TESSCO Technologies Inc (TESS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TESSCO Technologies third quarter fiscal 2010 conference call. My name is Shantilay 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 is being recorded for replay purposes. I would now like to turn the presentation over to Ms. 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 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 10-K. and other parodic 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. Good morning and thank you for joining us after another great quarter for TESSCO. Through a combination of market share gains, new market penetration and productivity improvements, we generated outstanding results.

Let me just highlight and David in a minute will give you the details. But sales reached almost $150 million. We had record earnings of $0.56. The year-to-date earnings per share nine months were $1.45 compared to last year's record which was $1.23 for the entire 12 months.

Operating margin continues at a seven-year high of 3.2%. Quarterly EBITDA per share was $1.14. We are increasing our guidance for this year to $1.70 to $1.85. We declared the $0.10 quarterly dividend and then we ended the quarter with a cash balance of $5.5 million without any outstanding balance on our revolving line of credit; truly a great quarter.

The converging world of Internet and wireless is changing the way we all live and work and TESSCO is a part of that; serving those who build, operate and use voice, data, and video systems. By leveraging increased demand for wireless applications, we are creating new solutions based offers and growing the markets, industries and customers we serve.

TESSCO's promise of delivering what you need when and where you need it is resonating with customers now more than ever and driving our top line despite the headwinds of today's economy. While growing revenues, we continue to focus on enhancing operational productivity by devising new ways to market, sell, and serve our customers.

Our marketplace strategies and initiatives are driving these outstanding results and should build momentum in the months and quarters to come. I'll turn it over to our Chief Financial Officer, Dave Young, to give you more an in-depth look of our financial results; and then when Dave is finished, I will come back and try to give you some additional observation and insights as to the markets and opportunities we are pursuing. David?

Great; thanks, Bob. Good morning. As Bob said, we are really pleased with these continued positive results and now I will give you some more details.

All comparisons here are to last year's third quarter unless I say otherwise. So for the quarter, revenues totaled $150 million. That's a 26% increase compared to last year's third quarter and gross profit reached $33 million which is a 12% increase.

So accordingly, we did see some gross margin compression this quarter. Gross margin for the quarter was just under 22% compared to 24.6% in last year's third quarter. The margin decline is really a function of mix and I will explain this as we go through the numbers.

Just also to note, revenues and gross profits increased 13% and 4% respectively over last quarter. So we continue to see sequential growth and that's our third consecutive quarter of sequential topline growth.

So from a line of business perspective, our mobile device and accessory revenues totaled $86 million. That's a 55% increase. We had a very strong holiday season for accessories.

The timing of these strong results was compressed some. The holiday started a little bit slowly but as products sold through, we were really -- we were there for our customers and I think this is just another indication that inventory in the channels still remains pretty low. Our customers really are relying on us to have the products that they need, exactly when they need it.

It was a really strong quarter for sales to our large Tier 1 carrier, about 100% growth compared to last year's third quarter. And this quarter, sales to this customer were about 34% of our total sales.

So we've done a great job of winning share at this customer. They've done a nice job of up-selling accessories. And so our gross margin for all accessory business decreased by about 300 basis points and that's really the function of the business mix, so the very strong sales to the large customer that typically carries somewhat lower margins.

The number of buyers in this line increased by about 3%. That's despite the fact that we continue to see a lot of smaller retailers go out of business. And our purchases per buyer for the core markets increased by 9%. So both of these are really strong signs that we are doing some good things with the core business.

Network infrastructure revenues were $49 million. That's an increase of 13% while gross profit increased by about 7%. So in this line, we also saw a decline in gross margin again related mostly to mix.

Sales of our broadband products have picked up some and we've seen some smaller scale carrier buildouts which are obviously very encouraging. The number of buyers in this line increased very slightly but purchases per buyer increased by about 12%, so another encouraging sign in this line of business.

Installation, test and maintenance; our year-over-year comparisons, they continue to be inherently difficult due to the changes in the agreement with our repair and replacement relationship that result in significantly reduced revenues and gross profits. Nevertheless, revenues were $14.6 million and gross profit hit $2.9 million. That's a 27% decrease in revenues and a 38% decline in gross profit.

