TESSCO Technologies Inc (TESS) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 TESSCO Technologies Incorporated earnings conference call. My name is Ann and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. (Operator Instructions) We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Harriet Fried of LHA. Please proceed.

Thank you, Ann. 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 discussion 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.

(technical difficulty) our customers are really rewarding us with their loyalty [and] increased purchases as a result of the product and supply chain innovations we offer. Our manufacturers and our vendors are the core of giving us an ever-increasing range of products that we need to design and deliver the solutions to build, use, or maintain wireless systems.

Obviously our team members had to execute flawlessly on our strategic initiatives to achieve the outstanding customer satisfaction we drove and to really the significant improvements in operating productivity and margins. David will be talking more about how we really increased the margins all the way down the line.

So, the other thing that we are really excited to talk about is the relationship with our largest customer, a Tier 1 carrier, is now expected to expand throughout the coming year. We talked about this in previous calls, and we were just notified of their decision on July 8, so just a little over a week ago.

So beginning -- their decision is beginning this month we'll gradually assume responsibility for a larger portion of their mobile device accessory purchases. And the larger increases will follow in the coming quarter.

As we talked about it, that we share the business with a competitor. What they decided to do is to combine or to transition all but one major category from this competitor to TESSCO. The result is really a reflection on our performance that we have been delivering and our preparation and commitment to assure them the on-time availability of the right products and the lowest total cost.

It is important to recognize that the carrier -- accessories are very important to the carriers in terms of driving their profitability. They have got to have the right products available, making sure that they have them available in the stores, and they don't have stock-outs, and then obviously driving the lowest total cost so they can maximize their profitability, which we have been contributing to.

It is also -- we are hoping that this expansion is going to give us more opportunities to introduce our proprietary products that are manufactured by our Ventev division. So this is a very exciting development for TESSCO, and we really thank this customer for their trust and confidence.

So let me turn it over to Dave Young, our CFO, who will give you more details on our performance, and I will come back and give you -- talk about our guidance for what we believe is going to be a remarkable year for TESSCO. David?

Great. Thanks, Bob, and good morning. We are really excited about our results this quarter. The non-concentrated business continues to produce strong results, and we are really proud of the record quarter that we posted. That, combined with the continuation and expansion of the business with the large customer that Bob just talked about, has us extremely excited for the fiscal -- for the rest of this year.

I will now give you some more details about the results for this past quarter. All the comparisons here will be to last year's first quarter unless I state otherwise.

The revenues totaled $164 million. That is a 15% growth over last year. This was driven by growth in both the concentrated and the non-concentrated business.

Our public carrier market declined 16% year-over-year. The carrier that we were working on with some aggressive builds last year has really slowed down, so our business has shifted.

We do see CapEx spending going forward, so we are really concentrating on building stronger relationships with the carriers but also with the contractors. We believe that our new, expanding, active component and fiber optic cable offering could help drive stronger results as we move forward into the year in this market.

Our overall reseller market increased by 22%. Excluding sales to our largest customer, our reseller business grew 24%, with strong growth in both network infrastructure products sold to value-added resellers and with mobile device accessory products sold to retailers.

Our concentrated business grew by 16% and represented 28% of our total sales this quarter. That is the same percentage as in last year's first quarter.

The user and government market revenue was up 22% year-over-year due to very strong infrastructure sales. As we have said the past few quarters, we see tremendous opportunity in this market for our customized solution offering as well as our infrastructure proprietary products. We are starting to get some real traction here, and we expect continued strong results.

Our small consumer direct business showed a 7% decline.

So, gross profit reached $37.2 million, which is also a 15% increase. So gross profit margin remained constant at just under 23% of revenues.

When you get under that, though, gross profit dollars from our concentrated business were essentially flat. So all the growth in gross profit dollars came from our non-concentrated business. This is obviously really great news, and it speaks to the opportunities that we have been capturing in our core markets.

So, now for a few more details on the lines of business. Mobile device and accessory revenues were $92 million. That is a 25% increase driven both by our largest customer and stronger increases in sales to our other retail customers.

Gross profit increased by 13%. So the margin decline here in this line of business was the result of lower margins from our concentrated business plus a changing customer mix in our non-concentrated business, as we continued to show strong sales to larger customers.

This is evidenced by the strong growth in revenue dollars per buyer. That number grew by 26% compared to the first quarter of last year, and the buyers in this line increased by about 2%.

