TESSCO Technologies Inc (TESS) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 TESSCO Technologies Inc. earnings conference call. My name is Tahesha, and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Harriet Fried of LHA. Please proceed.

Good morning, everyone, and thank you for joining TESSCO's 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, and good morning to all.

In our second quarter, we continued to make great progress expanding into new customer markets and building productivity and profitability. I'm very pleased with the strong margin improvement we drove both in the gross profit and operating income line. Bottom line, we grew earnings per share despite lower year-over-year revenues, which I'll explain in just a minute.

So my comments going forward now are reflecting a new reporting that we're using where we're separating the commercial segment and the retail customer segments to give you a better view of where the business is coming from, how it's driving overall bottom-line results, and obviously how we manage the business.

So first, let's look at the commercial segment. I'm especially pleased with the strong gross profit and net profit contribution of this segment. Within this segment, the private system -- and when we say private systems, we're talking about the utilities, transportation, enterprise, and government. This market showed strong growth as we continued to develop the new offerings to build and maintain the new systems that they're requiring.

But the sales to the public carrier and the commercial reseller market were -- declined as the new system builds were delayed year over year. So despite the year-over-year profit, we still grew the gross profit margin considerably, and as we go forward, this gross profit margin and productivity improvement will serve us well as we continue to focus on increasing the topline revenues.

Now let's shift the focus to the retail segment, and here we grew revenues in the retail dealer and our Tier 2 and Tier 3 carrier market. But the overall segment revenues declined as a result of the slower-than-expected expansion of the relationship with our major Tier 1 carrier and the timing of new phone launches.

Last second quarter, we enjoyed the launch -- an iPhone launch. This second quarter, we had no new significant phone launches. But now the third quarter promises to be much stronger in the Tier 1 and also in the dealer market with the iPhone 4S and other smartphone device launches and the holiday season coming up. So we've already seen a good order flow and we really believe that this will reverse the trend we saw in the second quarter.

I'd also like to just comment on our Ventev proprietary products, which includes wireless solutions and TerraWave. This is a very important component of our go-to-market strategy. So, Ventev designs and manufactures the infrastructure products, support, and cellular accessory products and expands our total offering of choices to the customer.

And if you'll recall, last quarter we talked about the big-box deployment that we had where we enhanced a in-building wi-fi system and power their wireless scanners. That was with the TerraWave product. Positive Train Control that we'd been talking about was primarily Ventev product, and this quarter we saw a major deployment in an NFL stadium for in-building. It was a distributed antenna system for improving the outdoor cell phone coverage.

So this quarter that just ended, Ventev launched a new power, case, and headset accessory line with really compelling retail store packaging, and primarily focusing on the iPhone, the 3, the 4, and the 4S, and we had the 4S product ready to go when the launches were announced. So the interest in this Ventev offering has been very exciting in this new quarter.

So overall, Ventev has grown to 11% of total revenues with much significant gross profit margins. So growing revenues and profit contribution from Ventev is really an integral part of our ongoing strategy.

So, we still expect fiscal-year 2012 to be a remarkable year as we accelerate the execution of our vision and strategies. As we continually talk about, the opportunities are exploding as the wireless and the Internet converge.

So if you look at the ecosystem, the continued explosion of smartphone mobility devices, which is serving us well, will accelerate the expansion and have to accelerate the expansion that we haven't seen of the carrier networks to support these devices' really insatiable demand for bandwidth. And then, with the private systems in the transportation, utilities, and enterprise, where we're seeing in-building, Smart Grid, remote monitor control, Positive Train Control, are going to be a major driver of our growth.

So all these new systems, whether it be a smartphone, whether it be a public system or a private system, it's really transforming the way we live, work, and play. And we're right there. We're leveraging these trends and delivering the immediate reliability of the product and the value-chain solutions at the lower cost, lowest cost that our customers require.

So we'll continue our goal of driving shareowner value with intense focus on the success of our customers, our manufacturers, and our team members. So with that, I'll turn it over to David who can give you more details of our financial results.

Great. Thanks, Bob. Good morning.

We continue to be really excited about the results that we've driven so far this year, and Bob mentioned the segment footnote change, and I'll get into a little bit more of that in a few minutes. But it really does reflect the way that we've reorganized our structure here to better attack the market opportunities that we see, and hopefully it will be able to provide you guys some additional transparency into the numbers.

