TESSCO Technologies Inc (TESS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 TESSCO Technologies Incorporated earnings conference call. My name is Michelle and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session during 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, Ms. Harriet Fried of LHA. Please go ahead.

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. I'm very proud to announce today and give you the details of our third consecutive record fiscal year. We have revenues, record earnings, and set the date for our $0.10 per share dividend for May 25. Now, these accomplishments are very significant as they demonstrate the strength of our marketing positioning and strategies and our ability to offset the reduced revenues in margins we have been experiencing from our largest customer, especially in the third and fourth quarter.

In the fourth quarter, purchases from customers other than this largest customer grew by 23% compared to last year. This growth reduced the concentration to this largest customer down to 15% of total revenues compared to 30% from last year. Our results were driven by expanding and deepening the relationships with the organizations that build, maintain and resell the systems that are being created by the convergence of wireless and the Internet. The adoption of the smartphone is just one example of this convergence and the opportunities being created for us.

From the increased demand for device accessories and for the system infrastructure that the smartphones require, all drive demand for us. So our vision is to leverage this convergence and establish TESSCO as the innovative leader in offering product and value chain solutions for the full spectrum of the wireless world.

In addition to winning the largest share of our existing customers' purchases, we're entering new markets, developing new products and new offerings, including our own proprietary products.

So let me turn it over to David Young, our CFO, who will give you the details for this record year. David?

Thanks, Bob. Good morning. As Bob said, our non-concentrated business continues to produce really good strong results and we're proud of the record year that we posted, despite the softer results from our largest customer. I'll give you some more details about our results for the quarter and for the year, and all quarterly comparisons here will be to last year's fourth quarter unless I state otherwise.

The revenues totaled $130 million, that's about flat to last year. What we're really pleased to report, though, is that not including sales to our largest customer revenues increased by 21%. Our public carrier market declined slightly year-over-year.

Some of the bigger build-outs that we were participating in have obviously slowed down and the March quarter is typically a little softer in this market. However, we do expect some seasonal pickup as the weather improves going forward and we do see CapEx spending going forward.

So we're focusing additional sales efforts on further penetrating the Tier 1, 2 and regional carriers, plus we're strengthening our relationships within the contractor market. And also, we really believe strongly that our new and expanding active component in fiber offering could help drive some strong results in this market.

Our overall reseller market declined by 4%, however, this includes a 47% decline in sales from our largest customer. So sales to this customer represented, as Bob said, only 16% of our total sales this quarter compared to 30% in last year's fourth quarter. So the remaining non-concentrated reseller business grew by 34% with strong growth in both network infrastructure products sold to the value added resellers and with mobile device accessory products sold to retailers.

The user and government market revenue was up 18% year-over-year due to strong growth in infrastructure sales. As we've been talking about the past few quarters, we've got a big focus on this market and we believe there are many opportunities to expand our presence as a solutions provider here. We're looking for big things related to our proprietary remote monitoring and control applications. Our small consumer direct business showed a 22% decline for the quarter.

To gross profits. So gross profit reached $30.4 million, which is a 2% increase. So flat revenues and increases gross profit we obviously saw a minor gross margin improvement this quarter.

Gross margin for the quarter was 23.3%, up compared to -- excuse me one second. So gross margin for the quarter was 23.3%, up from 22.9% in last year's fourth quarter and up considerably compared to the third quarter's 20.1%. The year-over-year improvement is due to sales mix.

Our one large customer with whom we had lower margins was a smaller part of our business, as we've stated before. And sequentially if you look at the margin improvement, it's really due to both the customer mix, the large customer being a smaller percent, but also nice increases in our non-concentrated gross margin.

And if we look at a -- from a line of business perspective, mobile device and accessory revenues totaled $66 million, again, that's a 15% increase but it's entirely due to the decrease in sales from our largest customer. And if we don't include the sales to that large customer, revenues in this line grew by 20% and the number of buyers increased by about 3%. Purchases per buyer for the core markets increased by 17%.

Network infrastructure equipment revenues totaled $53 million, increase of 20% while gross profit increased by about 27%, so really strong growth here too, both in dollars and in margin. We're really pleased with what we've done in this segment, strong growth with high margins. We're growing our product offering here, as I said before, and our proprietary products and solution results here have been strong. The number of buyers in this line was down by about 1% but the purchases per buyer increased by 22%.

