TESSCO Technologies Inc (TESS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen welcome to the first-quarter 2011 TESSCO earnings conference call. My name is Chanel and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, 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 short introduction, I would like to turn the call over to Mr. Barnhill. Please go ahead, Bob.

Thank you, Harriet. Welcome, everyone. Thanks for joining us. I am extremely proud that we grew our revenues 30% over last year's first quarter and this is on top of last fiscal year's record in still a very uncertain economic environment. Earnings were $0.26 per share and we are continuing our quarterly $0.10 per share dividend. So it is all great news.

This performance was a result of excellent execution on the key components of our strategic plan. Let me reiterate the three components. First, being our customers' total source for everything they need to build, run and maintain their wireless systems by delivering what they need when and where they need it with speed, reliability and productivity.

Secondly, architecting new product and value chain solutions to support the emerging and exciting new applications being created by the convergence of the Internet and wireless.

And lastly, intensely focusing on markets and customers where we can partner to deliver value by solving their knowledge, operational and financial problems and improving the way business is done.

As a result, we are selling more product categories to a record number of customers, entering new markets, introducing new products in solution areas. We have got a strong balance sheet and strong profitability. Dave Young will give you the details of our results and then I will tell you more about our growth strategies and outlook. David?

Great. Thanks, Bob and good morning. We are happy with these results. It was a very good quarter and now I will give you a few more details. All comparisons here will be to last year's first quarter unless I state otherwise.

Revenues totaled $142 million; that is a 34% increase, as Bob said. Not including the decline in the spare parts business, all markets showed nice year-over-year top-line growth. The public carrier market grew the most, 58% year-over-year and as we have talked about before, we have been having a lot of success here supplying some of the bigger build-outs that are going on now and that is very encouraging to us.

Our reseller market grew by 39%. We had strong results in this market, both in network infrastructure sold to the value-added resellers and also with mobile device accessory products sold to retailers, both our large customers and our smaller customers. And although small, our consumer business continued to grow. It was up about 17% this quarter.

Our gross profit reached $32.3 million, which is a 12% increase, so nice growth on the gross profit line as well. We did see some gross margin compression this quarter. Gross margin for the quarter was just under 23% compared to 26.7% in last year's first quarter. And this margin decline is largely a function of a decrease in the mobile device and accessory line of business.

The gross margin in Q1 last year was abnormally high for this line and it was driven mostly by a significant shift that quarter in product mix to our large national carrier customers. In this quarter, the gross margin there got back to more historical levels. So it was essentially flat to last quarter. We also saw some margin compression in the network infrastructure line of business and again, this is related to servicing the larger customers that are doing these bigger builds.

So a few more details now on the line of businesses. Mobile device and accessory revenues totaled $77 million. That is a 44% increase. We continue to see strong demand for device accessories from customers, both large and small and the continued proliferation of smartphones really continues to drive the business for us here.

It was another very strong quarter for sales to that large tier one national customer, almost 50% growth. Although as I said above, product mix changes here contributed to the overall decline in gross margin for the line of business.

The core non-concentrated business showed really strong results too. Not including sales to the large customers, revenues in this line of business -- to the large customer, revenue in this line of business grew by 40% and the number of buyers in this line increased by about 5%. And also purchases per buyer for the core markets increased 33%. So we continue to gain marketshare and our customers are buying more dollars, very encouraging.

Our network infrastructure equipment line of business, revenues grew by or totaled $55 million. That is an increase of 38% while gross profit increased by about 26%. So very strong top-line growth here too. As I said above, we are participating in some of the larger infrastructure projects, but our everyday business is strong here too. Our proprietary products in this line of business showed strong growth and the pipeline is very good.

We did see a decline again in gross margin here, as I described above, but the number of buyers in this line increased by about 4% and purchases per buyer here increased by 33%. Our customers are buying more in this line as well and that is another very, very positive signal for us.

The installation, test and maintenance line, again here year-over-year comparisons are inherently difficult due to the changes in the agreement with our repair and replacement parts relationship with an OEM that has resulted in significantly reduced revenues and gross profit. Nonetheless, revenues were $10 million and gross profit was $2.8 million. That is a 34% decrease in revenues and a 20% decline in gross profit.

