TESSCO Technologies Inc (TESS) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TESSCO Technologies First Quarter Fiscal 2010 Conference Call. My name is Patrice and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions). As a reminder this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Harriet Fried with Lippert/Heilshorn & Associates. Please proceed, Ma'am.

Thank you, Operator. Good morning, everyone, and thank you for joining TESSCO's conference call. With us today from management are Robert Barnhill, Chairman, President, and Chief Executive Officer, and David Young, Senior Vice President and Chief Financial Officer.

Management's discussions this morning will contain forward-looking statements about anticipated results and future prospects. Forward-looking statements involve a number of risks and uncertainties and TESSCO's results may differ materially from those discussed today. Information concerning factors that may cause such a difference can be found in TESSCO's public disclosure including the Company's most recent Form 10K and other periodic reports filed with the Securities and Exchange Commission.

With that introduction, I would like to turn the call over to Mr. Barnhill. Please go ahead, Bob.

Thank you, Harriet. Good morning and thank you for joining us to review what was another excellent quarter for TESSCO. While many companies have been struggling in this economy, TESSCO did a great job of leveraging on our successes and opportunities in the wireless industry.

As a result of strong focus and a high sense of urgency and the excellent execution of our business generation and productivity initiatives, we achieved sales of over $100 million and earnings per share of $0.38. I especially want to highlight that we grew sales almost 10% sequentially and saw sales growth in every product line of business and buyer growth in all of our served markets.

I am also very proud of our 3% operating margin, the best in five years. While continuing to invest in business generation, customer service and product availability, we ended the period with a cash balance of over $4 million. And for the consecutive quarter, we had no borrowings on a revolving credit facility.

At this point, I would like to turn the call over to David Young, our Chief Financial Officer, to walk you through the details of the financial results. After Dave's review I will come back to give you an update on our business outlook and strategies that we believe will make this a very solid year for TESSCO and our share owners. David?

Great. Thanks, Bob, and good morning. As Bob said we are very proud of our recent results and I'm glad to provide you a few more details now. All comparisons here will be to last year's first quarter unless I state otherwise.

So for the first quarter, revenues totaled just under $109 million. That's an 11% decrease compared to last year's first quarter, of the gross profit decline just 6% and totaled $29 million. As a result gross margin grew by 130 basis points and reached 26.7%.

From a line of business perspective, Mobile Devices and Accessories revenues totaled $54 million, decreasing 8% mostly as a result of decreased sales of cellular accessories to our core resellers as sales to our tier 1 national carrier customer remained essentially flat. Gross profit dollars decreased by only 1%, however, and so gross margin in this line of business increased nicely to 26.8% from 25.2%. Much of this gross margin improvement was due to product mix changes in sales to the large carrier customer.

We have had a lot of success recently in selling our proprietary products to this customer. And we are beginning to see some similar successes with other carriers and larger retailers.

The number of buyers in this line of business declined by about 2% as we saw many smaller retail cease -- retailers cease operations recently. And purchases per buyer excluding the tier 1 carrier and consumers decreased by about 10%. It is still a very difficult environment out there for smaller retailers.

Network infrastructure equipment revenues totaled $40 million, decreasing by 7%, while gross profit decreased by only 4%. Again in this line, we saw a nice growth in gross margins. It increased to 28.1% from 27.2%.

Product mix and success of our proprietary products in this line are driving the higher margins. The number of buyers decreased by about 4% and purchases per buyer decreased by about 2%.

Installation, Test and Maintenance revenues were $15.5 million and gross profit hit $3.5 million, a 27% decrease for both. Buyers declined by about 10%, while purchases per buyer decreased by 20%. The significant decreases here are largely attributable to changes in our agreement with our repair and replacement parts relationship.

These are difficult year-over-year comparisons. Not surprising, given what has been happening in the economy. But comparing these results to the March quarter gives us a sense that our initiatives and execution are really driving results and that our business is solidifying.

Sequentially, revenues are up 11% and each line of business shows growth. The number of buying customers in each market also increased.

Bob is going to talk a little more in a few minutes about our business outlook and some of the opportunities we are seeing. And we believe these opportunities have the potential to drive some really positive results later this fiscal year.