These results are pretty much in line with our second quarter results last quarter. So a small increase on the revenue line and just a small decrease on the gross profit line. Buyers in this line showed a small decline of about 1% while dollars per buyer, purchases per buyer decreased by 26%, again mostly a function of the change in the repair components relationship.

So, for the nine months, revenues were $391 million, that's a 2% increase, while gross profit came in at $93 million or a 1% decline for the nine months. So, last quarter, we talked about the fact that year-over-year comparisons were difficult but that the year-over-year declines were getting smaller.

That's reversed itself now, as we just talked about. This time last year was when we really started to feel the tightening in the market. But now though, our momentum has cost caused strong year-over-year comparisons.

Maybe more important to us is that we are continuing to show nice sequential growth in our core and and in the concentrated business. And the really great news is that we continue to improve our productivity all while we are continuing to invest in the future of our business.

So, that's a good lead-in I think to SG&A. Our operating expenses remained in check again in the third quarter. They totaled $27.9 million. That's up about $1 million or 4% compared to last year's third quarter.

This increase is attributable mostly to higher bonus accruals driven by the record results, partially offset by expense decreases in most other lines of SG&A. We continue to run our business in more efficient and productive ways.

So, accordingly, our operating margin -- our operating income for the third quarter was $4.8 million, 3.2% of sales and as Bob said, that's a continuation of a seven-year high for us and it demonstrates all this operating leverage that we've been talking about over the last year or so.

EBITDA totaled just under $6 million this quarter, $1.14 per diluted share. Net income was $2.9 million or a record $0.56 per diluted share. So for the nine months of 2010, we have generated $15.5 million of EBITDA. That's $3.04 per diluted share and our net income for the first nine months was $7.4 million or $1.45 per share. Now to the balance sheet.

We continued this quarter our primary focus on customer order completion. As I said before, it's as important if not more important than ever that we have availability for our customers and especially related to the holiday season that we just came through on accessories.

Our inventory has increased by about $9 million this quarter. So, from September to December, about a $9 million increase. Higher sales drove the need for that higher inventory but -- so turns remain strong, 8.6 turns and order completion is as strong as it's been in our history.

So, I think we've done a great job managing inventory. From a cash collection standpoint, cash collections were really strong despite the strong and increased sales. AR actually came down a little bit this quarter.

Our days outstanding were 34. That compares to 36 last quarter and 37 in the prior year quarter. So, as a result of those two things and the fact that AP didn't grow this quarter to the same extent that inventory did, we used about $0.5 million of cash from operations this quarter.

We didn't have any borrowings on our line of credit at the end of the quarter. Our CapEx was just a little bit higher this quarter than it's been in the last few quarters and mainly related to IT projects that we've had planned.

We did buy back a few shares this quarter. We bought back 24,000 shares in the treasury. We paid our second ever dividend in the quarter and so the two of those things totaled about $900,000. And so as a result of all of those things, our cash balance ended the quarter at $5.5 million.

As Bob mentioned, we have continued our quarterly dividend program, $0.10 per share payable on March 1 to holders of record on February 15. So, we are proud to be able to continue that quarterly dividend program.

And in summary, we are really thrilled with the momentum that we have built. We're looking forward to our fourth quarter and next fiscal year and the challenges and the opportunities that lie ahead. I'll now turn it back to Bob.

Thank you, David. Let me try to give you a sense of the future, what we're looking at. We feel a real shift in the mood and optimism but it's still very guarded in the marketplace.

The consumer electronics show where I was in Las Vegas just two weeks ago is really a good indicator. The difference in the atmosphere of this year's show and last year's was very startling and very encouraging.

If you look back last year, it's when all of this really -- all of this economic mess really started and I would characterize being in Las Vegas, which you know we get back to quite a bit with shows, was really like Death Valley. You could get a cab. Only 20% of the gaming tables were open. You could get a restaurant -- or a restaurant reservation anywhere you wanted to go and see any show. And just the mood was obviously very, very -- it was a frightening mood.

This year, it was Las Vegas, rock 'n roll. Cabs you couldn't get, dinner reservations you couldn't get. The show was uplifting, exciting, and it just was -- really to us showed a turning of what's happening in the overall economy, especially in our industry. But there still remains hesitancy. Companies are just waiting to see what's going to happen with the economy, with the capital markets, and with what's going to happen in Washington, DC.