In installation, test and maintenance, the repair component business that was accounted for on a net basis, we've talked about this before, fully transitioned out at the end of this year's second quarter so the year-over-year comparisons here are difficult. Revenues were $12 million and gross profit hit $2.5 million, that's a 22% revenue increase. But with the loss of the net accounting revenue, gross margins are -- gross profit is down by 8%.

Gross margin, if you look just back sequentially to the third quarter, gross margin is about flat and that's actually up a little bit. So that business has remained consistent since the transition of that components business. And buyers were down by 7% but purchases were up by 31%.

So to SG&A, our operating expenses increased slightly during the fourth quarter. They totaled $27.7 million, that's up about a half million or 2% compared to last year's fourth quarter. This increase is attributable mostly to higher compensation costs, which include a one-time severance charge of about $400,000 during the fourth quarter. We took a good hard look at some of our positions and were able to consolidate them throughout our organization.

Our freight out expense also grew slightly as the non-concentrated sales increased, but many of the other expense lines remained flat to down evidenced that we are really focused on productivity and that we're closely managing our expenses.

So our operating income for the fourth quarter was $2.6 million, a small 1% decline. And consequently our operating margin was a flat at 2% of sales. EBITDA reached $3.8 million in this quarter, $0.48 per diluted share. And net income was $1.6 million or $0.21 per diluted share.

For FY11, we're talking about the year here so it was a record year, as Barney said. FY11 revenues totaled $605 million compared to $522 million last year. That's a 16% increase. Sales to our largest customer were essentially flat for the year so the increase in revenues is entirely attributable to the non-concentrated business, so growth of about $83 million or 24%. EBITDA grew by 7% and totaled $20.4 million or $2.59 per share. Net income totaled $10 million, that's up 10%. And EPS reached $1.27.

So to the balance sheet, inventory came down by almost $6 million compared to December as we continue to rationalize inventories in an effort to improve turns and improve customer work completion. Our inventory turns were 8.5 times this quarter. Cash collections were good. AR came down by about 14 million this quarter.

DSOs were about 50, which is a little higher in the past. Some of our larger customers have a little bit longer payment terms, but we also saw our typical fourth quarter ramp in sales. So the March sales were much higher than January and February, which kind of inflates this DSO calculation.

The decrease in inventory and receivables was only partially offset by decreased payables. And so cash from operations was strong this quarter. We generated positive cash from operations for the quarter of about $2.3 million. We ended the quarter with $8.2 million in cash and had no outstanding balance on our revolving credit facility. Our Board continued the dividend program. We set the date to be paid in late May $0.10 per share.

And so as we look back at the fiscal year, we concluded what we feel was a really strong year, ahead of last year's record revenue in earnings per share. We're pleased with the growth in the non-concentrated business, as I said before, 24% growth in revenues. And we've built a tremendous amount of momentum.

This really was a year of transformation for us and we're proud of the fact that we were able to deliver these strong results while we were undergoing this transformation. Barney says that the convergence of wireless and the Internet is creating many challenges and opportunities and we're transforming into an organization that can really provide solutions that help our customers produce value, both for themselves and for their customers.

We still do face challenges related to the large customer. They're contributing lower margins and profits. In this possible business model change we expect the margin pressure to continue, and currently we don't have much visibility into this business model change. So our focus remains squarely on growing the non-concentrated business while improving margins and -- both gross margins and operating margins.

Those are our goals and we're very pleased with the progress we've made so far. We look forward to a good strong year in fiscal '12. I'll now turn it back to Bob.

Thanks, David. I think what we keep emphasizing is convergence and also concentration are the two monitors that we have. And this convergence is really creating these exciting new opportunities, both in the public carriers, but also the private systems, the outdoor systems, as well as indoor systems for the voice data and video. And we're there right in that convergence.

So as we look forward to the year, our goals are pretty straightforward. We continue to expand our position as your total source for the organizations that are responsible for building, operating, maintaining and reselling the voice data and video wireless systems. A tremendous focus on improving the gross and operating margins and return on investments. The word, again, we're aggressively going after reducing customer concentration and, obviously, performing with innovation, productivity and speed. And then bottom line is increase the value in returns to our shareowners.

Our strategies that we're executing on are very sound. One is to continue to enter and serve a diverse market space. And in doing this is we're very focused on building a portfolio of customers within these segments that -- where we can partner to deliver value by resolving their challenges and exploiting their opportunities and making sure that we're being rewarded for the value that we deliver. Focuses on more market or more customer share, as well as acquiring the new customers, and then also focus on either converting or disengaging with customers that are not profitable.

