TESSCO Technologies Inc (TESS) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter fiscal 2010 TESSCO earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to Ms. Harriet Fried of LHA.

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 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.

Thank you, Harriet. Good morning, and thank you all for joining us today to review what was a excellent quarter and a excellent year.

Fiscal year revenues grew 8%, reaching $522 million, and earnings grew 45% to $1.78. And as a result, we're giving guidance for this fiscal year, which we just started the beginning of April -- the guidance is $1.90 to $2.25, which we'll talk more about in a few minutes.

On top of these results reflecting the performance, we're providing our shareowners a 50% increase in the quarterly cash dividend and a stock dividend of an additional one share for every two shares owned. And again, we'll talk more of the details as we go forward.

These actions reflect TESSCO's dedication for the past 28 years to generate superior profitability and shareowner reward, as a result of delivering what our markets and customers consider as having superior value; attracting, rewarding and retaining talented and performing leadership and team members; and pursuing continuous improvement in marketing innovation and operational excellence.

We're very excited and energized with the opportunities being created daily by the convergence of wireless and the Internet, and we're very confident with our positioning as an innovator dedicated to architecting and delivering better solutions at lower total cost for those building, operating, and using mobility in the wireless data systems.

I'll give you a better sense of our opportunities after Dave Young, our CFO, reviews our financial results in detail, and gives you the specifics of the stock split and dividend increases. David?

Great. Thanks, Bob, and good morning. We're very happy with these results. It was a great year for us. I'll now give you some more details. All comparisons here will be to last year's fourth quarter, unless I state otherwise.

So for the quarter, our revenues totaled $131 million. That's a 33% increase. Gross profit reached $30 million, which is a 9% increase. Accordingly, we did see some gross margin compression this quarter. Gross margin for the quarter was just under 23% compared to 27.8% in last year's fourth quarter. The margin decline is a function of mix and our continued success with larger customers. And I'll explain this as we go through the numbers.

So, from a live business perspective, our mobile device and accessories business totaled $77 million. That's a 64% increase. And we continue to see strong demand for device accessories from customers, both large and small.

It was another very strong quarter for sales to our large Tier 1 carrier Customer, about -- over 100% growth there. The core, non-concentrated business also showed strong results. The number of buyers in this line of business increased by about 4% -- this, despite the difficulty that many small retailers have seen over the last year. And our purchases per buyer for the core markets increased over 20%. So we're gaining share and our customers are buying more dollars -- both very encouraging signs.

Our gross margin for all accessories decreased by almost 700 basis points, though, and that's really a function of the business mix -- the really strong results to the large customer.

On the network infrastructure side, revenues totaled $44 million, an increase of 14%, while gross profit increased by about 4%. In this line, we also saw a decline in gross margin; again, related mostly to customer mix. We've been working on some large carrier buildouts; obviously, very good news for us.

The number of buyers in this line increased by about 2%, but purchases per buyer here increased by 11%. Our customers are buying more in this line as well; another very positive signal.

In the installation, tests, and maintenance line of the business, our year-over-year comparisons here continue to be 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 here were $10 million and gross profit hit $2.7 million. That's a 23% decrease in revenues and a 21% decline in gross profit. The gross profit dollars in this line is pretty much the same as our Q3 results, although revenues are substantially lower.

Remember here that the gross margin varies substantially, based on the way that we have to account for the revenues from this repair component relationship. And as we disclosed in last quarter's 10-Q, this relationship with the OEM is scheduled to expire this summer. But it has, over the years, continued to become less and less meaningful to our overall business. In fact, in Q4, it represented about 1% of our total sales. Buyers in this line were flat, while purchases per buyer decreased 23%, mostly a function of the changes to the repair components relationship.

So on to SG&A. Our operating expenses remained in check during the fourth quarter. They totaled $27.2 million. That's up about $1.3 million or 5% compared to last year's fourth quarter. The increase is attributable mostly to higher people costs, higher sales promotion expenses, and higher IT costs. So we are closely managing our costs, but we continue to invest in the future of our business, bringing in sales talent, reaching out to customers, and improving our technology platform -- all of which should lead to a more efficient and productive business.

So, accordingly, our operating income for Q4 was $2.7 million or 2% of sales. EBITDA totaled $3.7 million this quarter or $0.71 per diluted share. Net income was $1.7 million or $0.33 a share. So for the year, our record fiscal 2010, revenues reached a record $522 million -- that's an 8% increase -- while gross profit came in at $123 million or 1% increase. We've got some really strong momentum here. These last two quarters, we've reported very positive year-over-year comparisons and we think that this will continue.

For fiscal 2010, EBITDA was $19.2 million or $3.74 per diluted share, and net income for the year reached $9.1 million or a record $1.78 per diluted share.