Broadband, rural broadband is a good example. Before the mess, there were a lot of projects that were going to be run and those are all put on hold when they announced the stimulus money and now they are waiting to see how the stimulus is going to affect them, this grant writing, the bureaucracy. And so these programs remain on hold and we are in the midst of things and we are seeing more opportunity but pulling the trigger is still difficult to get them to do.

So, inside of all of this, we continue to proactively develop new types of customers. We're into the utilities, we're into mines, we're into railroads, education, enterprise, going after the new WiMAX carriers; all in addition to our traditional carrier government, retail and bar space.

We are going to these customers with a capability to configure and build the entire solution for specific applications and we've targeted specific applications and I'll just really highlight. Obviously we continue with the public carrier networks that we've been in historically, cellular but then the new WiMAX carriers, specifically Clearwire; just doing some exciting things that we're involved in.

The city, rural and campus networks is another area that we are targeting. This again is the campus grade WiMAX system, the rural broadband, last mile and backhaul. Local and in-building networks, WiLAN systems at [Soho], enterprise; in-building cellular coverage where we're going after these opportunities and building the solution.

Mobile radio that we've been in historically is still a solid market [with dispatched] public safety. Then the remote monitoring and control. This is a very exciting area that's led by the utility smart grid and we've got some very exciting solution offerings in the smart grid.

We're looking at positive control precision agriculture and then the entire SCADA market. And then, security and surveillance, going after the video surveillance premise and access control. And then lastly, continuing but expanding our focus on the mobility and user devices.

Morgan Stanley did a great report in December. It's called the Mobile Internet Report and it shows that wireless portable devices are going to grow 3X over the next five years. Portable Internet devices which are the netbook PCs, notebooks, Internet tablets are going to grow about 2.5 times over the next five years. And these are the devices that the Web -- the Internet-enabled devices are what we are supporting with solutions and we are supporting them regardless of what the environment is; whether it be in car, in home, on person, in hazardous conditions; everything from the headset to the carry case to all the charging systems.

So, what I'm trying to expose here is that historically, as we've been in the carrier market, and we've been in the VAR market with some very good product offerings; but now today we are focusing on these key applications and really building the product offering and the solution that we need for those. It's a very, very exciting time to be involved in wireless and to be at TESSCO.

So let me just shift to the business outlook. Based upon our results for the first nine months of the fiscal year and combined with our outlook for the fourth quarter, even though it's seasonally less strong, we are increasing our earnings guidance to a range of $1.70 to $1.85 and this is up from the previous guidance of $1.45 to $1.70. And then we'll be prepared to give you the next fiscal year guidance in April when we get together again.

So, with that, I would like to just turn it over to any questions you might have and then come back and we'll wrap it up.

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

It's [Brian Nugent] for Anil. Thanks for that commentary. That was very helpful.

Along the lines of the first question, I wanted to ask which is out of the 10 maybe applications that you just listed, what stands out as the largest driver of the growth this quarter? And then looking out to maybe fiscal '11 and beyond, which segments or products or types of applications should we be the most focused on in terms of incremental growth opportunities?

Obviously this quarter the mobile devices continue to be the star and this is -- as we say, it's probably the smart phones are the only wind to our back. And when I say smart phones, I say the accessories that support those because we are not in the phone business.

That just continues to be just a very exciting opportunity is that one, there are a lot of smart phones being sold but then the attach rates for a smart phone is much higher than historically cell phones have been. People all the way from cases -- they are buying three, four cases that they can style if they will at a low cost; and then the charging devices, the headsets that they need.

So that was a major growth area really in all customer segments, all the way from our large carriers -- we've been successful. We are now serving all the primary carriers in varying degrees, but we've got some just exciting programs with carrier direct and then their independent channel and they are all seeing the same effect in terms of what's happening with these smart phones.

Then when you go beyond there, it's really just an addition of a lot of areas and there's really no area that you can say is moving out. We are just being -- I would say that the one area that is moving out is Clearwire; has some very exciting programs and they've got a very exciting build.

