TESSCO Technologies Inc (TESS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TESSCO Technologies second-quarter fiscal 2010 conference call. My name is Glenn and I'll 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 is being recorded for replay purposes. I would now like to turn the presentation over to Mrs. Harriet Fried of LHA. 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 well 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 10-K and other periodic reports filed with the Securities and Exchange Commission. With that introduction I'd like to turn the call over to Mr. Barnhill. Please go ahead, Bob.

Good morning and thank you all for joining us today. It was a great quarter. The excellent execution of our business generation and product initiatives resulted in sales of $133 million and record quarterly earnings per share of $0.51. This quarter's earnings and a 3.2% operating margin, a seven-year high, were achieved while we continued to invest in business generation, customer service, product availability and our future.

As a result of superior inventory and accounts receivable management we generated strong positive cash flow ending with a cash balance of over $8 million and no outstanding balance on a revolving line of credit. Our results and outlook to the next two quarters gives us the confidence to pay our quarterly dividend and increase the guidance, both of which I'll discuss in just a minute.

Dave Young, our Chief Financial Officer, will give -- will review our second-quarter financials and more results. David?

Great. Thanks, Bob. Good morning. As Bob said, we're really excited about these continued strong results and I'll now provide a few more details. And all comparisons here will be to last year's second quarter unless I state otherwise.

So for the quarter revenues totaled $133 million, that's an 8% decrease compared to last year's second quarter, and gross profit also declined by about 8% in total, just under $32 million. As a result gross margin was flat at 23.8%.

From a line of business perspective our mobile devices and accessories revenues totaled nearly $72 million, that's a 2% decrease. Sales to our large Tier 1 carrier customer remained strong, they were actually up slightly, due partially to increased sales of lower margin Bluetooth products.

Although sales of our cellular accessories to our core resellers continue to strengthen, we're down compared to last year's second quarter. But we're getting back close to prior year levels. Gross profit in this line decreased by about 4%, so we saw a small gross margin decline, again, related to increased sales of the low margin Bluetooth products. If we compare here sequentially, revenues in this line increased substantially and gross profit grew nicely as well.

The number of buyers in this line of business actually increased slightly, by about half a percent, despite the fact that we've seen a lot of smaller retailers close their doors during this economic downturn. We believe this is a real sign that we're growing market share in this difficult environment. However, purchases per buyer for the core market decreased about 9%, a continuing sign of the macro economic reality.

Network infrastructure equipment revenues increased -- or decreased by 1%, totaled $47 million while gross profit decreased by about 3%. In this line we saw a small decline in gross margin related mostly to product mix as sales of our broadband products, which are typically lower margin, have picked up some and we've seen some smaller scale carrier buildouts which is obviously encouraging.

The number of buyers in this line decreased by about 3%, but purchases per buyer increased by about 2%. Again, in this line our sequential growth in revenues and gross profit was very strong.

In the installation test and maintenance line our year-over-year and comparisons are inherently difficult due to the changes in our agreement with our repair and replacement parts relationship that resulted in significantly reduced revenues and gross profits. Nevertheless revenues were $14.2 million and gross profit hit $3.3 million, that's a 38% decrease in revenues and a 33% decline in gross profit.

Buyers declined by about 7% while purchases per buyer decreased 34%. Lower CapEx in the market has also negatively affected this line as sales of test equipment remained soft. Sequentially in this line results are not as positive as they are in the other lines, revenues are down 8% and gross profit is down 5%.

For the six-month period revenues totaled $242 million, that's a 9% decrease, and gross profit was $61 million or a 7% decline. So still difficult year-over-year comparisons, not surprising given what's been going on externally. But the year-over-year declines are getting smaller. We're almost back to the top line levels we were doing last year, but the exciting news is that we've increased our productivity so much. And as Bob mentioned, we continue to invest in the future of our business.

On to SG&A -- operating expenses remained in check during the second quarter, they totaled $27.3 million, that's down $3 million or about 10% compared to last year's second quarter. Almost every line of SG&A has shown some decline year over year.

Again, this decline in SG&A has not negatively impacted our ability to grow the business. We have as many marketing touches as ever, our customer service continues to be our hallmark. We're just running our business in a more efficient and productive way.

