TESSCO Technologies Inc (TESS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2011 TESSCO earnings conference call. My name is Michael, 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 today's 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 conference, Ms. Harriet Fried of LHA. You may proceed.

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 would like to turn the call over to Mr. Barnhill. Please go ahead, Bob.

Thank you, Harriet. Good morning. Well, it was another record quarter, bringing our fiscal year-to-date to a record, all on top of last year's record, on top of the previous year's record. All these results are being driven by executing our very focused plan to leverage the opportunities in the wireless communications industries.

In our second quarter, which ended in September, we posted all-time record results and continued our dividend. Record revenues, record number of purchasing customers, record earnings per share of $0.43, record EBITDA of $0.85 per share, and in addition, our operating margin reached an eight-year high of 3.4% and the quarterly dividend of $0.10 continued, which represents approximately a 2.5% yield on our current pricing.

It was truly an excellent quarter as we architected and delivered new, innovative product, plus value chain solutions to our customers for deploying and using wireless-based systems.

As we've said before, the convergence of wireless and the Internet is creating exciting new systems and applications, and we are right there, supporting our customers to take advantage of the opportunities, as well as resolve the challenges being created by this convergence. This is what is driving our results.

So Dave Young, our CFO, will give you the details of our outstanding second-quarter results, and then I will come back to tell you more about our growth strategy and outlook. David.

Thanks, Bob, and good morning. We are very happy with our results. It was a really great, record-breaking quarter. I will now provide some more details, and all comparisons here will be to last year's second quarter unless I state otherwise.

The revenues totaled a record $165 million. That is a 24% increase. Really a great quarter for the top-line growth. Our public carrier market grew the most of any of our markets, 42% year-over-year. We continue to participate in some of the exciting newbuild projects that are going on right now.

In our reseller market, we grew by 30%, strong growth in this market, with both network infrastructure products sold to the value-added resellers, and also with the mobile device accessory products sold to retailers, both large customers and our smaller customers.

And despite the decline in spare parts revenue we will talk about in a little bit, the user and government market revenue was flat year-over-year. There are some really exciting things going on in this market, too; interesting opportunities in transportation, oil, gas, the utilities industry that we are starting to capture. Bob is going to highlight some of those in a few minutes.

But as a reminder, the repair components business that I just spoke of is now officially over. At the end of Q2, it was completely transitioned out. And our smaller consumer direct business showed a minor 4% decline.

On the gross profit line, gross profit reached $36.8 million, which is a 16% increase, so very nice growth on the GP line, as well. We did see some gross margin compression this quarter. Gross margin for the quarter was 22.3%, down compared to 23.8% in last year's second quarter; essentially flat compared to our first fiscal quarter of 2011.

The year-over-year decline is partially a function of customer sales mix, with higher sales made to our large retail national Tier 1 carrier. We also saw some margin compression in the network infrastructure line of business related to servicing the larger customers on these network builds.

For a few more details at the line of business level, our mobile device and accessory revenues totaled $92 million. That is a 28% increase. 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 carrier customer, almost 30% growth there.

The core non-concentrated business also showed very strong results. If we pull out the sales to that one large customer, our revenues in this line grew by 27%, and a number of buyers in this line increased by about 5%. Purchasers per buyer for the core markets increased by 22%. Our offering to customers is very comprehensive in this line, and we continue to post really strong results here.

On network infrastructure equipment, revenues totaled $62 million, increasing by 32%, while gross profit increased by about 24%. Strong growth here too, and as I said before, we continue to participate in some of these larger public network infrastructure projects. And we are really excited about the growth that we see on the private network sides, projects where we're working with transportation companies, utilities, pipelines, to help them build out their networks.

This is very exciting and is a great opportunity for us to expand our strong proprietary product solution offering. The number of buyers in this line increased by about 2% and purchases per buyer increased by 29%.

Installation, test and maintenance -- and as I mentioned earlier, the repair components business fully transitioned out at the end of the quarter -- so the year-over-year comparisons here are difficult. Nevertheless, revenues were $11 million and gross profit hit $3.1 million. That is a 22% decrease in revenues, but only a 5% decline in gross profit.

Remember, the margin here has varied a lot depending on the products we sell into that repair components business. But as we've talked about before, that business represented less than 1% of sales this quarter, so the expiration of this business really won't have a material affect on our results. Buyers in this line were down about 2%, and purchases per buyer decreased by about 20%; again, a function of the change in that relationship.

