pricing carefully, expanding the development of higher-margin proprietary products and doing what we call 'more with less' in every marketing, sales, purchasing, fulfillment, operation and support area. So now with a kind of a backdrop of what are our strategies, let's turn to the guidance we have provided for this new fiscal year. And we have taken a little different approach and in that we're giving some more metrics to track our performance.

Number one, we're going to look at providing you with an average number of monthly buying customers. We plan to grow this at least 5% from our average monthly number of over 12,000 in fiscal year '09.

We will track the average number of product categories purchased by our customers. Just to give you a sense of how much room we have to grow, the average customer is buying approximately three out of our 27 total categories and our typical customer is capable of buying five to 10 or more of these categories each and every month.

Next, we're looking at -- we will report on expanding our core, our non-concentrated revenues faster than our Tier 1 carriers and large repair and replacement parts business. And lastly, we will track our free cash flow to net income ratio. We want to maintain this one to one. Free cash flow we define as the cash provided by operations, less acquisitions of property and equipment.

So those are the metrics in addition to the earnings per share that we will give you and it is important to recognize that it is never be see easy to predict sales in our business especially since the nature of our business is to ship products usually within hours or no more than several days after booking the orders. So there's really no back order to work from.

So, based upon the increasing order flow we have seen over the past four months and the many productivity improvements that we are implementing, we expect earnings to be in the range of $1.00 to $1.40 for the fiscal year. Now we will recognize that this is a wide range, but it reflects the realities of the economy, the swings of our concentrated business and the speed of our execution. But it also reflects the possibility of improving marketing conditions and the faster execution of our growth and productivity initiatives.

So, with that, we will open it up to questions and see what we can answer.

[Operator Instructions] Anil Doradla, William Blair.

I think the first question I had was you are not giving the revenue guidance for the year, but can you give us some idea about what you are thinking about it and also the margins in 2010? Does gross margin stay above the 25% for the year?

Great question and good morning to you. It's interesting is that we look at the various components of our business, it is difficult to project the revenue. We can do that within the core business but not when you look at the total combined business. Just as David said, the repair parts has a different model today and it is gone towards more fee than revenues.

We look at the -- when you put it all together, we feel that we will drive margins faster than we drive revenues as we look into this new year. And so we feel that we will maintain -- we will grow gross margins and grow operating margin because of the initiatives that we are doing. We have been very fortunate that we continue to remain competitive with our customers but at the same time growing those gross margins through a combination, as David said, of purchasing and of the proprietary products. David, do you have anything else?

I think if you look at what we're expecting in the core business, I think with the growth and the buyers and the cross-sale, it sort of turns into dollars per buyer. I think you can get a sense of where our mindset is there.

And then I think on the concentrated business, that -- again, that is much more difficult for us to forecast. But I hope that business grows this year as well.

Great, another question stepping back on the macro front, can you comment a little bit about kind of order flows and the channel inventory levels? There has been some talk about beginning from March, things have been looking a little bit better moving into April.

People have commented about the inventory being pretty much at the rock bottom. From your point of view, how do you view the world both from an inventory and the restocking point of view?

That's a great question. Our order entry has remained even through January which was a very slow month. The order count remains hot which again puts pressure on productivity because you have got less dollars riding in the box that is going through the distribution center.

The activity is extraordinarily high, which is a great thing in terms of just the people that are making sure that we have inventory for them, giving them quotations, giving them proposals. And so that -- we look at the -- we definitely look at loosening up.

It is hard to take any more inventory if the shelf is already bare. So, we definitely feel that there is a -- low inventories in the channel, which puts a pressure on us to continue our service level which was a real trick that we did this quarter where we could take out as much inventory as we did but still maintain our order completion levels.

So that is one of the things customers are depending upon us to come because they don't have the inventory. They don't have the buffer and we can supply them with what they need. So we feel a strong sense of what is happening in the marketplace. But again, we are really not -- we are strategizing to prevail regardless of what happens.

So your business model over the next remaining part of this year, is that based on some form of snapback on the inventory or does that assume that inventory levels are going to remain where they are right now?

That is why we gave the large guidance range. The snapback obviously pushes towards the high range. The lower end is where they continue with the low inventory.

Quite frankly, we hope that our customers maintain low inventories because it just greatly enhances our value proposition to them where we supply what they need when they need it. I really believe that as we go forward out of this economy, we have learned a lot.

People are saying inventory is a liability and I want to stay lean on inventory even though the economy starts to move again. But I want to maintain low inventories and depend upon Tessco to serve my needs.