In network infrastructure, this is really exciting. Revenues totaled $58 million, increased by 6%. But gross profit increased by 22%, so really strong growth here in gross margin.

We are growing our product offering. Our proprietary products and solutions have been very strong.

The number of buyers here was down a little bit, down by about 4%. But purchases per buyer increased by 11%. So more evidence of our ability to sell solution offerings in the network infrastructure line.

The installation, test, and maintenance -- the repair components business that was accounted for on a net basis, that fully transitioned out at the end of last year's second quarter, so our year-over-year comparisons are a little bit difficult here. Nevertheless, revenues were $10 million. Gross profit was $2.5 million. That is a small increase in revenue and a 10% decline in gross profit.

Next quarter is going to be the last quarter in which we will have a comparison to a quarter that included the transition of the repair business -- repair components business. So after next quarter, our comparisons will get much easier to understand. Buyers in this line were down about 7%, but purchases per buyer were up by 9%.

So on to SG&A. Some really good results here, too. Operating expenses increased only slightly during the first quarter despite the strong revenue growth.

So SG&A totaled just under $30 million. That is up about $800,000 or 3% compared to last year's first quarter. This increase is wholly attributable to increased bonus accruals in light of these really strong results this first quarter.

Our base compensation, freight, marketing, all were down this quarter consistent with the productivity initiatives that we have had in place. So we are driving some really nice results here in the expense line as well.

Accordingly, our operating margin hit a recent high. Operating income for the quarter was $7.5 million; that is up 119%. Our operating margin reached 4.6% of sales compared to last year's 2.4%.

So our main focus has been on improving margins both at the gross margin level and the operating margin in our non-concentrated business. So we are really, really pleased with this result.

EBITDA reached $8.7 million in the quarter. That is $1.09 per diluted share. That compares to $4.5 million or $0.55 per share from last year's quarter. Net income was $4.6 million or $0.57 per diluted share.

Now to the balance sheet. Inventory increased by almost $6 million compared to the March quarter. That is completely to support the increase in sales.

We continue to rationalize inventory in an effort to improve turns and as well as customer order completion. Our inventory turns were 10.4 this quarter. That is up from 8.4 in the fourth quarter.

Our AR increased by about $18 million, driven by the increase in sales especially in the mid-to-late part of the quarter. Our DSOs were 42 for the quarter; that is pretty typical for us.

The increase in inventory and receivables was, though, only partially offset by increased payables. So we ended up using about $2.5 million of cash from operations this quarter. We ended the quarter with just under $4 million in cash and had no outstanding balance on our revolving credit facility.

As in recent quarters we didn't buy back any shares. Our Board however, though, did continue our dividend program, increasing it by 50% up to $0.15 per share. As Barney said, that will be paid in mid-August.

So in summary, we are really pleased with this result. This was the best quarter that TESSCO has ever had, and it was driven by growth and profitability improvements in our non-concentrated business. To us that is the best part of this story.

The momentum that we are building along with the positive news from the largest customer has us really energized about the remainder of the year. So we look forward to some really good things. So I will turn it back to Bob.

Thanks, David. These results really reflect how TESSCO continues to accelerate the execution of our strategy -- that being, to be the total source of the requirements to support wireless voice, data, and video systems.

As we continue to talk about it, the opportunities that we are seeing are exploding as the Internet and wireless converge. We are there. We are right in the center of it, delivering the value proposition of immediate availability of the hardware and services needed at the lowest total cost in a very reliable way of doing business.

We're obviously very positive about our value proposition, the opportunities, results, and momentum. Our higher dividend, which was increased by effectively 124% since we initiated it in August of 2009, really shows the Board and our confidence and enthusiasm for those prospects.

So, considering that and looking at the momentum we have gained in our core business and the additional direction we received from our largest customer, we are going to go back to providing guidance for the full fiscal year, whereas last quarter we only gave you the one-quarter guidance because of the uncertainty that we were looking at.

So we currently estimate that earnings for fiscal-year 2012 will be in the range of $1.70 to $2.10. We recognize that we are giving you a fairly large span there between $1.70 and $2.10. It still reflects the uncertainty around the timing and the impact of the expansion of the Tier 1 carrier's business.

I will just summarize as far as the goals and strategies remain the same, but we have the fundamental objective of accelerating the execution of our initiatives. We are going to continue to expand our position as Your Total Source for all the organizations that are responsible for the building and operating and maintaining of wireless systems.