On to SG&A, our operating expenses increased during the first quarter; they totaled $31 million. That is up about $4 million or 14% compared to last year's second quarter. This increase is attributable mostly to higher freight costs, which are completely variable with sales, as well as higher people costs. And we continue to invest in our business generation teams, with an eye on capturing these new opportunities that lie ahead.

It will take a bit of a transformation here. Our sales organization is transitioning to a much more consultative, relationship-driven organization. Our database marketing efforts are becoming much more sophisticated. And we are providing much more technical support to our customers as we architect and design these full, complete solutions.

We continue to closely manage our other costs, but we believe that the investments in people and systems that we are making really are the right thing to do, enabling us to grow the business right now and make continued investment in the future of the Company.

Accordingly, our operating income for Q2 was $5.6 million, nearly 30% growth on a 24% revenue growth. And so consequently, our operating margin reached 3.4% of sales, as Barney said, an eight-year high.

EBITDA reached a record $6.7 million this quarter, $0.85 a share. And net income was also a record for us, $3.3 million or $0.43 per share.

So for the first six months of the year, revenues totaled $307 million. That is a 27% increase compared to the first half of last year. EBITDA for the first half of the year grew by 16%; totaled just over $11 million or $1.41 a share for the first six months. And net income totaled $5.4 million, up 20%, and EPS reached $0.69 a share.

So now to the balance sheet. We maintained our primary focus on customer order completion, while demanding strong turns on our inventory investment. Inventory grew by $3 million compared to the June quarter. This increase supported higher sales pretty much across the board and so our inventory turns reached 10 times this quarter. That is a good, strong number for us.

Cash collections were also good. The strong sales, particularly late in the quarter, drove much higher AR this quarter. But days sales outstanding were 41 for the quarter. That is just a little bit higher than we've been in the past. Some of these larger customers that we talked about have a little bit longer payment terms than those we typically grant. So that is the increase in DSO.

The increase in inventory and receivables, though, was completely offset by increased payables this quarter and other liabilities, plus net income. So we generated positive cash from operations for the quarter, about $1 million. During the quarter, we did pay the final earnout payment for the acquisition of TerraWave and GigaWave several years ago. Plus, we paid the prior year's dividend -- the prior quarter's dividend payment and typical CapEx.

So therefore, we ended the quarter with $0.5 million in cash and no outstanding balance on our revolving credit facility.

Our Board continued the dividend program this quarter, $0.10 per share of common stock. It will be paid in November. Like the last payment in August, this dividend is a 50% increase in the per-share dividend amount compared to where we started when the dividend began in August 2009.

So we continued our strong start to the quarter, ahead of last year's record pace. We are particularly encouraged by the top-line growth in the core, non-concentrated business. The balance sheet remains strong, and we are looking forward to further utilizing the platform for growth that we've built over the last few years.

When we look at the opportunities ahead, we get very excited. The fact that we are so well-established in the network infrastructure and device accessory markets, both of which continue to have very strong growth prospects, has really allowed us to broaden our scope and go after some exciting opportunities in new markets with new technologies.

It is a great time for us, and we are looking forward to delivering what we think will be a record 2011 and even more in the years to come. I will now turn it back to Bob.

Thank you, David. The results that Dave really outlined are being driven by, first of all, just an extraordinary team that is very focused and accountable for achieving new outcomes in five major areas that I will outline.

First, we are focused on earning a greater share of our customers' purchases. The foundation of TESSCO's success is our intense focus on customers and solving their concerns and delivering their requirements. We continue to provide our customers with superior knowledge, configuration of their orders, delivery, and control for the procurement of their product solutions. So for our customers, we deliver better solutions at lower cost and are now being rewarded with a higher percentage of their purchases.

Second area is developing new products and solutions offering, which has been just a major transformation in progress as we've gone forward. As the technologies change and advance, we expand our offering to provide everything that makes wireless work. We are a customer's total source, from network systems and infrastructure to test, installation and maintenance products, to mobility devices and accessories. Today, just beyond supplying products, we are architecting the new innovative solutions to support the emerging and exciting voice, data and video systems.

So first, our products and services support the primary networks. The networks are the public-grade networks, cellular, 4G, LT, WiMAX, rural broadband, wireless Internet. Then, we look to the private systems, the outdoor wide-area networks, campus, multi-building coverage, last mile, rural broadband coverage, city and public safety. And then we go in-building, to the WiFi systems, where we are looking at the enterprise, as well as enhanced cellular coverage.