So for the consolidated results, and all quarterly comparisons here will be the last year's second quarter, revenue totaled $149 million. That's a 10% decline from last year. Not including Tier 1 customers, though, our revenue grew by 1%.

Gross profit reached $34 million, which is an 8% decrease. Gross profit margin was up by 50 basis points to 22.8% for the quarter, and all of this improvement is attributable to improvements in our business before including the results of the Tier 1 carrier market.

SG&A decreased by $3 million, or 10%, during the second quarter, totaling $28 million. That's a result of productivity gains in compensation, freight out, marketing, as well as lower bad-debt expense.

Accordingly, our operating income for the quarter was $5.8 million. That's up 5%. Our operating margin was 3.9%, compared to last year's 3.4%. We've been talking a lot, as you know, about our focus on improving operating margins, so we're very pleased with this result.

Our net income was $3.5 million, $0.44 per share. EBITDA was $7 million for the quarter, $0.87 per share. And for the first six months of the year, our revenues were $312 million. Our operating margin was $4.3 million, net income $8.1 million, and EBITDA reached $15.7 million, so good, strong income-statement results there.

And then, to the balance sheet. Our inventory increased about $5 million this quarter. This increase is related to the expansion of the relationship with our large Tier 1 carrier customer. The transaction -- the transition, as Bob said, didn't start until our second quarter had closed, but we needed to build inventories leading up to that transition in order to meet delivery requirements. So due to the growth, which primarily occurred late in the quarter, our inventory turns were 8.5 times this quarter.

We had a strong cash collections quarter. AR decreased by just over $12 million. DSOs were 47 for the quarter, which is some increase compared to recent quarters as we continue to do more business with customers that require somewhat longer payment terms. But as I said a few minutes ago, our bad-debt expense has been very low so far this year, so our account write-offs are remaining in line with -- they're actually better than recent history.

Since the increase in inventory was more than offset by the decrease in receivables and other networking capital decreases, we generated about $13 million of cash from operations for the quarter. We ended the quarter with $13.5 million in cash and had no outstanding balance on our revolving credit facility.

And one final note before we get into the segment information, our Board set the dividend date for our next payment. A $0.15 dividend will be paid on November 16 to owners of record on November 2.

So now, just a little more detail on the segments. We're reporting now our financial performance down to the net profit contribution level based on two reportable segments, the commercial segment and the retail segment. You'll recall before this quarter, we had reported revenue and gross profit on three segments based on product categories.

So within these two segments that we're now reporting, we're providing sales and gross profit at the customer level -- customer market level, and then as some additional supplemental information, we're also providing revenue and gross profit by our product lines of business. However, you should note, though, that there have been some reclassifications within those product lines of business that affect prior-year comparatives. So for comparative purposes, we have recast all the applicable prior-year periods into a new segment structure.

So I'll now talk quickly about each segment's results. So for the commercial segment, revenues were $83 million. That's flat to last year, but despite the flat revenue, our gross profit in the segment totaled $21 million, or a 6% increase. And again, revenues in the private-system operator and government market were up 17% year over year. This is the customer segment that we used to call self-maintained users and government.

As we've said these past few quarters, we see tremendous opportunity in this market for customized solution-offering infrastructure proprietary products, and we are getting some real traction here and we expect those strong continued results.

Gross profit in this market is up 27%, so a 17% revenue growth drove a 27% gross profit growth, so the proprietary products are really kicking in here to help improve margins. Revenues in our commercial dealer and reseller market remained essentially flat, decreased by about 1%, but gross profit was up 8%, so strong margin improvement here as well.

Revenues in the public carrier contractor and program manager market declined 17% year over year and gross profit declined 23%. As Barnie mentioned earlier, we continue to see the carriers delay their bill plans, and this obviously affects our business.

So when we look at the segment net profit contribution, we're subtracting from gross profit any expenses that can be directly attributed or allocated to this segment. This includes sales, product management, purchasing, credit and collections, distribution team expenses, plus freight out and internal and external marketing costs.

Our segment expenses for the second quarter were approximately $10 million. That's down about 16% compared to last year's quarter, mostly related to marketing and people costs. So consequently, our profit contribution in this segment totaled nearly $12 million. That's up 36% compared to last year's quarter.