Accordingly, our operating income for the second quarter was $4.3 million, that's 3.2% of sales. As Bob mentioned, a seven-year high for us. And it really demonstrates the operating leverage we've been discussing over the last year or so.

EBITDA for the quarter totaled $5.3 million, that's $1.04 per diluted share. Net income was $2.6 million or $0.51 per diluted share, both of those again were records for TESSCO. EBITDA for the first six months was $9.6 million, $1.89 per diluted share. Net income for the first six months was $4.5 million or $0.89 a share.

So now just quickly on to the balance sheet where we were able to drive some very strong cash flows during the quarter and we strengthened our already solid footing. We've continued our primary focus on customer work completion with lower inventory levels. Inventory has increased by about $13 million since March, but it's still down about $5 million compared to this time last year.

Higher sales are driving the need for higher inventory, but we keep turns and order completion strong and they're actually back to our historic strong levels. We also began ramping up inventory for the retail holiday season.

Cash collections remain strong, days outstanding -- days sales outstanding were 38 for the quarter. And so, given the current economic and credit situations we're doing our very best to stay on top of these balance sheet items and I'd say we've done well, but it does continue to be a very demanding job.

As a result of these initiatives we generated $5.1 million in cash flow from operations this quarter. We didn't have any borrowings on our revolving line of credit. Our CapEx remained low. We didn't buy back any shares into treasury and so we built a cash balance of $8.4 million as of the end of the quarter.

So as Bob said, it was a great quarter, we're thrilled with what we've accomplished. We expect the rest of the year to continue to be a challenge from an economic environment perspective, just like the first half. But we've built a great team of people here who we believe are up to the challenge. So we're looking forward to the rest of the year. I'll now turn it back to Bob.

Thanks, David. It is really great to deliver these results and demonstrate the earnings generation power of our operational leverage that we're building. And even though the economy remained difficult we're building success through market share growth and by moving into new markets and new products and continuing to improve productivity throughout the organization.

Now the convergence of wireless and Internet technologies is producing some exciting new applications, including [WiLAN], WiMax, machine-to-machine, smart phones, net books, utility Smart Grids, just to mention a few. And as a result we've been growing our offering and markets in the customers served.

Just for an example, last month we announced an agreement with Verizon Wireless to jointly market integrated solutions for machine-to-machine applications. Our alliance with Verizon will enable transportation and utility enterprises to leverage our integrated product solution on the Verizon 3G wireless network. It will help these enterprises then maximize the efficiency of remote monitoring while reducing their procurement cost. It's just one example of the new opportunities that we're generating.

We are very optimistic about our future, but, as David said, still we recognize it's going to be tough going as we move into the remainder of this year. But we're very encouraged by the opportunities we see for these remaining six months. Reflecting this -- we'll be paying our quarterly dividend of $0.10 per share and we're increasing our guidance for fiscal year $2010 to $1.45 to $1.70 per share.

So with that, I'd like to then open it up for any questions that you all might have. Operator?

(Operator Instructions). Anil Doradla, William Blair & Co.

Good morning. It's actually Brian Nugent for Anil. Just wanted to talk a little bit about the Verizon relationship. Are there certain -- I think you mentioned transportation and utility; are those the applications where you're going to participate? And then if you can give some perspective on in those verticals what's your current sales run rate today?

Well, these are one of the areas that we continue to focus on, transportation and utilities, so we have a lot of other offerings. But this is one where we're taking the equipment we provide and directly put it onto the Verizon network and we're jointly selling through them. So it's an endorsement program that will be working collectively with Verizon. David, do you have any --?

Yes. Brian, those two verticals will fall into our self-maintained user market category. And it's probably -- those two categories are probably 15% to 20% of the total in that line. Just the existing products that we're selling them.

Yes. And can you just give an idea of what the margins would look like in that segment? Just directionally are they accretive or dilutive?

I mean, our view is that they ought to be accretive to some extent so that we can -- our goal is to get our proprietary line of products in there with this stuff. The TerraWave products will go along with this and some of the other network infrastructure stuff we've been working on. So shouldn't be any decline in margin and hopefully we'll see an improvement.