Intense focus on improving gross and operating margins and return on investments. Increasing the diversification of the customers that we serve. Performing with innovation, productivity, and speed. And increasing the value and returns to shareowners.

So the strategies we have behind these goals are to continue to build a portfolio of customers where we can partner to deliver value by resolving their challenges and exploiting their opportunities, and making sure that we are rewarded for the value we deliver. We are very carefully developing and managing the value proposition and solution offering addressed to specific targeted customer services.

We have got some major initiatives on our Internet data-based one-to-one marketing and sales system to make sure that we get the leverage of our business generation. And then continuing to deliver an extraordinary doing business experience with our customers.

And then underneath all of that is to innovate in our sales, marketing, product management, and fulfillment organizations to serve the customer better but at the same time drive productivity. So with that, we will open it up to any questions you might have.

(Operator Instructions) Anil Doradla.

Hi, guys. It's Brian Nugent in for Anil. Congratulations on the excellent results and the improving outlook.

Thanks.

On the expansion with the relationship with your largest customer, are there -- I think you kind of answered this -- but are there new product categories that you won orders? Incremental orders? Or is this somewhat of a resumption of the orders in your traditional areas of strength there?

Oh, no. This is a major increase in total volume (technical difficulty). We saw this quarter really the resumption of the products that we were responsible for, the product categories. But this transition that they are doing is transitioning a significant volume from our competitor to us.

So we will be responsible for new categories as well as new manufacturers and obviously new SKUs. So I think, David, what is it? A 200-SKU increase approximately?

It is a pretty -- it's a very significant -- it is going to be waved in, though, obviously to make sure that we are absorbing this major, major increase for us. David, you got any other comments on that?

No. And Brian, that is just why the guidance range is really so big. Is that we don't know -- as Bob said, we just learned about this, and we are working with the customer on a transition plan. And we just don't know how that is going to go.

We don't know the extent of it, the impact of it. We are expecting, as we put in the press release, we are expecting that this will put a drag a little bit on the margin as we get more volume. But again we don't know the extent of all that at this point.

Fair enough. Are there significant incremental operating expenses that you expect related to this ramp throughout the year? Or can we expect it to stay at a similar range as you get into seasonally stronger quarters, in the 18% range?

The guidance actually looks like you might get down to 17% maybe on peak revenue seasonally. Is that the right way to think about it?

Yes, I think. I mean, I think that we will see some operating expense increase. Right? We are going to have operation costs and purchasing costs and all those things that will be growing. So we will see some of that.

But yes, I think you are in the ballpark. Otherwise I think -- from the non-concentrated business I think we have got a couple of additional strategic positions that we are looking to fill. But otherwise I think that we are pretty well set on the SG&A line.

Yes, but most of the real expenses will be variable expenses.

Right.

I also -- it's important that a lot of these new relationships that will be transitioned to us will give us additional opportunities that we can take into our other channels. So we look at this being really a leverageable event as well as expanding -- continuing to expand our total offering to our broad customer base.

All right. Then I understand there is still some uncertainty, so I don't know how much you can comment. But we see this ramp coming in fiscal '12. Is your understanding that there could be a similar type of business model change in your fiscal '13, or is it --?

It is an important and a great question. It kind of goes back to what I was saying earlier in terms of the importance of accessories to the carriers, and where they are continuing to shape their model to assure that they have got speed to market with the right products, and they have got on-time availability, and they don't have stock-out, and continuing to lower their total costs.

So we are committed to achieving that under our current model as well as going forward. But you are right; we really don't know what is going to evolve as we go through this fiscal year.

Okay, thank you. I just also wanted to comment on really nice gross margin on the non-concentrated business. Can you just talk about the mix or what kind of traction you are getting? It sounded like the proprietary products were a big part of that.

But also is there other -- besides mix, any other type of efficiency improvements that we should be thinking about?

Yes, I think that -- so the proprietary products were still about 10% of the total sales. We did see some margin improvement there, though. So a little bit bigger percentage of the gross margin.

I think that we are really seeing some strong results and bigger deals with the proprietary, particularly on the network infrastructure side. So that trend, we expect that to continue.

I think that -- and then in the nonproprietary side, as -- we have done some really interesting things with pricing and looking at different pockets where we can optimize our pricing to get some increase in margins. We are also working very closely with our manufacturers to not only get new leads, but to get some cost savings as well.