On to SG&A. Operating expenses remained in check during the first quarter. They totaled $26 million. That is down $1.7 million or 6%, compared to last year's first quarter. Almost every line of SG&A has shown some decline year over year from marketing and sales promotion to facility occupancy costs to IT and corporate overhead.

What really excites us here, though, is that we are still investing heavily in our future. We are just doing it in more efficient and productive ways.

The two accomplishments during the first quarter really stand out here. In June, we hosted a virtual tradeshow related to wireless networking. This virtual form allowed us to present our broad array of wireless networking product solutions from world-class manufacturers to a lot of customers -- many more than we could have reached at a typical tradeshow and for a fraction of the cost.

Also in June, we rolled out our wireless guide, which is the industry's primary tool for wireless professionals. We rolled that out in an interactive page-turn format on TESSCO.com. This electronic tool gives users better functionality than the printed book since they can easily and virtually browse through what would ordinarily be 1700 pages. But it requires no printing or delivery costs and it is always up-to-date.

These are just a couple of examples of things we've done to improve our productivity. And we have shown -- and these have shone through in terms of improved operating margins.

So our operating income for Q1 was $3.3 million. That is 3% of sales and that is a recent high for our operating margin. Increasing our operating margin is something we are very focused on, and we are proud of these recent results.

EBITDA totaled $4.3 million this quarter. That is $0.85 per diluted share. And net income was $1.9 million or $0.38 per diluted share.

Now onto the balance sheet where we were able to drive some really nice cash flows during the first quarter and we maintained our very solid footing.

We continued our primary focus on customer order completion with our inventory levels. Inventory did increase by about $4.5 million since March, but it is still down about $9 million compared to this time last year. And inventory turns and order completion are getting back to our strong historical levels.

Cash collections remain strong. Day sales outstanding actually saw a slight improvement this quarter. They were 38 compared to 39 last quarter.

Given the current economic and credit situations, we are doing our very best to stay on top of these balance sheet items. And I would say we have done well, but it does continue to be a very difficult job.

And as a result of the balance sheet initiatives, we've generated about $6.6 million of cash flow from operations this quarter. We didn't have any more borrowings outstanding on our revolving line of credit. And so we built a cash balance of about $4.4 million as of the end of the quarter.

Just a quick update on our stock buyback program. During the quarter, we didn't buy back any, any shares of stock and our authorization remains at about 84,000 shares.

In summary, we are very proud of what we've done and we're looking forward to what lies ahead of us in fiscal 2010. It is a difficult environment, but we are very encouraged by our results and the prospects we see on the horizon.

I will now turn it back to Bob.

Thanks, David. It is really great to report this solid performance. And we're very encouraged by the first-quarter results and we see growth opportunities so -- during the rest of the fiscal year. As a result, we decided to raise the bottom end of our guidance by $0.15, taking the range from to $1.15 to $1.40 per share.

I believe our results demonstrate the effectiveness of our strategy and the very impressive dedication, innovative thinking and a high sense of urgency of the entire TESSCO team. Our strategy is founded on integrating, leveraging and scaling our many successes.

Specifically our strategic initiatives are focused in three primary areas -- four primary areas. First, building stronger value-based strategic relationships with our customers. Making sure we provide them extraordinary value and lower their inventories and total cost, and as a result motivated them to make TESSCO your total source for all of their requirements. Our pipeline is pretty exciting, including major customer opportunities with smart phones and net books, utilities, public safety, energy production, transportation enterprise, just to mention a few.

Second, building stronger value-based strategic partnerships with our manufacturers, making sure we grow their sales and lower their marketing sales and distribution costs and results -- and result -- make -- have them make TESSCO their primary channel to our broad and diverse customer base.

Third, entering new markets and developing new offerings by leveraging the expanding and converging world of wireless and Internet technologies. New applications are emerging and we offer solutions not just for cellular but for two-way radio, WiLAN, WiMAX, security, video surveillance, data collection and more. We are also partnering with our manufacturers including those that are producing our proprietary products to design new innovations at better price points.

And lastly, the fourth leg of the chair, while doing everything possible to drive topline growth, we continue our intense focus on improving margins, productivity and cash flow. As David was outlining, we are really doing and continuing to do more with less.

In summary, I believe we are on track to deliver a good year to our share owners.

So, Operator, at this I'd like to open it up for any calls or any questions you might have.

(Operator Instructions). Anil Doradla with William Blair.