Great. And then finally, is there any sort of timeframe that we should be thinking about on when revenues from the relationship might start hitting the P&L? Is it more of a fiscal 2011 event?

Probably from a material standpoint. They're out there selling this, Verizon is selling it aggressively and we're right there with them. So we would like to see something happen by the beginning of next year. But I think from a -- the material benefits of this will probably be in fiscal '11.

Yes, I think this similar to all of our wireless networking products that the trials come before the big volume. I mean in WiMax for an example, with the campus grade WiMax we've got some really exciting opportunities where we're going in, we're surveying, we're doing what's going to be required, there will probably be a sampling. We've got a test in Reno, Nevada for example and how that test (inaudible) -- how it proves out then we'll open up other opportunities in the state of Nevada. So it's just -- it will continue to ramp as we go forward.

All right, thanks. And I know it's an unusual time, but from a high level can you just comment on the seasonality in the business overall? First of all, I would think you'd agree like a lot of the peers in the space are seeing probably better than seasonal growth in the September quarter, would you agree with that?

And then second, how do you see that playing out in the December quarter? Because there's a lot of variation in the sequential growth historically that we've seen in the December quarter the last few years.

Yes, I think we're looking -- the growth we've seen is probably a little more than the traditional sequential growth over the past few years. I think it's driven -- our execution really has been driving some increases in market share, I think. So that's I think what we saw in the September quarter.

And then December, from what we've seen, we think the September quarter -- or the December quarter is going to be pretty strong. We're not banking on a huge retail holiday season, but the holiday season at any extent should provide some lift. And we're still seeing -- I talked a little bit about the carrier, the smaller scale carrier builds that we're seeing. We're expecting some of that to continue.

These are largely urban, sort of rooftop things that aren't as dependent upon the weather. So we are starting to see and get some good feelings about that. So I think that we're looking for a pretty good December quarter and then our visibility is obviously a little bit more limited as we get into our fourth quarter.

And I guess along the same lines, can you comment on the inventory situation, what you're seeing there? Is it stabilizing? Is there replenishment in the channel? And also how much variation is there by segment with regard to inventory?

Yes, I think the inventories in the channel are still pretty low. We've seen them replenish as sell-throughs gone, maybe increase a little bit. But they're still pretty lean. That's why I think you've seen us increase our inventories again as we've got to make sure that we've got it when our customers need it.

And so, I think mostly in the reseller markets you've got pretty light inventories. I guess in the user and the carrier markets, they're buying as they need it. So there's not a lot of inventory there either.

Okay. And in terms of accessories, I guess you got a little bit of a lift from the Bluetooth sale. Was there also a material impact from the iPhone-related accessories and possibly some restocking there?

All the smart phones are very strong, but the iPhone is -- I think most of us saw Apple's announcement yesterday is very, very, very strong. And it's probably the only area that we have some wind at our back where all the other markets are still swimming upstream. But the iPhone has definitely driven a lot of new opportunity for us, we have a lot of exciting products that we've developed, our proprietary products as well as the other branded products. And it's a very strong exciting area. And we think it's going to certainly continue through this holiday season. But it's been fun to watch.

Yes. I guess overall if you could quickly update on the proprietary percentage of sales?

Yes, it's still right around the 10% range, it hasn't materially changed too much.

Okay. And on the Bluetooth, was that -- I was just wondering if you can on a sequential basis quantify the impact of that on the margins, that was where we saw kind of a big decline in that segment sequentially. And is that really just mix related or is there anything else that we would want to read into that?

No, it's really mix related and it's really all related to the large Tier 1 carrier. And that's just we won some SKUs there and are now selling some more Bluetooth into that customer. So there's really nothing to read other than product mix at that main carrier. If you take that out margins were flat.

Okay. But I guess going forward would you expect with having won those SKUs recently, is that what you're saying? That would (inaudible) be a headwind in the next couple of quarters?

Yes, that's right.

You know, I think while you're there, the margin is again a very exciting story to us that we continue to sell value, and where a lot of our competitors are using price cuts as their major strategy. So the fact that we're maintaining margins in this particular economy is just really a testament to our -- the value that we deliver to our customers.