So I think from the gross margin line we are attacking it from both sides. And then on the operating line it's just trying to do more with less. Keeping compensation, and keeping marketing, keeping those things in check and really just driving the top line.

Yes, a lot of it too, Brian, is inside the strategies that I outlined. It is, one, really focusing on building a portfolio of customers where we can deliver strong value, but then also be rewarded for it, and disengage with marginal segments that are not rewarding us for what we are doing.

And then also with rationalizing product line is making sure that we have the right products. But by rationalizing the product line we assure that our excess and obsolete expenses are going down, and we have the right product that our customers want. So it is those -- there is a lot inside of those strategies that I outlined that are really taking hold.

Thank you. Is there any update on some of those product areas that you have highlighted in the past? The railroad project, the smart grids, are those -- I mean are we going to -- are those hitting meaningful type of revenue run rates? Or is that still more of a driver for late this fiscal year or even fiscal '13?

The positive train control has obviously been delayed by the railroads and the government. We are seeing some of that business. I think the most exciting thing there is just the leveraging the relationship that we have built with GE and also taking the product we have developed into the other markets. One for the railroad in terms of their communication and their signaling, as well as other markets.

Smart grid, again, we continue to do more in that area in terms of our SmartBox. Again it is more of a collector box rather than the Big Bang, if you will, in terms of smart grid.

So it is just another -- it certainly -- positive train control hasn't resulted in what we expected it to be. It is going to be really back-end loaded as the railroads get closer to the deadline, though. But it is going to be a while before that really grabs hold.

All right. Then last I just wanted you to -- we always want to get your take on the macro situation. And just you have some, obviously, customer-specific situations going on. But are you feeling like the inventory situation is kind of easing, and the overall macro environment is -- are you positive on the outlook from that perspective?

Again a good question. We really didn't touch on it, but I think we are all concerned about the economy in terms of what is really happening and what is happening in Washington in terms of really putting a -- people are still very apprehensive in terms of making spends. We continue to see people pull back in terms of what they are looking at.

Obviously, our guidance is inside of that. But there is a tremendous focus on keeping inventories low, but at the same time being able to react to short-term developments.

That is what we are good at. So in a way it kind of plays into our value proposition and our business model.

But as we continue to say internally, it ain't easy. It is a tough environment that we all have to work in.

All right. Thanks a lot, guys. And again, congratulations on the quarter.

Scott Searle, Merriman Capital.

Hey, good morning. A couple of follow-ups. Dave, did you guys provide your 10% customers in the quarter?

Yes, it is just the one. It is just the one large customer.

And what percentage was that?

28%.

28%? And just in terms of the accessories business with the large customer now, you are going to get a significantly larger chunk. But can you give us some idea of the magnitude?

Does that increase your business potentially by 50%? How should we be thinking about that?

You referenced also the gross margins as well. It is a lower gross margin business. But are you talking about from a corporate standpoint due to mix, or because the incremental business is lower gross margin?

Yes, it's basically -- the increased business with this particular customer is going to drive margins down. So more volume but lower margins. Right? Does that make sense?

Yes. Just some type of magnitude in terms of the opportunity? What percent? Like -- or maybe your share prior to this new development?

Yes, I think that's a difficult question. It is probably not 50%, but it is somewhere just below that, we think.

Again as Bob said, we just found out about this. We are just working through the transition plan. We don't know exactly how this is going to wave in.

So I think at the peak, once it is all transitioned, it is probably not quite 50%, but somewhere in that ballpark is our best guess right now.

The competitor is keeping one major product category, although it will be less than that. But one of the other things though I think is important is that all the carriers are looking for increased volume of smartphone accessories. A smartphone accessory has a much higher attach rate in terms of accessories sold per phone.

There is just a beautiful pipeline in terms of new smartphones coming out that will drive overall volume. We obviously showed a pickup this last quarter after the slowness that we experienced. The industry thinks that there is going to be more smartphones sold, more tablets sold, and it is all going to drive accessories.

Is there a big increase in costs from an OpEx standpoint that you're going to have to bring onboard to be able to support this business? Or can your existing infrastructure handle it?

There is going to be some increase in operating expenses. As Bob said, most of it will be up in the gross margin line, where it is product and the labor that we contract to do everything. Right? Packaging, those sorts of things.

But there will be some incremental purchasing and operational costs. It will be down in SG&A.

Got you. And the time frame? It sounds like you are still digesting; but how long does this take? Is it two quarters, is it four quarters, or still to be determined?