Good morning. Good quarter. First question, I think, perhaps working my way from the big picture down to some of the Company specifics -- would love to hear your insights with the overall trends in the industry, especially over the past three months. And perhaps some kind of macro commentary on second-half '09?

It's a big great question. I would say that in general, there's no wind to our back. The fact that it's still very lumpy. You see the little pockets of great things, but we still continue to build our success through marketshare and moving into new markets and to new products.

On the cellular accessory side, obviously the iPhone is very hot. It has been driven some extraordinary growth and some other products. It's a -- very exciting areas as you look across the entire market. The network infrastructure people are still trying to build out their networks, but it is lumpy.

We've got some great opportunities with some of the secondary and some of the new entrants into the network infrastructure build. The wireless networking deployment is -- continues to get more traction, but still not really moving out.

It is exciting to see that we actually got some network infrastructure stimulus build out of one of the railroads -- a fairly large order. So we are starting to see some of that trickle down. So it's the -- we are winning through our diversity of offerings and the diversity of markets we sell.

So, David, do you have any overall?

No. I -- we are looking at the rest of our fiscal '10 to still be operating in an environment similar to the one we're in now. We are not really looking for any macro improvements. It is hard to tell when that is going to come.

All right, so when you talk about the macro improvements or lack of it, you are talking perhaps more from demand side or are you talking more from inventory stabilization, inventory drawdown? Can you give a little bit more (multiple speakers).

I would say that definitely the macro side in terms of just the overall market demand is still lackluster. But you make a great point in terms of the inventory drawdown.

We are seeing inventories. I mean, we are watching -- that's one of our critical elements is in terms of how we continue to look at the -- our inventory requirements because everybody is very lean in the marketplace.

We had a product that went from demand of five, let's say, on a relative basis consistently in April, May and then in June it spiked to 100. And those are going to be the challenges for us as well as the overall industry as demand spikes.

The inventory is so low in the channel, it's going to create a blip. And it's -- again, the challenge is making sure that you don't totally build your inventories into that blip. But at the same time, you make sure that you have it and you can take care of the customer.

Right. Good. Switching gears a little bit. If you look at the trends out there, there seems to be greater move towards now notebooks, ultra low-cost PCs, netbooks, whatever you want to call it. Smart phones, of course, keep growing at a healthy rate.

Just wanted to -- you to comment upon how TESSCO is positioned on the accessory side for kind of the non-handset, non-smart phone market?

We -- that is one of our major initiatives. We have an extraordinary product offering for the netbooks. We even have a major retail chain that we are working with on a test basis in looking at the various products. We have got products from our primary manufacturers as well as our proprietary products, a fleet line of everything from mice to carry solutions to cooling platforms to --.

So long-winded answer is that it is a very important market segment and we see a lot of things, great things, going to happen there. But it also is as we are looking is it's a convergence of the handset of the laptop and now the netbook. And all of those accessories is what is going to do is it's going to bring in the consumer into our conventional voice cellular arena to look to them for supplying the laptop and netbook accessories. So we think it is going to be a big category.

So from your perspective, Bob, looking into the carrier sales stores and all that [sells], do you think in the second half '09 can we expect about 5% perhaps of [old] sales of retail service stores being these mids and notebooks or laptops, or even that estimate is high?

I think it's -- I think we are going to see a real blip in over holiday. I think we're going to see -- as we move into the November, December and January, we are going to see a lot of activity for both the smart phone as well as the netbooks. And it will probably slow down after you get into holiday, but that's what people are buying today and you know we also believe Apple's announcement today. And it's strong.

So, I mean if I were to focus on the netbooks category, would you say on a blended basis, would you say 10% of all sales in retail stores could be netbooks for second half? Or I guess that might be too high, excluding smart phones?

I think you are going to see -- that's a big question mark. I think it is going to drive a combination of smart phones and netbooks. I think people are point to go in and say, "Wait a minute. Do I really need a netbook or would I be better to move towards a smart phone?" But it is definitely going to pick it up.

I think the other important thing is back-to-school. We are going to see a lot of netbooks being driven by students. And the back-to-school is where we are expecting a very strong season as we look. So it is really going to move that typical holiday from the November, December back into the August and September time slot.

Very good. So coming back to your P&L income statement, it looks like nice savings on the SG&A front. How did you guys achieve these savings? Was it done more by personnel cut or was it done by just greater, just being more careful on the cost?