All right. On the positive side, obviously we've seen in lot of good leverage there in operating expenses. So it's still declining year over year. So I'm just trying to figure out what are the areas that you can continue to improve efficiency and ultimately is there more room for leverage in the operating expense line?

I think the leverage is going to come from the top side. I think as we continue we've done just some extraordinary things in our operation -- productivity, freight, marketing, where we've increased, as David said earlier, our marketing touches but we're doing it much more electronically today and eliminated a lot of the high cost print, the same thing with trade shows.

So I think that we're at a point where you'll see the operating leverage continue as we increase that top line, and continue to look for nonproductive areas that we can cut out. But we've done a good job of where we are right now and it's going to -- there's not going to be a lot of fixed expenses required as we build that top line going forward.

All right, thanks. On the balance sheet, how are you guys thinking about cash deployment going forward? Are there plans to restart the repurchase program or any major capital requirements coming up? Or not next quarter or anytime in the near term, but over time would you expect to increase the dividend or how should we be thinking about that?

I think that from a cash commitment there's no big CapEx on the horizon that we're aware of right now. We're upgrading some systems and stuff, but that should keep CapEx in line, generally in line with where we are right now.

It's really -- I don't know if you want to speak for the Board, but I think the clear direction now is the dividend. We think that it's improved our liquidity, we've seen a little bit more trading volume than typical, we've had a nice improvement in the stock price. And so I would guess that we're going to look to continue that.

As -- my goal from a management standpoint is that working capital, we continue to take working capital out of the business so that we finance the growth in inventory with -- keep the inventory turning so the tables are growing with inventory as sales increase. So there's no real working capital need or CapEx need that should slow us down.

But then on the same side is we want to remain opportunistic. We feel that there could be some excellent opportunities for us for new product acquisition, customer acquisition or company acquisition as we go forward. So as David said, we really want to be on a very strong footing as we continue in this economy to make sure that we're positioned where we can execute on any of these opportunities that come up.

All right, sounds good. Thanks a lot, guys, and great quarter.

[Jay Kumar], [Midsouth] Investment Funds.

Yes, guys. Quickly, two questions. One is do you see yourself playing any part in the broadband initiation of the government?

Absolutely. We're working on several opportunities right now that -- for major state WiMax deployment. These are the campus, the smaller grade systems that are not the big municipality, but tying together schools and various statewide organizations. This is going to be a very exciting area for us and we've got a whole team that's focused on that.

I think, as I mentioned on the last call, we had already gotten some stimulus grants for the transportation industry for putting communications into tunnels. So this is an area that we're tracking very, very carefully and are excited about the opportunities that it looks like it's going to present for us.

Are you guys going to be partnering like -- somebody like Verizon or are you just going to go by yourself in those contracts?

I think on the contracts we're looking at, they're not the Big Bang and they're more the private system where they're the rural areas that are looking to do it from the private point of view so they're not using the Verizon or the AT&T network.

Okay, I understand.

We've also been working with some rural ISPs to help them write their grant requests to the government to get some of the stimulus money. And we've specced in our product line there. So if those grants come to fruition we could see a nice increase there as well.

Okay. What part of your business is phone (inaudible) through the iPhones? What's (multiple speakers) of the revenues probably would be a better way to ask it.

Sales -- we don't really disclose that. Sales to our largest customer are roughly a quarter of the sales. And a portion of that is driven by the iPhone, obviously. But that's not something we disclose.

Thanks, guys.

(Operator Instructions). Sir, at this time there are no questions in the queue. Please proceed to closing remarks.

Okay, great. Thank you and thank you, everyone, for your participation in the questions. As we've been discussing, fiscal year 2010 has proven to be a very good year for TESSCO. And I'm very pleased that we're delivering these strong bottom-line results while continuing to invest in the future.

We've achieved a lot in the first six months of the fiscal year and we have the momentum going to achieve a lot more. We're being very proactive in pursuing the opportunities we see and, in the process, enhancing shareowner value.

I do want to take this opportunity to thank and congratulate all of our team members for their commitment, focus and sense of urgency. Their energy, dedication and innovation have made this strong performance possible.

We're looking forward to giving another update on our progress in January after our third fiscal quarter. And, as always, if you have any questions, please give us a call. And so I want to thank you very much for your support and have a great day. Thanks.

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