Their system is going to be very robust as we go forward and so you see their spend is quite large. But then when you get behind those two areas, it's pretty much just pushing through and getting the business that's out there.

I think the other answer to your question is, where do we see going forward, and it's all driven by this convergence of the Internet with wireless. Smart phones, the laptops, the netbooks are going to continue to be very strong. We're getting into new channels.

Some of the big box people that are consumer-based we're getting into that we've never been in before. I believe that the rural broadband we will see in this calendar year start to move out as some of these programs get started. The smart grid application in utilities is going to be great.

And video surveillance is a high growth area for us right now but the numbers are still relatively small. But that's going to start tying into these rural systems and these campus systems where they are going to be hanging the video surveillance onto the back of an internal WiMAX system or a WiLAN system.

So again, in summary, we are going to see -- I believe that the carriers, the major carriers will be spending this year to improve their systems as they move into 3G, 4G, and LTE. We'll continue to see the WiMAX systems grow, continue to see the smart grid growth -- and smart grid and then the rural broadband and then the mobile devices will continue to be growth areas for us. That's -- David, do you got anything?

I think that's it.

And in the mobile and portable segment this quarter, I assume you think you are taking share on some of the new products entering the mix. Can you just talk a little bit more specifically on which? Is it Bluetooth or different accessories that you feel like you are taking share or is it really just stronger sellthrough at the primary customer?

It's obviously we are getting share, we are getting into customers we've never been before. We are getting the SKUs, the products we hadn't -- the biggest growth area is the carrier solutions, the cases, the carrier solutions, the cases that you put on the back of your iPhone or your smart phone; the red ones, the green ones, the silver ones.

It's a phenomenal experience as far as what's going on. Same thing with headsets. You see a lot of exciting things happening with both the wired as well as the Bluetooth headsets.

Bluetooth right now is kind of an overcrowded area and become fairly competitive and really not that high a growth compared to the wired headsets which are pretty exciting. People can use a wired headset in an airplane where they can't use a Bluetooth. So they are going towards one headset that they can use anywhere.

All right and so you've hit an inflection point in that business this quarter it looks like to me. So is the $80 million ultimately -- we've been seasonally pretty flattish in March in that segment I think over the last couple of years aside from last year. So I'm just trying to figure out how sustainable the $80 million level kind of -- is that a good run rate going forward or when do you get back to that level?

Yes, I think that -- I think it's a reasonable -- it's probably a little bit on the high side as we think about this next coming quarter. I think that our guidance kind of reflects that. We had a -- we had a stronger holiday I think than we originally had expected and so I think that if you look back at some of the prior quarters, it's probably a better run rate through the next quarter. But I think that the things that we're doing and as we get out of this little bit of a seasonal thing here in this March quarter that we would get back to that pretty quickly we would expect.

So you would expect sometime even before the seasonal pickup in fiscal '11 we could see an $80 million figure again?

Yes, I would think so.

Okay. And then switching gears a little bit, does your agreement with your large test and maintenance customer reset at the end of the year? And if it does, should we expect any changes to the relationship?

That agreement expires in December of 2010 as it exists right now. It's becoming such an immaterial piece of business to the bottomline, it's obviously got some -- it's material for the test and maintenance line and the topline is okay.

But that business has been on a steady decline over the last seven or eight years as we've gone through different iterations of that program. So as it exists, it expires at the end of the calendar year. So we'll kind of see what happens. But it's -- we're certainly not expecting any growth.

Brian, you were referring to the repair parts contract, right?

Yes, yes.

I wanted to make sure we didn't cloud it with (multiple speakers)

So we've been very pleasantly surprised by the way you've held the operating expenses in check over the last really year despite a huge recovery in sales. I'm just curious, has there been any shift in expenses from the operating expenses to the COGS line or is it really mix or something else going on with the gross margin?

Yes, there is no shift there. It really is just product mix and customer mix on the gross margin line. I think what we've done in the SG&A lines has been -- I think really where we've gotten a lot of efficiencies is two places.

One is in operations, so just effectively getting stuff in and out of our facilities. And second really is on the way that we're going to market, especially through e-commerce. We've taken out a lot of print costs, a lot of tradeshow costs.