This segment really has been producing nice results, and we're proud of the growing margins and profitability, and we feel very positive about our ability to drive future growth in this segment.

So now to the retail segment, revenues were $66 million. That's down 20% from the prior year. Gross profit totaled $12 million, a decline of 25%. We did grow, as Bob said, revenue in the retailer dealer agent Tier 2 and Tier 3 carrier market by about 3%, as we continued to penetrate and add accounts in this market.

The revenue growth there, though, was entirely offset by the reduction in the Tier 1 market. Revenues from our largest customer make up a large majority of the sales in this Tier 1 market, but it's important to note that also included in this market are sales to other Tier 1 customers. Revenues from the largest customer, which declined 30 percent -- 33%, were partially offset by growth from other Tier 1 customers. But for the quarter, revenues from the largest customer accounted for 24% of sales. That's compared to 33% in last year's second quarter.

So, our sales here declined due to the timing and no phone launches, as well as the slower-than-expected expansion, the relationship with the major customer, and so the retail net profit contribution totaled $5.2 million. That's a 30% decline. We did see direct expenses down by about 21%, however, as a result of lower marketing expenses and higher productivity there.

So now below the segment profit contribution line are our corporate support expenses. This category includes our administrative costs, finance, HR, IT, as well as operating facility occupancy expenses, depreciation and amortization, interest, plus the companywide pay-on-performance bonus accrual. So overall, our corporate support expenses are up about 5% compared to last year's second quarter, primarily due to the higher bonus accruals, partially offset by productivity savings and reductions in other overhead-type expenses.

And then, finally, the supplemental revenue and gross profit information related to products. We're now showing four main product lines, our three traditional ones plus Network Systems. Network Systems' results were previously included mostly in the network infrastructure line of business. And as I mentioned earlier, we've made certain internal reporting changes so that some of the product categories that used to be rolled into mobile device accessories, for example, now roll into base station infrastructure, and all of the prior-year numbers that were referenced in the release have all been -- are all based on the current classification and not the historical reporting basis. So you can take a look and see what those product segments have done.

So there's a lot of detail here, we know that. But I think once you get a chance to digest this and really got through it, I think it's going to provide you a much better understanding of our business results.

And so, just to reiterate, we're really pleased with this past quarter's results. It was a really solid follow-up to our record first quarter, despite the softness in the business from the large customer, and that really was just timing as it got squished into our third quarter. We drove strong profitability improvements. Our revenue concentration is down, our bottom-line earnings are up. The momentum that we've built is very exciting, and we're ready for the rest of the year.

So I'll now turn it back to Bob.

Thanks, David. Just to reiterate what David said, I know we're probably throwing you a bit of a curve ball as we go into this new segment reporting, but I can tell you that it, number one, is the way we're running the business; number two, it's given us internally much greater focus in terms of the drivers of the business and where improvement areas need to be, and it will certainly give you more transparency as we go forward in terms of what is happening in our business.

So with that having been said, going forward our goals and strategies continue to be the same, but we are accelerating the momentum of the execution. We continue to expand our position as a total source and always looking at the organizations that build, operate, or maintain wireless, not only voice but the data and the video systems.

Continue to build a portfolio of customers where we can partner to deliver value by resolving our challenges and exploiting our opportunities, and be rewarded for the value delivered.

And this is part -- I'm really pleased with the discipline that TESSCO is showing as far as disengaging with customers where we can't be rewarded for the value that we deliver and where we walk from business, if you will, where we can't be rewarded for what we're doing. And this is one of the drivers of the profitability, and as we continue to expand, we're looking for customers in this area.

The second is continue to develop and manage the value proposition solution offering. The new solutions that we're developing are really incredible as we expand within remote monitoring control and with smart devices.

Third is deploying an Internet database one-to-one marketing and sales system. We've talked about this before, but we have a major initiative with TESSCO.com and salesforce.com. January 1, you'll see the new TESSCO.com, which is going to be much more compelling, which will then tie into the delivering the extraordinary doing business experience. The one-to-one marketing system that we're developing with salesforce.com as the foundation is starting to drive productivity for our salesforce where it's creating new opportunities.