And now on to the balance sheet. We continued our primary focus on customer order completion this quarter, but we were able to drive some nice reductions in inventory. Inventory was down about $14 million compared to December, and our turns remain really high -- nine times.

Our cash collections remain strong. The strong sales, particularly late in the quarter, drove higher AR this quarter, and days outstanding were 42 for the quarter. The decline in inventory drove payables lower, but payables didn't decrease as much as inventory; so that, combined with the receivables collections, drove strong cash flows during the quarter.

We generated $3.4 million to cash flow from operations; finished the quarter with $7.7 million in cash on the balance sheet; and had no outstanding balance on our revolving credit facility. So not only was it a record year for revenues and earnings, but our year-end balance sheet is as strong as it's ever been. We're proud of this balance sheet and it certainly provides a strong platform for our short and long-term growth initiatives.

There are a couple of other exciting things that we announced last night. Now, first, in recognition of the nearly three-fold increase in stock price over the last 12 months, we announced a 3-for-2 stock split for shareholders of record on May 12. The shares will actually be issued on May 26.

And second, given the strong balance sheet and confident outlook, we increased our cash dividend by 50%. The record date for that dividend is May 19 and the cash dividend will be paid on June 2. Both of these, I think, are very strong signs that we take very seriously our commitment to deliver value to all shareholders.

So, in summary, we're thrilled to report the record year. We're proud of the platform for growth that we've built, and we look forward to continuing our strong momentum. Fiscal 2010 was a great year and we're eager to produce an even better 2011.

I'll now turn it back to Bob.

Thank you, David. As I mentioned earlier, the convergence of wireless and Internet technologies is revolutionizing the way people live and work. And as a result, new applications and systems are creating new opportunities for TESSCO to support.

We're already a well-recognized leader in supporting the world of two-way and cellular communications. Now we're developing leadership in other industries, deploying -- other industries that are deploying, and using mobility and data systems.

Let me give you two examples. The utility industry is poised to make the transformation from a centralized, producer-controlled network to one that is decentralized and more customer interactive. The smart grid is characterized by a two-way flow of information capable of monitoring everything from power plants to customer preferences to individual appliances. The integrated communication sites are pivotal to the deployment of any smart grid system, as millions of residences and commercial smart meters will need to be constantly connected and monitored at the back-office utility.

TESSCO engineered and is currently delivering collector sites to energy utilities, to assure efficient, reliable, and always-on data communications. Our unique position allowed us to architect and deliver a complete solution that consisted of solar AC power systems, radios, monitors, battery monitoring equipment, shelving, backplanes, cable jumpers, antennas, lightning surge, site security equipment, and even the installation tools. And all these products we offer in inventory and -- so the whole area is just a very exciting opportunity for us.

Let me give you another example -- the railroad industry. Railroads must monitor critically data and track assets through their transportation network, and provide for what they call positive train control, to prevent collisions on their right-of-way. So there's a need to more efficiently manage the collection and transmission of all the data, often from what they call the dark waysides -- the waysides that don't have power coming to them.

TESSCO is positioned again to create and engineer a complete solution for the railroad that includes everything from the solar power battery backup enclosures to the wireless connection and backhaul equipment. We're also in a position where we can deploy and help deploy the thousands of railroad sites throughout the United States.

In both examples, we're leveraging our wireless expertise to support in this particular area what we call the remote monitoring and data control, which is just one of the new applications that is being created from this convergence that we've been talking about. These new opportunities, which, when you combine with the evolution of cellular and WiMAX smartphone and other subscriber devices, and the resulting network infrastructure build-out that will be required to support these devices, has given us extreme -- has created an extremely energized view of our long-term future.

So, based upon all of this, our business outlook is based upon the initiatives for the coming year as well as the signs of improvement we've been seeing in the economy. We expect to generate earnings in the range of $1.90 to $1.25 [sic] per diluted share -- this is pretty split -- and this range reflects a possibility of further market condition improvements and faster execution of our growth and productivity initiatives.

I'd also like to review the actions of the Board. As a result of continued study, review and commitment to govern TESSCO, to further our ability to develop long-term value, minimize the risks and distractions to our business, and protect all interests of all shareowners, the Board took the following actions.

First, we formed a new Risk and Strategy Board Committee that will work closely with me and our other executive managements, and to assess risk to our business, determine capital allocation, and develop and analyze growth strategies. The Committee is comprised of three independent Directors. Dennis Shaughnessy will chair this Committee. Dennis is the Chairman of the Board of FTI Consulting, the New York Stock Exchange-traded global business advisory firm. And prior to joining FTI, Dennis was a general partner in Grotech Capital, which managed approximately $1 billion in private equity funds.