Gross profit dollars in this line are pretty much the same as the last several quarters, but the margin is a little bit higher. Just remember here that the gross margin can vary substantially based on the way that we account for the repair and replacement component parts relationship.

As we have disclosed in past year filings, this components relationship with the OEM is scheduled to expire later this summer, but again recall that it has over the years continued to become less and less meaningful to our overall business. In Q1, it represented less than 1% of our total sales. Buyers in this line were down 2%. Purchases per buyer decreased by 33%. Again, a function of the change in that relationship.

On to SG&A. So operating expenses did increase during the quarter. They totaled about $29 million. That is up about $3 million, or 12% compared to last year's fiscal year first quarter. The increase is attributable mostly to higher people costs, as well as higher freight costs, which are completely variable with sales. We continue to invest in our business generation teams, largely in the new and emerging strategic areas that we have been talking about and that Bob will describe in detail in a few minutes. And we continue to very closely manage our costs, but we believe that the investments in the people and the systems that we are making really are the right thing to do and we are going to continue to invest in the future of our business.

Accordingly, our operating income for the first quarter was $3.4 million or 2% of sales. EBITDA was $4.5 million this quarter, $0.55 per diluted share. Net income was $2.1 million, or $0.26 per diluted share.

Now to the balance sheet. We have continued our primary focus on customer order completion and thus, we increased inventory by almost $8 million from fiscal year-end. This was to support the higher sales across the board, but in particular related to the large carrier builds. The large majority of the inventory growth was in the network infrastructure productline. But we continue to manage this inventory investment very well. Our turns remained high at about nine times.

Our cash collections remain strong. With strong sales particularly late in the quarter drove higher AR, but days sales outstanding were 41 for the quarter, right in line where we have historically been. The increase in inventory and receivables was completely offset by increased payables. Our cash bonus plan related to the last fiscal year was paid this quarter, so we did show a small use of cash from operations for the quarter, about $400,000.

We ended the quarter with $4.7 million in cash and had no outstanding balance on our revolving credit facility. And we did, as Bob mentioned earlier, we continued our dividend program, $0.10 per share of common stock. It will be paid later in August. And again, this is a 50% increase in the affective per share dividend amount compared to when we started the dividend program about this time last year.

So it was a great start to the year. We are ahead of last year's record pace and we are particularly encouraged by the top-line growth in the core non-concentrated business. The balance sheet remains strong and we really look forward to further utilizing this platform for growth that we have built over the last few years and delivering consequently what we think will be a strong fiscal 2011. With that, I will turn it back to Bob.

Thanks, David. Now let me try to paint a picture if I can in terms of what is happening in our business and our industry. We like to joke and say internally in 1982 when we started, communications really consisted of two tin cans and a string. But we began supporting two-way radio and then in '83, we captured the cellular wave and now today, we all see and feel how this convergence of wireless and the Internet is really revolutionizing the way we live, work and play.

We see these new video and data and voice applications and it is really an exciting time for consumers, as well as businesses, as well as TESSCO. The iPhone and the iPad are just really the demonstration of the power of the wireless device that ties directly into the Internet. And you just think of the applications, I mean all the way from e-mail, to books, to home security, controlling your thermostats, EPFs. I mean it is just the applications are mind-boggling and what is happening in the enterprise space and the government space are even more profound. And we are there. We are right at this convergence and as we say, we are architecting the new solutions required by our current customers, as well as new customers to help them deploy, as well as support, as well as use the new systems.

Let me give you a couple examples of these new applications that we are supporting. Obviously, smartphones and other wireless devices I mean have been huge for us in terms of everything from headsets to charging systems to the cases, the iPhone, the short-out -- I mean we can't get cases out to our customers fast enough to supply the demand that is happening.

But then when you get into the more commercial applications -- I mean security and surveillance. I mean we have got a huge initiative with wireless cameras, DVRs, the backhaul of going back to security. We've got a major initiative with Cisco with our training businesses. We are doing all of Cisco's physical premise and video surveillance training. We are developing syllabus and then delivering it. So not only is it driving product sales, but it is also driving the training business that we have as well.