Then to this customer segment we're developing specific value propositions and solutions offerings for them and making sure that we're managing that offer and -- while developing new offer is rationalize the offer and making sure that we're optimizing our value-based pricing. So our offers are focused on providing the new opportunities for our customers to deliver on their strategies.

Then with this value proposition and offer aggressively communicating the value proposition through an increased enhanced Internet databased one-to-one marketing system that we continue to build. Fourth, making sure that we're delivering extraordinary doing business experience for our customers with great speed, reliability, productivity and care.

And then lastly is that over -- we've been really restructuring our entire organization to make sure that we've built the system for marketing to sales, the product management to fulfillment to serve our customers better and drive our productivity.

As David mentioned, the dividend will be paid at $0.10 per share. And then on the business outlook we're going to move towards giving quarterly guidance and -- rather than the annual guidance that we've been giving and this is for really two reasons. One is that as we continue to transform the business there is going to be some continued enhancements that we're developing. And then also in light of the lower revenues and margins that we keep talking about with our largest customer, we're going to give this quarterly guidance so that we can give a very realistic outlook in terms of where we're going to be.

So the first quarter of fiscal year -- this fiscal year we expect strong year-over-year growth in our non-concentrated business, both at the top and the bottom line. And then we also on the other side expect continued year-over-year gross margin contribution decline from business with our largest customer. So because of the strong growth in the non-concentrated business we'll see more than an offset of the declines to this large customer. So we're projecting this quarter to be very strong at $0.30 to $0.45 per share(Sic-see press release) and that compares to last year's $0.26 per share.

So we're excited about where we are. Feel really good about the progress that we're making. And so with that I'll turn it over for questions.

(Operator Instructions). Your first question comes from the line of Anil Doradla of William Blair & Company. Please go ahead.

Hi, Barney. Congrats, guys, on the guidance. A couple of quarter specific issues. Can you walk us through the relationship -- your kind of corporate wide margins or the margin profile of your testing -- your mobile segment versus this large customer? What are the puts and takes and the dynamics of the gross margins there?

And you talked about mid-teens, should we be expecting this to go to zero over the next year or do you think there are some commitments which enable you to maintain the business at a certain level? That would help us. And I have a couple of follow ups.

I think -- let me work backwards. As far as the relationship with this Tier 1 carrier, it's very good but they're going through their rationalization in terms of how they want to do business from the accessory point of view. We're also -- our proprietary products continue to expand in that area, which will grow regardless of their changing the business model.

And the business models, when we originally started we were the merchant. We got -- we presented the products, we managed the products, and then we obviously did the fulfillment. But as we've moved -- as time has gone on, they're doing more of deciding what products that they want to offer and then we're doing more of the fulfillment effort. So right now we -- the relationship is strong. We're performing well. Obviously, the volumes have reduced but they're starting to pick back up. They've emptied out, I believe, their inventories with some of the apprehension in terms of the iPhone. But, I think as we all saw, both Verizon and AT&T are doing very well with the iPhone, and then also these new smartphones that are coming out.

In terms of the margin, I'll have David comment in terms of the comparison of the margin of our overall accessory business, as well as the AT&T business.

If you look, we said that it's about 16% -- this large customer is about 16% of our total sales. And, obviously, the margin has been declining compared to last year and it's also much lower than our other margins. So we don't get into specifics in terms of what those margins are, but suffice it to say that a customer that large has lower margins. Does that answer what you were getting at?

So when you say it has lower margins with respect to your mobile segment, right, or is that corporate average?

No, lower in terms of that mobile device segment.

So effectively what you're saying is that the continued decline should be positive on the overall margin profile for your company.

Yes. As the core grows faster than the concentrated -- as the non-concentrated grows faster than that one customer, yes that should be positive for overall margins.

Just to refresh, your next quarter, again, the EPS growth -- did you say the revenues were going to grow for next quarter? I kind of missed that. Or did you say that sequentially it's going to go down, or year-over-year it's going to go down?