And then, lastly, you'll see that we are innovating in our marketing, sales, and product management to drive productivity. So, our goals again remain the same, as improving that gross and operating margin, increase the diversification of the customers that we served, and I think this quarter is a real good indicator of how we're reducing the independence of any one customer, and again increasing the value and returns to all shareowners.

So with that having been said, we are taking our guidance, we're taking the bottom end up from $1.70 to $1.80 and keeping the top end the $2.10, so it will be -- we're expecting that earnings this year will be in the $1.80 to $2.10 range. And I well understand that the guidance that was out there was $0.52, and we came in at $0.44, but again, that was not our guidance. Our guidance was for the fiscal year which, again, we feel very, very comfortable with. As David said, the timing was a major impact of this third-quarter results.

So, I think that the -- with that, let's just open it up for some questions.

(Operator Instructions). Anil Doradla, William Blair.

A couple of questions. I always like to start off on the macro front. Would love to know your take, Bob, on the demand environment and inventory environment. Any color on that would be highly appreciated, and I have a couple of follow-ups.

I think that the inventory environment in the channel is low. I'd say that I think a lot of what we saw was, again, inventories shaping. And you know, there's so many new devices coming out, it's surprising that the inventory hasn't, in the trade, has not increased to the levels that it probably should to support these.

I do know that with these launches, and these launches are happening now, it's pretty exciting. There's a lot of buzz over the iPhone 4S, which at first there wasn't. You know, I think people were disappointed in the 5 -- that the 5 wasn't announced. We can give some thoughts on that, if you want.

But the -- so we see the first couple of weeks of this quarter, it's definitely a hurry up. You know, the orders are starting to come in and the expedites are there, and so we're scrambling to keep up, but we're keeping up well. So the order -- and I'm talking primarily on the -- or 100% on the smart device accessories side. So I think it's going to be an exciting season.

You know, I think everybody has seen the press in terms of the bookings that both Sprint and AT&T and Verizon. That's the other thing that's very strong for us is this is a new area for Sprint, and we're right there again with serving them on their needs. Very, very successful in terms of the independent dealer channel, both in Verizon as well as Sprint, and obviously with AT&T. So it opens up a whole new world for us, and recognizing that we've been at the very beginning of the iPhone, so we are considered in the industry as one of the leaders in terms of having the right products at the right time at the right price for the iPhone, which continues to be the major dominant player.

But we're also seeing, though, some really pretty exciting new devices, and we've got to keep using the word device rather than phones because we're also with the tablets and the iPads and the other smart devices that are really getting some traction.

So can you remind us, Bob, what accessories -- what form of accessories do you support for the iPhone 4S today?

Okay, so for the iPhone 4S, we have every major brand that supports the iPhone 4S, as well as Ventev.

And the Ventev launch that I was talking about is a brand-new product line and really exciting retail packaging. We had a showcase the week before last, and we had our major manufacturers there, as well as Ventev. And the packaging is a high-impact consumer appeal, but also a high density so that more product can be on the peg, and that got a lot of excitement at the showcase, as order entry showed as well.

So again, the answer to your question is we go all the way from the OEM product to our proprietary products, giving the customer the choice of what they want, but at the same time we are the recommender of what we know through our market intelligence and our sales rate in terms of what are the popular products for the store.

And you talked about Ventev being about, what, 11% of sales right now? Just to give us a sense from your strategy point of view maybe 12 months and 24 months from now, where do you guys see Ventev in terms of contribution -- revenue contributions?

Our goal, which you know is to get it a double or a triple in terms of as we go forward, we still want to be the total source choice of choices which include the OEM products. So where Ventev is -- we're always designing product that -- where there is an unmet need and where we're -- take packaging, for an example with Ventev, we felt was an unmet need in the marketplace.

So it's both on the network infrastructure side, on the base station infrastructure, it is a major player, and now as the accessories we go forward is going to be -- I would say that if you look backwards, it was much more -- it was heavily dominant on the commercial side of the business, and now we're seeing the traction in the retail side of the business.

Great. That's all I have for now, thank you.

[Eric Martin], [MA Capital Management].

Just wanted to get a sense of how much the timing was regarding this Tier 1 customer in terms of sales of APS for the quarter.