Remote monitoring and control. This is probably one of the most exciting areas. And when we look at remote monitoring and control, this can be Smart Grid as an application, as well as with the railroads with positive train control. Now what we are providing to the railroads and the utilities are -- it is a collection box and this is a box that hangs on a pole or it goes into a foundation and inside that box, you have got the controller, you have got the radio, you have got the antennas and then you have got battery backup and solar.

So we put together this entire solution with the components that we have in inventory and we can figure it and integrate it and ship it to the customer as one product SKU that they can deploy that immediately. And you just think of the number of these boxes that need to be delivered to customers to drive this Smart Grid application where the positive train controls or video surveillance in terms of remote areas -- it is just this convergence that we are configuring all the products that we have in inventory, all the products that we are adding that next component in terms of really architecting the solution for them.

Now if you visualize all these new applications, it is putting a huge demand on the network and the iPhone is a perfect example. We have all heard continued in the news that they just don't have enough bandwidth and there is gigantic builds that are being contemplated and being taken -- taking place already. As David talked about, we are already supplying a lot of the buildout, but the buildout we believe is just really going to begin.

So if you look at the carrier grade, whether it be 3G or 4G or WiMAX, we are in that system in terms of helping them deploy their systems. Then you have the wide area network, which is best manifested in terms of the rural broadband and this is huge. There is a lot of stimulus money out there. There is still a lot of constraints in terms of getting that money and doing the grants. But we see this as being a major area as we move forward.

And then just looking at the local area networks in building systems, the products that we have designed -- I mean all the enclosures for healthcare, putting the access points in the top of ceiling tiles. I mean TESSCO is there with major stadium builds, putting Wi-LAN in the huge sports arenas and stadiums. We are in that. Now again, we are not installing, we are selling to the people that are installing, but we are engineering and architecting that solution that they can deploy immediately.

Then the other important thing is that as we look at these new applications and these new systems, it is driving this and it's taking us into new markets that we didn't historically serve. I mean our historic base was the carrier obviously, public safety, value-added resellers, retail, but now we are going into utilities, transportation, rail, oil and gas, healthcare, education. It is taking us in with these product areas and the expertise that we have with wireless.

So all of these new customers require our fundamental value proposition and the new applications leverage our operating platform and product offering. So thus, the Internet, plus the wireless convergence is fueling new opportunities and is going to provide us with greater diversification and obviously growth in profitability and productivity. It is a very exciting time to be at TESSCO.

So with that, we've started a great year and we believe that this is going to be another record year and we are reaffirming our guidance, the $1.27 to $1.50 and this is versus our results last year, which was a record of $1.19. So with that, I will open it up to questions.

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

Hi, guys. Congrats, Barney and team on the good execution. I think Barney, the first question I had was Steve Jobs talked about an improved vendor list for the cases and I know you guys have a good relationship with AT&T currently, but do you see the iPhone 4 issues as an opportunity for you to directly interact with Apple? And do you see an opportunity out there for a direct relationship with them?

It is a great question and the answer is yes. And one of the fundamentals things is that Jobs also in his announcement said that they were hesitant to give the case manufactures their information about the new phone. So that is a reason that they don't have any cases in the pipe because they didn't share those specs.

So one of the things we are trying to do is leverage that in terms of the credibility that TESSCO provides in terms of being able to keep those types of things confidential. So with our existing manufacturers, we are working closely and obviously with our proprietary products very aggressively to leverage on the credibility that where we can get that early insight into what those products are going to do and keep it totally confidential.

Now, Barney, you have a case to support the iPhone 4 today, is that correct?

Yes.

And is it just one version or are there multiple versions of it?

We have multiple versions with our existing branded manufacturers. We have got great cases and then the same thing with proprietary products, we have the cases, and one of the things we are moving very aggressively. We have been shopping the stores and the Apple stores don't have cases in them today and then you go into our retailers, and Best Buy and whatever, they don't have a broad assortment. And so that is a huge opportunity.

And also I think it demonstrates what we are all about is speed to market and with our major carrier, I mean we had products in the pipeline that had been approved that they have in the stores today, which was really a feat to move out as quickly as we did.