We think the brunt of it is going to come in our third quarter, in the December quarter.

The objective, obviously, for the customer is to get the transition done prior to really the beginning of the holiday season, which is the big season. Now we have already have seen some of the SKUs being transitioned to us already.

So again it is going to be a -- and it is going to be a function of our ability to absorb. So that is why our performance is so key, because I think that they will transition as fast as we can absorb it.

Scott, I think that is an important point there too, is that this is -- all of this discussion is based on what we -- our current best guess. So we do know that the customer, as we said in the release, is still very interested in lowering its total costs and is going to continue to evaluate its business models.

But like the other large supply-chain relationships that we have had and we currently have, there is no guarantees in this. So it is all about our ability to perform and prove to the customer that we can lower their costs, improve the way they do business. So there is a lot that we have got to do in the next -- in the coming quarters to make this work.

I think the other point is that when we add, as David was saying, some expenses to support this, those resources are going to be able to be deployed over our other business as well as we take on these new product opportunities. So it is not a 100% delta. There will be some leverage there other than the packaging and logistics costs, which will be variable.

Got you. You had some comments as it related to CapEx. Could you provide a little bit more color there?

Last year I believe you had some Clearwire in the numbers on a year-over-year basis. So perhaps they are little distorted by that.

If you could maybe give us some sense in terms of the sequential growth that you are seeing ex-Clearwire. It sounds like you are expecting growth in the second half of this year. But give us some frame of magnitude and how maybe AT&T/T-Mo is impacting you or not impacting you?

Yes, it is really not impacting us. Well, the fact that they are really not building that much has impacted us.

But you are right, last year's numbers had some Clearwire in there. It wasn't gigantic, but it certainly has an impact -- the fact that they are not building -- on this year's results.

I think that as we look into the year, we always see a bit of a ramp in August, September, October time frame in the carrier market. So we are expecting to see some of that.

We might get some of this LightSquared, depending on how that goes. There is no -- the slowdown at AT&T and T-Mobile has put a little bit of the lid on that carrier market.

Got you. Just lastly, in the proprietary space you guys I think have talked about potentially being acquisitive. Where does that fit in terms of near-term or your priorities?

Well, first of all it is a very high priority. We have got two primary sides to that business. One, the accessories, which are important; but then also on the commercial side, the product that we design for positive train control is a Ventev product, which is our brand name. We're seeing a lot of growth in (technical difficulty) on the infrastructure side which comes out of Ventev.

So that is a major, major imperative for us, is to continue to aggressively grow that business. We just added some senior management into that area. So that is going to be important as we go forward.

Yes, I think, Scott, our acquisition strategy would be to look at maybe some of the companies that we're running into more and more in a particular market, like the utility market. So who are -- what competitors are we running into? What do they have that could add?

I think again we are not looking for acquisitions that are going to bring us operating platforms and warehouse and that sort of stuff. But maybe if we can find a smaller company that had some real engineering expertise in one particular application, that would be I think where we would be looking. There is nothing imminent right now, but we have got some ideas.

And lastly if I could -- I mean, a great June quarter in terms of both top-line and bottom-line results. You are going into seasonally stronger periods, and you are bringing on some significant business from your larger customer on the accessories side.

While the updated guidance is significantly above where prior expectations have been, it still seems conservative. Is there something else that I am missing in terms of either mix or costs or otherwise timing? Or is there something else here that I should be paying attention to when I am looking at that $1.70 to $2.10 range?

No, I don't think so. I mean, I think that the uncertainty around this transition and the fact that there may be some transition costs that we are going to have to incur in this quarter, that is part of it. Again, we don't know that yet. Maybe not just this quarter; into next quarter as well.

I think that there were a couple of bigger deals that landed this quarter that are going to be a little bit harder to replace. But no, there is not -- you are not really missing anything.

You're right; we are going into what typically is seasonally stronger for us. Other than the March quarter; that is always typically our weakest quarter. So I think you got it. You basically have it, I think.

Great. Thanks, guys.

(Operator Instructions) Ladies and gentlemen, with no further questions this concludes today's question-and-answer session. I would now like to turn the call over to Mr. Barnhill for closing remarks.

Great, thank you. Thank you all for joining us today. I think you have heard that our year is off to a great start. We are obviously energized to delivering extraordinary value to customers and our shareowners.

So thank you for joining us, and we look forward to giving you another update at the end of the second quarter. Thank you.

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