Jay Baitler -- another member of the Committee. Jay is Executive Vice President of the Contract Division at Staples. And Jay is overseeing substantial organic and acquired growth at Staples, and has a strong background in sales, business development, and operations.

John Beletic also serves on this Committee. John is our lead independent Director and has extensive experience in venture capital and private equity. John is a venture partner at Oak Investment Partners, and currently serves on several other Boards for both public and private companies. I'm also a member of this Committee.

Secondly, as a result of our business momentum, growth in our stock -- our price per share and overall strength, we terminated our shareowner rights plan ahead of the February 2011 planned expiration date. We put the plan in place in 2008 when we believed that TESSCO was easy prey, and TESSCO shareowners could be robbed of the growth and long-term value by a hostile takeover attempt.

And finally, reflecting the current trends in corporate governance, the Board decided to change the percentage of outstanding shares required to call a special meeting of the stockholders from 50% to 25%.

So, in closing, I want to reiterate how this convergence of wireless and the Internet is revolutionizing the way we live and work, creating these new applications and systems that are unlocking human potential at an unprecedented rate. We're there. We're inside this convergence, architecting better product and value chain solutions at lower total costs, to support the construction, operation, and use of these new and exciting mobility and data wireless systems.

So, with that, Operator, I'll open it up for questions.

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

Good quarter. A question that's been on everyone's mind off lately is just the M&A activity and what can we expect? Clearly, you guys have made some changes in your corporate structure out there. From an M&A point of view, can you give us some update as to where you guys feel you've positioned TESSCO and how open you are, perhaps, to any M&A activity?

Sure. I think as we've continually said, is that we're always open for opportunities that are going to reward our shareowners. We're also very focused on making our core growth, which we're very excited about, and assuring the business and customers and team members are not distracted from that primary goal. So the process continues. It's always been the same. And now with this new Risk and Strategy Committee, we'll just intensify the analysis of any opportunity that comes to us.

Very good. Switching gears to some more Company operational-specific issues, on the Tier 1 accessory customer, can you just provide an update on that? What percentage of proprietary products was sold to this customer?

I'm sorry, Anil. Could you repeat that? You cut out there.

Oh, just the accessory customer, Tier 1 -- how much of business came from your proprietary segments?

Yes, our proprietary business is still about 10% of our total sales. So we don't break it out by line of business, but the majority of it does go into that mobile device and accessory line.

Now, if you look at the macro front -- and this is a question I keep asking every quarter, and I'm going to do it again -- just the inventory situation, the double ordering things and the market size -- how do you guys see the end markets shaping out?

We still see pretty light inventories out in the field. We're still -- and we gauge that by our customers' reaction to our stocking levels. So when we've got to have the stock and make sure that we've got it when the customers want it. And we still see that's the biggest thing that our customers are looking for, is our inventory availability. So our VARs and our retailers are stressing to us every day the importance of us having inventory. So we take that as a pretty clear sign that there's very little inventory out in the channel.

Yes, the demand for now delivery is greater than ever. And that's because, as David said, the inventories -- they're keeping their inventories low and they're buying just what they need when they need it; which again, is our value proposition.

Are you seeing a buildup of inventory in mobile handsets at the service operators, the carriers, and across the whole food chain? Or do you think inventories are pretty low still?

Yes, I think the inventory varies by model, depending upon how successful a particular phone and a particular phone launch is; but in general, I believe that their turns are maintaining. You know, they'll bring inventory ahead of a launch and then they'll deplete it. At the end of life, maybe the inventory is up, but I don't think the trends have changed.

But also the smartphone, a portion of that business is obviously grown; and therefore, the dollar value of the inventory is higher.

Very good. Well, thank you very much and congratulations.

Scott Searle, Merriman.

Nice quarter. Hey, just two -- a couple of housekeeping questions. And I apologize if I missed this, but on the gross margin front, it seems like the network side did pretty well. Is that just a mix issue then, related to more government and reseller business? And as well on the test side, I know there's a customer wind-down issue going on there, but the gross margins were a lot better. So is that something that's sustainable going forward at the new lower revenue level?

Yes, I think typically, the gross margins in the test and maintenance -- there's a lot of variation there. The test equipment stuff is a little bit lower margin that our blended average. The tools, the shop supplies, is higher margin.

And so I think -- you probably see a little bit of -- this is a little bit higher than typical, I think, in the test and maintenance. And it's really mostly a function of the ins-and-outs of the components business. So I think you're going to see overall, when that business winds down, you'll see higher than average margins but probably not this high.

Okay.

Does that make sense? And then on the infrastructure side, the margins on the infrastructure side, sequentially is probably a little bit up. And that's really just our proprietary products were a little bit better and then just our overall mix issues. Broadband was down a little bit, but -- okay?

And Dave, on the proprietary product front, that was what again this quarter -- it was about 10%?