So from a pricing point of view, would it be fair to say some of that -- some of the pricing on those models would be much favorable to you guys?

Yes, I think you're looking at -- I mean it is still going to be competitive pricing. I mean it is not going to be a skimming strategy, if you will, in terms of being first to market, but it is attractive, attractive business in terms of supporting that product.

Okay. And on your Tier 1 accessory customer, can you provide an update as to what percentage of proprietary products were sold through that customer?

Yes, well, the proprietary products for the entire business were 12% of sales. We don't break that down by segment or by customer. So the business there has been good. I think it could be better and we are focused on getting more of our proprietary products into that big customer.

Okay. And finally, I think, Barney, stepping back kind of big picture, you guys are pretty well (inaudible) and how do you see the demand environment, especially in the context of inventory levels and the sustainability of it? Any comments on that front?

When you say inventory, do you mean at the customer level?

Yes. I mean across the whole channel. That would actually be very helpful.

Yes, the business -- we have always been in the business of speed of delivery. And speed to delivery was typically on just across the board three to five days, but today, the business is now and customers are very, very lean on inventory and they want fast cycle times and they want to get the product they need very, very quickly. And that is where, as David said, we are getting more share of our given customers because we have the availability and we have the operational expertise to get that quickly.

The other thing we are doing on the back end, we are doing better and better with our suppliers to get faster cycle times so that we can continue to turn our inventory quickly. But that is our business in terms of reacting to what the customers need when and where they need it. A lot of these builds, for example, is that they need local pickup and we are doing collapsible pickup points where we can forward-deploy the product without putting inventory all over the country. It is basically the customers' inventory, but we will put it locally where they can pick it up.

So the leverage, if you will -- I think what you're asking is, as the market continues to build, there is going to be more pressure on us to perform, but also more leverage as it results in sales growth because the channel is lean in terms of where the inventory is.

So Barney, building up on that point, are you seeing a further push, whether it from the carriers or through the channel, to actually hold larger amounts of inventory on your balance sheet or it's just a case of greater efficiency?

I think that they are putting the pressure on us as they should and as we want them to do to have availability when they need it. And so it is a question that we have increased -- as David said, we have increased our level of safety stocks and we have layered in based upon our projections, but we are not being in the position of where the customer says, okay, you have got to maintain all this inventory. They are saying you have got to support my needs and again, part of our challenge is making sure we have the complete assortment of product they need, especially when you look at an infrastructure buildout. I mean if you are missing one screw, they still can't do the installation.

So that is again a challenge for us is the making sure -- and that's -- when I say a challenge, that is what we do and that is what we have historically done and that is why I tried to explain as we go into these new areas, we are just leveraging what we have already done with the platforms in place. But it really is increasing the importance of our value proposition and our ability to execute.

Very good. Thank you very much, Barney and once again, good job on the execution.

Thank you.

Scott Searle, Merriman.

Good morning. Nice quarter. Bob, Dave, my apologies. I got on the call a little bit late, so I apologize if this is redundant. But looking at the breakdown of revenues and accessories kind of stagnating from March to June, is there anything specific behind that? Is that a product transition issue that was undergone with the iPhone or otherwise, you guys stepping away from less attractive business? What is the quick summary on that front?

And to follow up to your comments on the iPhone 4 and your potential involvement with Apple, what sort of visibility are you getting now and growth would you expect going forward into the September quarter on the accessories front?

Scott, to your first question, I think that what happened -- one of the things that happened this quarter from an accessory side was that not a whole lot happened in anticipation of the iPhone launch. The iPhone launch was at the very end of the quarter and so early in the quarter, there weren't a lot of promotions, there weren't a lot of new handset launches, there weren't things that typically happen that drive some sales for us.

And so -- and then coupled with kind of Apple's secrecy on the iPhone, we didn't have the ability -- our OEM didn't have the ability to build products for that phone ahead of time. So the big channel fill of the big launches for our accessory products for the iPhone 4 are going to happen in the September quarter. And so I think that is largely I think what we saw in the first quarter.