So, I remember last quarter you highlighted that December, at least second half of December, things started dropping off. Til mid-January, it was pretty dire.

But starting from mid-January, I think you made a comment saying that things have improved. Have you seen -- since mid-January of this year, has it been kind of a sequential improvement month over month until the end of April or has there been some pushback?

There's been a continued increase. One of the things we're trying to assess is what we feel is more of what we are doing to achieve or to gain more market share than necessarily the enhancement of what the economy is doing. But yes, we have seen through February, March, April an acceleration of the business we are doing.

Okay, now coming to the operating expense front, can you maybe talk a little bit more -- I know you talked a little -- but build up on that a little bit more about what you see as an opportunity in 2009 for continuing? And can you quantify what you expect to see on that side on the OpEx front?

Yes. I think we are looking at targeting a pretty flat year in terms of SG&A. We think that we have got the capacity in terms of facilities and in most part, salespeople.

My comment before is we didn't achieve these SG&A numbers by big layoffs or anything like that. So we have got our people pretty much in tact. We may have a couple of strategic hires as we look at some of these new markets and new product lines. But I really think that our goal is to keep SG&A flat this year. We will continue to do a real good job managing our marketing spend and then our overhead is in pretty good shape, I think.

And finally one question about the Tier 1 relationship. Can you give us a little bit more of an idea about how we should be thinking of it going forward? There was that new agreement. When does that expire and -- so a little bit more color on how we should be viewing it for the remainder part of the year?

It is a great question. We obviously have a very, very close relationship. There's new opportunities that we continue to be given.

It is a share issue in terms of how do we get more of our SKUs into the carrier. We are doing an excellent job in terms of product development in our (inaudible) product line that we're bringing in more innovation and we continue to do an excellent job in terms of the service requirement there. So we are very optimistic and obviously it depends upon their sell-through as well as our share of the SKUs that we are providing.

Thank you very much.

Thank you.

Thank you.

Mike (inaudible) Proactive Consulting.

Congratulations on the profit (inaudible) the balance sheet improvements. My question was on the Power of One program as to what the initiatives -- what key metrics you will be looking at to gauge how successful that is going forward?

Great. The Power of One, as I mentioned, is Phase I. We rolled out to the customers that have been purchasing from us.

And the key metric there is driving their consolidation of purchases, which they will move into the measurement of what we call cross-sell which is the number of categories that they're purchasing from us. And consolidation of purchasing basically comes down to breaking a habit.

So it is going to take, while there's incentives for them to do that, it is going to take time for them to recognize the power of what we can give them. But we are tracking this cross-sell indicator and it has been improving.

The other thing is naturally by cross-sell, it will improve repeat and repeat is how we measure whether a customer buys from us each and every month. We have seen an improvement on repeat. As I mentioned, we will be reporting back next quarter how we are tracking on that cross-sell ratio.

Then on top of it, we will be rolling out this quarter a Power of One program going to new potential customers. And there we will be looking -- that will drive -- the metric there will be the number of new customers that we begin serving.

One of the target areas is to go into these new, what we call self-maintained using organizations -- the enterprise, mining, transportation, utilities -- and there we should see major growth in there which again we will be able to report that success. David, you got any (multiple speakers) Anything else you got?

Ted Moreau, Cardinal Research.

Bob, maybe you can elaborate a little more on the smart phone and application horizons here because there's been study after study coming out about the increasing capability of smart phones, some of them which with GPS capability, etc.

I'm thinking, might your relationships with the current Tier 1 and other Tier 1 carriers expand as a result? I'm thinking of Verizon's open network development program which apparently is moving ahead according to their call this week and also the fact that they are negotiating with Apple for iPhone. I just wondered -- with the great numbers AT&T is putting up on iPhone, what all this means for you.

Well, it is a great and it is a big question is that when we say smart phones, we're really starting to look at the convergence between a computer and a cellular phone. And there's huge opportunities. In fact, that it is even moving towards the carriers are starting to look at providing computers that are wireless equipped in addition to what we are calling the smart phone.

I think as we have all seen, there is a global decline in the sale of cellular phones, but the smart phones continue to be strong. It is doing two things.

It is, one, it is expanding at a fast rate. It is putting pressure on the networks to support the phone. So, we should see more network infrastructure buildout.

Those of us that are using iPhones, as I've mentioned before on these calls, as you can continue to see a degradation of the service, the speed of that phone -- so that should help us on the network of the structure side. And then also, the attach rates -- what we call the attach rate of selling accessories with a phone is much higher than a conventional phone and the accessories purchased are usually at a higher price point.