We've done these virtual trade shows. We are doing a lot more of the push to the customers in our knowledge tools and through electronic means and so we've been able to cut a lot of expenses there as well as on the corporate overhead lines too; just doing things better. But those operations and marketing are probably the biggest areas that we've been able to rationalize a little bit.

And I think on top of that, it's important to point out that we did not have any reduction in force. We've continued to hire throughout -- we've got a new class of account managers that just came in the last week.

So we continued to hire and not cut talent and continued to develop talent throughout this past year which is very exciting to be able to drive the productivity but continue to invest in the future. And although we've cut marketing overall cost, we haven't -- we've increased marketing effectiveness and marketing reach.

That's the same thing with the salesforce, same thing with product management. The whole area was developing these, we've created a separate solutions design and development team that is working with the product managers to make sure that we have the full solution for these new applications that we are pursuing. So, again we are investing in the future while driving that productivity and driving positive cash which is a very exciting thing for us.

Yes, yes. Going forward, can you -- will the puts and takes on the gross margin be really mix related? And along -- I guess along those lines, as we see some of these new applications making a larger contribution to the mix, would we expect that to be -- kind of bolster the margin in this low 20% range or do you see it inching back up to the mid-20%?

I think you've nailed it in terms of its mix and that's the other exciting thing that we are really proud of is that compared to our competitors, we have not used price as a weapon in this very competitive down market. We continue to give our customers value-based pricing, show them that we're delivering to them at the lowest total cost what they need so that our pricing, although there's pressure and although there's continued review, we have not been cutting price in reaction to this market.

So the margin mix is a function of our -- the margin pressure up and down is a function of our mix. We continue to get better costing, we continue in many areas to get better sellthrough pricing. So it's just that mix of going from low margin items to high margin.

Yes, Brian, when we think about some of these new applications with things like video surveillance where we are selling cameras and DVR's and that sort of stuff; that is going to be a little bit of a drag probably on the margins as we go out. But, we are hopeful that being in that business is going to allow us to create some new proprietary products, sort of accessories for those kind of lines that will hopefully augment that decline in margin.

Thanks, that's helpful. Can you guys just give us an update on how you are thinking about your cash deployment? We haven't seen a share repurchase for a few quarters before this quarter. And as you continue to bolster the balance sheet, would your preference be to increase the dividend or step up to share repurchases? Or how should we be thinking about that?

Well I think that you know we bought 24,000 shares this quarter and that was really in the span of just a few days when we saw that for some reason, the market was reacting a little bit strangely in our view and we're able to pick off some shares of what was a really attractive price in our view again.

But, I don't know. We've got about 60,000 shares left on our current authorization. We're going to discuss that with the board. I don't think that we're going to be aggressively back in buying shares unless we can find opportunistic times to do that. I think the board is interested in continuing and possibly thinking about increasing that dividend at some point.

At the same time, we are obviously funding the business. As we grow, inventories and receivables will grow and also looking -- we still have a pipeline of acquisition opportunities that we would want to fund out of cash rather than out of stock. And so, we're just making sure that we're being able to be nimble in any direction we need to go.

As far as the repurchases, we can take this off-line if we need to, but I was just curious how the share count -- did it increase sequentially despite the repurchases? Is there anything to read into that?

The weighted average share calculation?

Yes.

Yes, that was -- we've got some incentive-based [equites] in the performance shares that we grant, the bonus and we've already hit some of those targets. So we've got to put some of those shares into that weighted average share calculation since we've already achieved some of the thresholds.

Thanks guys and great quarter.

(Operator Instructions) There are no further questions in the queue and at this time I would like to turn the call back over to management. Please proceed.

Good. Thank you. As I mentioned, the converging world of the Internet and wireless is really changing the way we live and work and we are right in the middle of that. We are there.

And now with almost three decades of experience, TESSCO's knowledge of wireless is really unparalleled and we are extremely gratified by the continued trust of our customers that they placed in us as well as we are very proud of the commitment and flawless execution on our initiatives of the TESSCO team and these two things are the foundation of our results and for our future.

So, I really appreciate everyone's participation today and the questions. We'll report back on the initiatives and important developments at our year-end call. But in the meantime, if you have any questions or would like to visit our facilities, give us a call. Thank you very much and we will be talking to you soon.

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