So with that in mind, Dave, how big could that channel fill be? What is kind of the range of outcomes for you guys?

Well, I mean I think we don't really talk about projections at the line of business, but we are expecting a good strong quarter in the device (technical difficulty), both at that large customer, but then also in the rest of the channel.

And it is also beyond the iPhone. I mean you look at the Android and you look at the other smartphones and the other things and as David says, we are going to start moving into holiday and we're looking at all the various new phones, various new accessories. Green cases, for an example, biodegradable green cases. I mean we have got a great product that we are rolling out there and that is going to drive and in addition to just our core business with power and headsets and Bluetooth. I mean it is going to be strong as we move towards the Christmas season.

Got you. And just to follow up on one of your comments related to the other carriers, how are you doing on that front in terms of expanding the accessories business beyond the one large relationship?

We have got -- on the indirect side, we have got agreements with all the carriers except for one on the indirect side. So that business, we are really known for that and have had a lot of success there.

On the corporate side, we are working with obviously AT&T and then we are increasing our business with Sprint. The other two on the corporate side are not there yet, but we are working them and I think the Tier 2s, we are pretty well represented there as well.

But the independent channel again is our sweet spot. The ability to handle a multitude of points-of-sale and supply them with what they need and give them the merchandising solutions is where we are very strong and that is why we are just making great inroads into that business and it is an attractive business. It really leverages our value proposition, but leverages our overall profitability and productivity.

Okay. And to maybe follow up then on AT&T or the large carrier relationship on the network infrastructure side. It looks like you had a very good quarter on that side of the equation. AT&T had good results this morning in terms of CapEx spending. I think they were talking about being up 60% year-over-year in their wireless CapEx. What sort of visibility are you getting on that front?

And Barney, going back to your comments about the channel being relatively lean, are you experiencing any major shortages that are really kind of slowing the overall supply chain and deployment schedules up and kind of slowing down your revenue recognition on that front?

No, I think we are on top of it. We are working well with our customers to get some advanced look. We are layering in the availability. I mean that is again what we do well. We have got a whole team that looks at how do we increase that cycle time.

I think the other thing that is an advantage for us is we do have alternative products that if for some reason we have a supply problem in one particular area, we can bring or suggest an alternative product to them. Anything else? Are you still there?

Sorry. And also on the proprietary content front, Dave, I think you said it was 12% of revenues. Could you remind us what it was in March and what the target is for the end of this year?

Sure. In March, it was either 9% or 10%. It has historically been just under 10%. So we did see some growth there. And our long-range target is to significantly grow that. By the end of the year, we would like to probably see it around 15% -- in the 15% range I guess.

And remember too that that's beyond just the mobile device accessories. I mean you are looking at the commercial product. You're looking at the Wi-LAN components, enclosures, jumpers. I mean you're also looking at the Smart Grid collector box as a vented product. So we are not only doing the accessories, but the commercial products as well, which is very exciting.

Okay. And then maybe to follow up on that lastly, moving into some of the new product opportunity areas, be it sensors and other [N to M], how are you guys tracking on that front? I think if I recall, I want to say it was about 10% was the target looking out towards the end of the year. Are you guys tracking along those lines? What has got you most excited and how is the visibility on that front?

Yes, I think we are tracking it. I think that we have had some wins with utilities and some pilot programs that we have been involved in with other energy companies. And I think that if our solutions prove to be as good as we think they are, I think that we will see some nice growth coming there. And that will show up in the user and government line in the segment note.

Okay, great. Nice quarter, guys. Thanks.

(Operator Instructions). There are no further questions.

Great. Well, thank you. I appreciate the opportunity to give you an update and appreciate the questions. And just to reiterate, going forward, we are going to continue to expand our role of being that total source for those that are deploying, supporting, reselling, using all these new systems. And we will -- our focus is how do we deliver better solutions at lower total cost for our customers.

So we are off to a terrific start and look forward to growing momentum as the year progresses and we accelerate the execution of our strategic plans. So again, thank you and look forward to talking to you at least in 90 days and tell you about what we are doing this quarter. Thank you.

Ladies and gentlemen, that concludes the presentation. You may now disconnect. Have a great day.