I'll let David comment more specifically, but we are very proud of the fact that we have not -- there's no risk. We have continued to look at nonproductive resources in all areas, but the team is strong. We have continued with our various programs. And so that there's from a people side, it's a question of looking at the productivity.

Also say that we have taken a terrific focus on improving productivity rather than cutting costs, which is a major, major distinction. And as David mentioned that you take marketing -- I mean we move toward e-marketing, this virtual tradeshow that we rolled out. I mean, the amount of people that spent time, we had thousands of people that spent 38 plus minutes on our tradeshow and whereas a $1 million tradeshow would have produced just a fraction of those results.

And the cost of a virtual show is very very low. The pageturn that David referred to of our guide. I mean it is going to allow us to -- printing that book is a huge expense.

So we've continued to look at areas that we could get higher productivity, higher success at a lower cost point. And thus, we get productivity, and that is why we say doing more with less.

David, do you want to comment some more?

Yes. Anil, comp and benefits are down just a little bit. And so it really didn't come from people costs. It's really -- it's coming from every line. It's a better management of every expense line, things like our occupancy costs and we've looked at our corporate report and office supplies and IT and just -- it's really, across the board, just a good, hard look at every dollar. And I think we are doing a better job managing that.

I will also say that we have gotten concessions from all of our suppliers and vendors.

Very good. You know, the proprietary product line? How should we be looking at it for the remainder of 2010? You'd -- you said in the past it was about 10% of the total revenue. How should we be looking at the contribution from that segment?

Yes. This quarter I think it was right around 12%. So it's continuing to grow. We are having a lot of success as we said with some of the bigger customers. The infrastructure business has been improving as well. And that has striven increase in the margins there. That's the TeraWave and Gateway acquisition that we did a few years ago.

And so I think that our goal is to get that to be a bigger percent, long term, 20 to 30% of our sales. So I think we ought to keep thinking about that percentage growing as a percentage total and, thereby, helping to grow the margin line.

And finally on the share purchase, there is about 80,000 [plus] shares, I think Bob mentioned. How should we be looking at that? I mean, is that something we can expect over the next couple of quarters? Or you haven't made up your mind?

I think it's -- we always remain opportunistic in terms of where we see an opportunity to acquire shares. We are obviously very focused on cash and cash flow right now. And so we are looking at the various areas that we can deploy cash from an effective point of view.

So I think it's a open corporate strategy that we will continue to review that as well as other opportunities as we go forward.

Finally one final question. The accessories look like it turned out to be better than expected. Would it be fair to say that that was largely driven by the iPhone-related increase or --?

I would say that that's a -- we had successes in other pockets, but that was the real driver, that iPhone. When AT&T came out with the $99 price point and the new phone, it was like a firecracker.

So were people buying more accessories per phone? Or it's just that the number of phones went up and the average accessory spending per phone remains the same?

I think it's the -- the attach rate for iPhone is much higher. You are seeing people buy accessories. The carry case solutions are amazing. There, you have people buying multiple cases. It has become a real fashion statement where you've got people changing their cases every month.

So you've got a -- and they are different types of cases for different types of needs. Everything from styling, going to a party, or when you throw it in your briefcase and rugged cases and what -- I mean, it's really -- it is an amazing phenomenon in terms of what we're seeing there.

So it is a combination of definitely the quantity of phones being sold, but also the attach rate and also the fashion aspect of multiple cases, multiple chargers, multiple headsets. You know, the stereo headsets. People are watching movies on it so they need a better quality headset, so they are trading up.

It's a -- as we've said repeatedly on these calls is that it's probably the tipping point of the convergence of wireless and Internet. And it's all the things that it's driving. I mean, you could watch baseball games. You could watch movies. And so that is driving the accessories for that particular product.

Very good. Thank you very much, Bob, and best of luck going forward. I'll get back in the queue.

Carolyn Hughes with NYC Capital.

Good morning. Thanks. Bob, you gave us a good overview of the business opportunity that TESSCO has ahead. Could you give us an update on how the Power of One program went?

Great. The Power of One -- the (technical difficulty) just a packaging, if you will, of our fundamental value proposition of making TESSCO your total source. And we've created -- when the economy tightened right at the first of the year, a refresh -- talking about the Power of One -- you know, one source for everything from knowledge to products to product resolution. And then we incented the customer to purchase product categories that they had never purchased from us before.