Yes, about 10% of total.

: And what's the outlook on that front? Because certainly, that could really help the overall gross margin profile and it seems like there's been a lot of interest on that front. Can you just kind of take us through your current thoughts there?

Absolutely. You're exactly right on with that. And just in those couple of examples that Bob talked about, with the positive train control and the utility business, we're wrapping a lot of proprietary products and services, even, in some regard, into that product.

So our margins there -- we're taking OEM pieces, putting it together with our proprietary products, and just -- and marketing it as a complete solution. And so we're driving some really nice margins there. We're out to grow the percentage of our product sales that are proprietary, but when we think about the entire solutions that we're selling, we're really trying to wrap in our technical expertise and our services as well, and that's going to drive margins.

Dave, does that mean you need to add a lot of bodies in on the services front as you kind of ramp this opportunity up?

We'll be adding some. And so as we get into this more technical product, our tech support and our engineering capabilities got to improve some. So that's where we're going to look to add some capability. But it's not a whole lot of people. We've got a lot -- we've got a good core group of those engineers here. But yes, we will be adding some incremental costs there.

And just to follow-up on to your and Bob's comments related to -- it sounds like smart grid and security, you gave some examples there -- I thought that was running at a relatively small percentage of the mix. But the outlook was for that to get potentially pretty big by the end of this year.

Are there some numbers you could put around it? Does that start to get up to 10% of the mix when you start thinking about some of those newer market opportunities?

Yes, I mean, our hope is that it would become close to 10% of the sales by the end of the year on a run rate basis. It's not there yet. But then even longer-term, we're looking at some really big numbers here, if we're able to execute and become in those industries what we've become in telecom.

Got you. And just on the network side of the equation, you made reference to your big customer there starting to -- sounds like they're starting to ramp up a little bit. What's the visibility you're getting to Capex starting to flow out into the field right now? Are you starting to see that pick up? And what can we expect as we get into the second half of this year?

Yes, I think that we're starting to see some break in LTD and WiMAX buildout. We're starting to see some of those dollars. The one customer in particular that we've been having some success with on the WiMAX front, we're really expecting that to continue. We are seeing some of the big guys start to really talk more seriously about their LTE buildouts. And we would expect to benefit from that, as they've got to support these smartphones. And so we think that's going to be coming at some point this year.

And we're also seeing the acceleration of the real broadband initiatives for the private and public carriers as well. So that's going to be enhancing that overall infrastructure build.

Bob, are you -- did a lot of your customers actually get some financial benefit from the broadband stimulus? Because it seemed like more of it was really skewed towards the wireline side of the equation, really skewed towards anchor institutions, but (multiple speakers) --

That's a great question. First of all, the promise of the stimulus money has slowed the actual deployment of these systems, because everybody is doing their grant writing to get this money. So, there's huge dollars that have been earmarked for the rural broadband, but there's a lot of hurdles you've got to jump over. And so it's really slowed getting that money. But it's going to come, and it's going to be a major driver of that buildout.

So, Bob, you don't think it's a case of it being allocated elsewhere? It's just a timing issue?

It's the timing and the hurdles that are placed to get that money. And there's a lot of people out there that want to get the money, so there's a lot of applications in. And then you've got to marry the people that are capable of building and operating the systems to the people that are trying to get the money. So it's really complicated, the entire ecosystem of this. But it's got to happen and it will happen. And we're there working with these people to help them through the hurdles as well as architect their system.

Okay. Hey, guys, thanks so much. Great quarter, and I'll yield the floor. Thanks.

(Operator Instructions). And you have no questions at this time. I would now like to turn the presentation back over to Bob Barnhill for closing remarks.

Great. Thank you. And thank you all for the opportunity to answer your questions. We've covered a lot of ground today and as we've -- I think, hopefully, we've communicated that 2010 was a very exciting year for us. I think we all know that it's still, as we say, it's not easy out there. The economy is still very bumpy and very cautious. And we've continued to get more market share and move into these new opportunities, and, obviously, drive great productivity that is really helping the bottom line.

I'll also say that, as we've tried to communicate, the pipeline of new opportunities is extraordinary and the highest that it's ever been. So that's the good news.

Then on the other side is that it takes increased discipline and focus to make sure that we're going after the right opportunities and deploying them in a way that is profitable, and if we can continue to win in these market areas. And I gave you two areas that we're obviously very focused on, and the same thing with the carrier-based infrastructure and the retail handset side of the business, even what we're now calling the prosumer, which is the professional and consumer that are moving into these new areas.

We've got iPad accessories. We've got -- we're working on the infrastructure to support it. So again, it's a very, very exciting time.

So, I really appreciate your participation and look forward to tracking our performance with you for what we think is going to be an excellent fiscal year 2011. Thank you very much.

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