Sequentially, we're looking at a pick-up. As Barney said, the volumes with that large customer have improved some and we're expecting that to --

Okay, very good. Stepping back -- again, I always like to ask these questions so I'm just going to try it again. I would love to hear what your crystal ball is saying in terms of inventory. We've been hearing from our supply chain that within the mobile handset smartphone space there's been shortages of some of the components. Would love to hear your perspective on that, and would like to hear more macro commentary.

I think that you said it well in terms of there's been some delay in the actual handsets because of the component shortages. That's delayed a lot of the launches and a lot of the delivery, and then that then reflects on the accessories that are being purchased. And so the purchases of accessories lag the expectation of the phones with the big carriers.

Now, we're doing better and better with the independent channel where we continue to go after the independent channel rather than just the corporate or the carriers direct. So the answer is yes. We also see the fact that we believe that inventories have leaned out through the entire channel because of these expectations.

David, do you have a thought on the --

No. I think when we look at our -- if you look at the large customer in particular, our softer results this quarter are a little bit contrary to their overall results for the March quarter. And so our view there -- we just didn't see a lot of orders so our view is that they were really working through inventories and delaying some of the launches.

So potentially if some of these launches would have taken place on time clearly that would have been a positive for you guys. Any way of quantifying that? How much of an impact that could have played on your results, not only from that one customer, but in general across industry?

It definitely had a big impact on fourth quarter. And on the top of it is we had -- not only did we have the order entry delay because of a lot of the confusion that was in the marketplace, but then on top of it you had the Chinese New York, which then impacted the orders getting into the factories and the delay there. So through the end of the fourth quarter and into this quarter we've been playing catch-up in terms of getting product in and fulfilling on order input.

In the past you've talked about the proprietary products mix being somewhere in the low teens. Can you give us an update? What is the breakdown and contribution of proprietary products and how should we be looking at that segment for 2012?

You've got two pieces of our proprietary products. One you've got the, call it, commercial piece, if you will. The Positive Train Control is a good example. As far as what we're doing, we've already started shipping into the railroads positive train control solutions. So that's one piece of proprietary, as well as the smart grid [deflector] boxes for the utilities.

And then on the other side is the accessories and we're getting a higher penetration of the proprietary products as a mix with our overall other branded products. And then the contribution there is significantly larger from a gross margin point of view on both sides of the business.

Anil, it was -- for the fourth quarter it was -- proprietary was just under 12% of the total sales for us.

And for 2012, how should we -- how do you think that will work its way through?

Certainly, our expectation is that number gets bigger. We've got a couple of really interesting orders that we've just gotten and some in the pipe, one with a large home improvement retailer. Big orders here and orders where our proprietary product -- this is on the network infrastructure side, the in-building wireless system really going to drive some nice results. So we think that there's a lot of momentum there and that number ought to grow this year.

And this one particular opportunity that Dave is referring to is for the WiFi inside of store in multiple stores and it was totally our proprietary products, both on antennas, as well as the enclosures for the access points for that, so a very exciting opportunity. And again, just a good indication of the diversity of the markets that we're not serving that this is an in-building system and being done directly by the retailer to build out their in-building systems for their customers, as well as for their own operations.

Just one final question. If I just look at the proprietary business and I look at the growth profile of that, can you compare it with the corporate wide growth? And can we see this maybe end of fiscal '12 could this be closed to 20% of sales or is that being too ambitious?

Again, you've got to separate the two pieces, the accessory piece, as well as the network infrastructure piece and that's certainly in the arena of our goals and what we're developing from a product offering point of view.

Okay, great. Thank you very much, guys.

Thank you, Anil.

Thank you, Anil.

(Operator Instructions). You have no further questions at this time.

Okay, thank you. Anil, thank you for your questions. I think it gave us an opportunity to give a little bit more color on terms of just where we really view the exciting opportunities coming from. And these opportunities, as well as the momentum in our non-concentrated business, is really very energizing to us.

So if you take a step back we all know that we're living in a time of unprecedented change in the world and in our business and we are very committed to thinking of new ways to change the way business is done by responding to the challenges and realizing the reward from all these new exciting opportunities that are being presented to us.

And I would also like to take this opportunity to thank our customers that trust us to satisfy their requirements, our manufacturers that provide us with the products to build our solutions, an incredible team and Board of Directors for their commitment and contribution, and our shareholders for their support. And thank you to all of you for helping us deliver on this third consecutive fiscal year.

So I thank you for giving us this opportunity to tell you about what we're doing and I look forward to giving another update on our initiatives and progress after the end of quarter 1. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.