So, it is all very exciting. We are involved in supplying the accessories for the computers, the bigger computers, the laptops as well as the accessories for the smart phone. The accessories continue to grow at a very handsome rate.

We still -- the network infrastructure build has still been relatively slow. In addition to the network infrastructure, you're going to see more and more wireless backhaul infrastructure, again, which we are very involved in, in replacing the wireline side to reduce their costs.

So, it is a major area for us. It's tracking. We have all been tracking what Verizon is doing with Google. The new iPhone; it is very, very exciting.

What if Verizon would complete an agreement with Apple and also be a distributor of the iPhone, would that mean anything more to you?

Absolutely. It is just more devices out there. It is going to be interesting to see what Apple does. Verizon is on CDMA. iPhone wants -- where Apple is on GSM and has not introduced a CDMA phone anywhere in the world and stayed with GSM.

So it's going to be interesting to see what happens there. But whatever the device is, it helps us because there's just more devices out there that need accessories.

We also see an addition to the high tax rate and the higher price point. You definitely see a higher frequency of changing out.

Cases for an example are becoming huge for us and the average user might change their case every other month, they get a new style case. I think it is also important to recognize that Apple still has one more year -- or AT&T has one more year of exclusivity with Apple.

I think it runs out at the end of '09. Bob, along these lines, it just seems as though the trend in the industry is to non-proprietary devices, non-proprietary network so that any particular application and device can hook into any particular network which is part of this open network concept.

And I know Verizon talked about it on their last call. So it looks like it is actually starting to happen and I presume this would be favorable for you as well, the more devices. And a lot of these are -- may well be non-communication related, as you've stated.

I think that just the laptop computers is just another -- where it's essentially an open platform, and you can come on and also that these phones now have the WiLAN capability which again you can access in your own internal system without going onto the major network.

So, it is an open platform not only as far as going through the carrier's network but your own private network. Again, that was one of the things that we mentioned earlier, is our focus is really on these private networks which are growing at a very fast rate in addition to supporting the public cellular networks.

Along these lines, do you envision having maybe more non-communications devices as part of your portfolio? I'm thinking of meter reading and the ability to manage the energy capabilities in your home and other things that are all going to I think spring out of all of these intelligent devices that are going to come online.

Absolutely. The laptops that we are supplying all the cases for laptops, power supplies which are deemed not communications based. And then as you get into the machine to machine, the Smart Grid that we're talking about using wireless to control the utilities Smart Grids; video surveillance. Surveillance is itself -- yes. The wireless applications are going well beyond just voice communication. Data collection, I mentioned mining. We're having great success in mines in terms of their WiLAN systems. So it is an exciting time.

Great, thanks Bob.

Anil Doradla, William Blair.

Yes, Bob, quick question on 2010. If I look at the four quarters from first to the fourth, how should I be looking at the EPS? Should I be viewing it as kind of a sequentially growing EPS, or first half stronger than the second half? Can you give us some guidance as to how we should be looking at the four quarters in 2010?

Absolutely. You're going to see an acceleration as you move through the year. And our guidance is obviously back loaded, if you will, in terms of -- especially as you look at the high end as far as gaining acceleration of our initiatives.

Again, our initiatives are really focused on market share, new markets and productivity regardless of what the economy throws at us. But then we should start to see an acceleration as we get into the second half of the economy. But again, that is why we are giving the wide spread. David, you have any more thoughts?

I think it is important to realize we are building off of a $0.16 quarter. And so we have got the -- the second half of the quarter was much stronger than the first half of the quarter. So we would expect to see some growth right away, but I think we are expecting it to ramp as the year goes up.

Okay, thank you very much.

(Operator Instructions) At this time, there are no further questions. I will now turn the call back over to Mr. Robert Barnhill for closing remarks.

Thank you. I really appreciate the questions and participation. As I close, I just want to emphasize that while being very aware of economic challenges, we are excited about our opportunities in the world of wireless.

As I've mentioned, we are expanding into new developing private broadband market systems while continuing to support the cellular. We are developing new robust product solutions and service offerings, including our proprietary products.

We are very focused on the growing of our buying relationships with our customers and the product categories they purchase and doing all of this while improving margins, productivity, profitability and cash flow. With all of this being said, we believe that fiscal 2010 should be a good year for us even if the difficult market conditions continue.

And I really look forward to reviewing our first-quarter results with you in July. So, just take this opportunity to thank our customers, thank our manufacturers, our team members and naturally you, you shareowners, for your support. So we will talk to you in a couple of months. Thank you.

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