Well, it really was just that -- as Bob said, so last second -- we're comparing to a quarter that had some major device launches in it compared to this quarter that really didn't. And then, the transition that we talked about last quarter of taking a larger share of the business from that one customer, that got delayed some as they planned for some of these new launches. So we didn't see those new -- that new business coming to us really until the first week of our fiscal October.

Right, I was just trying to get quantification of how much of an impact that was to the second quarter if we would have received that order and booked that in this period.

I think if just the iPhone 4 alone, if the new phone launches would have been 30 days into -- prior, I mean it would have been a totally different quarter. So, I mean, it was a major -- but we'll catch up this quarter. It will be a fabulous quarter because now we've got all these new devices that are coming out, plus the whole new opportunity with Sprint being an iPhone supplier.

Gotcha. And then, I'm assuming the higher SG&A impact for the quarter was due to the guide up, so you're reserving more this quarter for incentive compensation. Did I catch that correctly?

Yes, the incentive comp this quarter is significantly higher than it was last quarter -- last year's second quarter. I mean, we've made $1.01 in EPS already, compared to $1.27 for all of last year. So, obviously our projections are pretty big, and that is going to drive some higher payout performance rewards for us.

Gotcha. I've got one more question, then I'll maybe follow up with David later if I need to -- if I can get a better handle of understanding your visibility and bookings. I'm kind scratching my head here a little bit.

But in terms of where we're at today for the investors here that are involved, would it not make sense to start implementing a share repurchase program here? You know, you've guided to some reasonable growth rates this year. It seems like to me you guys are trading at a depressed valuation. What can you share with us in terms of redeploying some of that cash back to your shareholders? I know you did the dividend, but at these valuations, I am just wondering if it makes sense to start buying back some shares here? Thank you.

First of all is that you're right about the dividend. It is $0.15 a quarter, $0.60 a year, which is a fabulous return on the current stock price.

We have our Board meeting tomorrow, and I will tell you that creating shareowner value is the number one topic as we look at that. So, obviously, one of the major alternatives is just what you said.

So it's a question of how do we at these values that we're not happy with -- we feel that this slide that we're seeing today is -- there's a lot of hype in terms of the blogs, if you well, in terms of the $0.52. And we knew that that and the revenue decline was going to be a major impact, which again we think it's a quarterly phenomenon and that's why we're hanging in there and reiterating our guidance for the coming year.

And I think that the fact that we've generated so much cash, too, that we ended the quarter with over $13 million in cash. That is a different level than we've been at before. So I think that is stuff the Board has to consider as well.

Yes, I mean, I agree on all that. The only thing I would tell you from an investor perspective, maybe it's a little bit different than having analysts on the call, I will say -- you know, I understand that the quarterly numbers are not your guidance and you guys focus on a year-end, but anything you can do to help smooth out volatility is appreciative because then you have investors like me that have to wake up on a stock that's down 13% that's a top-five holding in their portfolio.

So I understand the quarterly numbers are not your numbers, but that's why I want to maybe follow up with David later on what kind of visibility you have in your business because if you have good visibility, I think some help managing Street expectations would be appreciative for even longer-term holders like us that typically don't like to jump on these type of calls.

I would just keep that in mind as you flow forward. I know everyone has a difference of opinion, but depending on how much visibility you have in your business, it would be helpful to get some more clarity on how we kind of flow through the year. Thank you.

I totally agree with what you've said, and that is one of the initiatives is how we reduce the dependency on any one customer. That's what we feel good about what we did this quarter, but you're absolutely right. In terms of how do we -- our goal is to be consistent with our performance and to eliminate the peaks and troughs that obviously we're seeing right here. But having said that, we feel very good that we increased our bottom-line EPS even in the face of the top line. So -- but we're with you.

Great. Thanks, guys. Good luck.

Thank you.

(Operator Instructions). We have no more questions at this time. I would now like to turn the call back over to Mr. Bob Barnhill.

Thank you. Thank you for your questions. Thank you for being here.

I just want to bottom-line reiterate that we're very, very positive about our value proposition, the opportunities, and the momentum, and also reducing the dependency on any one major customer. So, I look forward to reporting us delivering on this $1.80 to $2.10 earnings-per-share guidance and really delivering a good conference call with tracking on our results next quarter. So, again, thank you for your support and thank you for being a part of the call.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.