So if you can visualize these systems, the three primary systems, then on top of these systems rise the new applications that are emerging. And we participate in smart phones and other wireless devices, two-way radio, voice-over IP, security and video surveillance, remote monitoring and control, just to mention a few. And I want to come back to the remote monitoring and control in just a minute. This is smart grid, oil and gas pipeline, positive train control, precision architecture -- or agriculture, rather, and asset tracking.

Now -- so then, the third area is where we are designing these new TESSCO-only proprietary products. And we are focused in several key areas. One, mobility devices; we continue smart phones from the cases, headsets, charging systems. Then the WiFi, where we support the enclosures, antennas, cabling systems.

And then one of the major areas that we are having terrific success in is what we call the turnkey subsystems, smart grid, collector boxes. TESSCO has designed a proprietary collector box that we now have on test with several of the major utilities that will allow collecting the data from home and businesses and then backhaul it to the primary station, so the control of the grid can be handled.

Positive train control is a big area. This is -- positive train control is the air traffic control system for railroads, where if there is something wrong with a switch, if there is a potential collision, the system takes over and will actually shut down the locomotive. What we've designed is a proprietary station that allows solar backup, as well as the RF propagations, that can be delivered directly to the railroads so that they can install it with the lowest total cost. These two systems alone are having absolutely great ongoing potential.

The fourth area is we are entering new markets that are deploying the wireless voice, data and video systems. So if you can visualize this product line, the solutions that we are offering, that now that we are going beyond our historic carrier, public safety, value-added reseller retail base into new industries -- utilities, transportation and rail, oil and gas, healthcare, education, just really to mention a few.

And then lastly -- David touched on this a little bit -- that our results are being driven and we are gaining greater effectiveness and productivity through truly relationship-focused sales and the Internet and data-based marketing. We've transformed our sales team into very focused, market, relationship-building, with target customers where we can partner to deliver value by solving their knowledge, operational and financial problems and improving the way they do business.

Our marketing and sales support is being driven by ever-improving data and Internet market and one-on-one marketing, which will drive new levels of customer satisfaction, sales effectiveness and productivity.

So as David mentioned, our guidance, we still believe this will be another record year, and we affirm our guidance of $1.27 to $1.50. And as we indicated, we are this quarter continuing our dividend of $0.10 a share.

So with that, I will turn it over for any questions.

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

Yes, thanks, guys, for taking the question. You know, usually I like to start off with the macro environment, so kicking off on that front, Barney, would love to hear your thoughts and comments on just the channel in particular, where we are, the inventory situation.

There has been some concerns, especially across the board, about demand and kind of North America on the consumer front. From your point of view, would love to hear your commentary on that, and then I have a couple of follow-up questions after that.

All right. Good morning. Good to hear from you. The overall economy and marketplace still remains tentative, in terms of everybody is cautious in terms of what they do, but at the same time focused on -- I think we all know from a carrier point of view is that there is this pent-up demand for new bandwidth that is being consumed by these new applications. So we are starting to see some movement, but it is still a very tentative movement as we look at the carriers as a whole.

On the consumer side, these smart phones are still driving the primary excitement. And they are looking for the new devices; it's still incredible in terms of the attach rate for accessories that are going to the new smart phones. When we look at the industrial applications, this positive train control, the smart grid, video surveillance, we see a real promising future there. But the sales cycle is relatively long. And again, people are just starting to look at what they want to do when they want to do it.

We are working now with an opportunity for the wireless backhaul for the charging stations for electric vehicles. Well, the electric vehicles, so it is a chicken and the egg, in terms of the electric vehicles coming on as well as needing the charging stations.

As far as your question about inventory, inventories still remain low in the channel. People are looking for the on-time delivery. This is one of the areas that we are performing well as far as I mentioned the increased customer percentage of their spend, because we have the availability. We can deliver what they need when and where they need it, which is from our value proposition a good thing. And so there is not a lot of inventories in the channel that needs to be purged.

So David, do you have any other thoughts on --?

I think you got it.

Okay, Anil? Thank you.

Okay, great. So a couple of follow-up questions. You talked a lot about your adjacent markets. You talked about remote monitoring, smart grids and everything. Combined, can you just give us a sense, the proportion of your top line coming from these adjacent markets?

And can you just comment about the trajectory of growth? Are we talking about a double-digit growth over the next two, three years? And looking out a couple of years, where do you see these kind of just markets? What proportion do you think they are going to turn out as a function of your top line?

I think that going forward, you are going to see very exciting growth, number one, from the public carrier market as we enter into the new active components, the radios that we are going to be supplying into the new buildout. That is going to be a huge opportunity.