So first, there has been a tremendous awareness. So if we can get customers to consolidate their purchases from all there various other suppliers and focus them with us, they will definitely lower their inventories and lower their total cost.

So we have gotten great acceptance of the program. We are rolling it out. We continue to every -- now every two weeks, we are running a program where we focus on a certain area for the customer. So we've got enrollment from virtually all of our customers into the program, which gives them these extra savings. But then it's -- they are continuing to buy more product categories.

And it kind of goes back to the opening comments is that, that is our secret sauce is to get people to consolidate their purchases. And it obviously is good for TESSCO, but it is also good for the customers as they can lower their inventories and lower their total costs.

So it's a very exciting program and it is something that we continue to enhance as we go forward. And we will continue to, regardless of the economy. It is, one, helping us in this economy, but it is going to really drive future success for us.

Great. Thanks very much.

(Operator Instructions). Ted Moreau with Cardinal [Research].

Hello. Two quick questions. One, I don't know if you aware or not or whether you are involved in it, but Verizon is having a major conference here on their open network applications and looking to have people submit all kinds of proprietary devices for this open network concept.

And I would think that would be a major market growth driver for you, especially in the non-handset area with all of these new innovative applications that will be going over the telephone network. Are you -- can you comment on that and are you going to be involved at all or --?

Yes. We are definitely -- I mean, that is an area that we are just going to continue to drive the devices. It is driving the machine -- the machine applications. It is going to continue to open the devices that will play on the convergence of the wireless and the Internet. Everything from a camera to GPSes, to applications, to machine on machine, security -- so yes.

I mean this is a major, major growth area for TESSCO and for the industry as we play on this convergence. And what Verizon is doing is really creating a platform to launch these areas -- these new devices.

And do you need any kind of contractural relationship with Verizon for all this to happen? Or -- or not necessarily?

Yes. To do business with Verizon as well as any of these, you need a license to hunt if you will, that where they certify you as a bona fide supplier. And we do have it and we are working with a lot of the new areas with Verizon. We have some exciting things on the horizon with with Verizon.

Right. And is this -- I think it's -- I don't know if it is a -- I think it is a teleconference they are doing, but are you going to be involved in that at all in some way or not necessarily?

Yes, I mean our people will be involved with those opportunities. Absolutely.

Right. And then second question, briefly, with all of the cost-cutting and the margin strength that you showed, how much more room do you have to improve the margins in what might be your target, relative to your historical levels of years ago?

I believe that our operating margin now is in the zone that we want to continue to push. I think these areas of productivity, we have been very successful and very conscious of making sure that we are investing in the future and not cutting out things that are going to put us into a position where we can't really prevail in this marketplace.

And you'll see, as David mentioned, we are increasing inventories. We are sales talent, marketing talent, but we are getting better and better of driving that productivity with those investments as we go forward. So that is why I keep emphasizing, it is not necessarily the cut. It is the productivity that we are going to be driving in these areas.

So we feel that there is -- certainly, when we start to generate more top level, there is tremendous operating leverage as we go forward. The biggest variable cost we have is the obviously product and also delivery cost. One of the things that we didn't mention, we have become -- we've been very successful in driving delivery productivity, freight rate productivity, again in a very difficult market with fuel surcharges and the like.

I think from a gross margin standpoint, some of these things that we are talking about -- these opportunities -- may alter the mix from a gross margin standpoint as well. So we've got some things coming up that we know about related to some Bluetooth initiatives with some of our larger customers that -- that may negatively impact the gross margin line in the next couple of quarters.

Now we hope that the strength of proprietary products and other things can offset some of that. But I think from -- I completely agree with what Bob is talking about from the operating line. We think there is still some nice leverage available there.

Great. Thanks a lot and nice quarter. Thank you.

There are no further questions in queue at this time. I would like to turn the call back over to Bob for closing remarks.

Great. Thank you and thank you, everyone, for your participation and questions today. We are really off to a good start for our fiscal year and we are very energized to achieve more. We look forward to giving you an update on our progress after the second quarter. And as always, if you have any questions or -- then please give us a call and we would love to see you and give you a tour of our operations and what we're doing. So with that, thank you very much.

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