Then these other opportunities in the industrial markets, with the railroad, utilities, again, will be explosive as we look into the new fiscal year. So that going forward is going to be a major driver of our growth, really beginning probably at the third -- fourth quarter this year, but then really accelerating into the next fiscal year.

Our other lines of business, the accessories, the everyday infrastructure business, the installation test and maintenance, I think is going to show continued growth, especially as we move into these new markets and get higher market share from our customers.

So we are looking at reducing concentration. You will see much greater growth in our non-retail markets than what you've historically seen in that side of the business. David, you got (multiple speakers)?

Yes. I think if you look at our current results, it's still -- these remote data and remote monitoring controls, those sales are still relatively small. I think it's probably about 10% of our user and government line is coming from those sorts of applications. But we expect that to grow substantially.

Great. And going forward, clearly, you are very positive of this market. Other people are also very positive of this whole trend towards remote monitoring. Walk us through why TESSCO will be able to succeed in this place. Is it the relationships with the railroads and the government agencies, or is it some unique solution in your portfolio that enables you to do well?

It's a great question. Really, we are leveraging on our background and experience in wireless, and then matching that up with the Internet convergence. So it is we are there, and we can anticipate and work with the companies that need integrated subsystems.

So when we say smart grid, we are providing the -- we are focused on the subsystem of a collector box. This is the box that hangs on a pole, and inside that box is the battery backup and antenna, and then the radio inside that is going to collect the data and put it out and backhaul it. So our value-add is integrating that subsystem that then can be integrated with the larger controllers and things that they need.

The positive train control is another perfect example. This is for a dark wayside, so dark meaning that they don't have AC power, and where we've integrated solar with battery backup power to power the radio, as well as the controller. And then we've integrated in the RF propagation with the antenna and all the cabling so that it is a turnkey subsystem.

So long-winded story, but it is our knowledge and our experience and the ability to take our entire product line and knit it together into a single SKU being a subsystem that they can immediately deploy.

Very good. Thank you. And final question on my end is obviously, there has been some back and forth in terms of some of your big shareholders. Can you give any sense -- I'm not sure how much you can talk -- but give us your perspective on your latest thoughts of where the Company is and where do you think you guys plan to move it going forward?

And along with that, do you expect any kind of M&A, either a tuck-in from your point of view or any particular end markets that you would like to focus on going forward?

Great. Obviously, today's call we want to continue to focus on the big story, which we feel is our results and future opportunities. And then that leads into your last part of your question in terms of our M&A activities. We are always looking for those niche opportunities that can help us expand into voice-over IP, or where we can get, as we did with TerraWave and GigaWave, where we expanded our WiMAX -- or WiFi enclosures and support products, as well as the Cisco-based training programs.

As far as the offer I think you are referring to, our independent board, after very careful consideration, felt that the offer was grossly inadequate and we rejected it. And we continue to focus on our plan, assuring that we generate long-term value for all of our shareowners. And all of us at TESSCO know that at this point, our strategic plan remains very sound and has generated results and has positioned us to continue to generate future growth and value for all of our shareowners.

And if you really take a step back and look at what we've done for our shareowners, what the outcome -- I mean, our dividend now represents about a 2.5% yield since we began our buyback in 2004. We've bought back 4.2 million shares for over $37 million. And then if you look at our price per shares, we've outperformed the Russell 2000 and our peer group over that past five-year period.

So we feel good about our strategic plan at this point, and we are continuing to execute it to make sure that we can generate greater returns in the future in this very exciting industry.

Very good. Thanks a lot, and good job on the execution.

Steve Jacobs, Bank of America.

Congratulations on the quarter. In regards to the Discovery bid, I agree that it is inadequate, but there has been rumors out there that there is another bidder. Can you confirm that?

At this point, we really can't. That is for the Board. I mean, we always are talking to people and exploring opportunities.

All right. Either way, again, congratulations on the great quarter and continued success. And hopefully we will let the share price do the talking.

Absolutely.

Take care.

Thank you.

(Operator Instructions) There are no further questions at this time. I would now like to turn the call over to Mr. Bob Barnhill.

Thank you very much for being with us today. And as I've mentioned several times, our goal is to continue our trend of producing record results in the month and quarters ahead, and really through the opportunities that are being created by this exploding wireless communications industry. It is a very exciting time to be TESSCO, to be at TESSCO, and it is great to see the results that we are driving.

Thank you, and I look forward to continuing to communicate with you in the days and months to come. Thank you.

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