TESSCO Technologies Inc (TESS) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TESSCO Technologies first-quarter fiscal 2013 earnings conference call. My name is Fab and I will be your operator for today.

At this time all participants are in listen only mode. Later we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Harriet Fried of LHA. Please 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, and good morning to all of you joining us today. We started our new fiscal year with solid results. We generated 18% revenue growth and $0.51 in earnings per share.

Our revenues in our core commercial and retail markets grew by 6% over last year, and we achieved these results despite what we saw was some continued choppiness in our markets, especially in the areas of enterprise, transportation and energy.

We continue our strong focus on growing profitable revenues by attracting new customers and driving category share and cross-sell.

The installation -- the transition out of the high-revenue, low-margin third-party logistics business with a key customer, which we discussed last quarter, is progressing according to schedule. And we continue -- but we do, however, maintain -- continue to maintain a strong relationship with that customer, supporting its other programs and supplying our own manufactured Ventev products.

As we transition we will shift the considerable focus that this large program required toward our core business. This change is enabling us to further realign resources to our core business and build on the great opportunities that are materializing from the convergence of wireless and the Internet.

So let me maybe try to tell you about the trends that we see in broadband, which should be probably universally known, but I think it is worth emphasizing, and these are the growth drivers of our business. The new systems and devices are driving demand for wireless broadband capacity, and the biggest change has been the explosion in mobile data. And we are moving towards the time when every person on the planet is going to be connected by wireless broadband.

And when you look at the whole -- it is becoming an ecosystem. It is the network of networks and it consists of what we call the private systems as well as the public systems. And everything that we are doing can be wirelessly connected. And we're going to see the smartphone is the platform, is the hub. It is the command central for home, your business, your health care, your car, and even as we are looking at now and even your wallet in terms of paying for things.

So if you separate out the public system, the carrier system, they are finding that delivering all the data that is required is a major challenge. And the existing mobile network simply can't sustain the growth on its own. And tomorrow's mobile Internet must span multiple networks and deliver seamlessly the high secure mobile experiences that people want. And this is going to require a new architectural approach and it is going to be powered by a cloud intelligent network of networks.

And there is considerable activity towards expanding the capacity and coverage for high-speed data through deployment of this next-generation which are smaller cell sites referred to as micro and picocells, which are going to make it very -- it is easier to install. They're going to be installed in smaller areas and continue to build this network of networks. And we're seeing that's as far as the LTE deployments.

AT&T alone announced that they're going to spend $20 billion this year, and they will have spent $115 billion over the last five years just to build out the capacity to handle the bandwidth requirement.

So now if you look the -- you got the public systems on one side and then you look at the private systems. And here in building WiFi -- mobile enhancement Wi-Fi is going to become the universal wireless connectivity. More and more people are going to use their devices that don't have an Ethernet connection or don't even connect to a cellular network. And we are seeing growth in hospitals, enterprise, retail, cruise ships, shipping logistics.

Then you've got this enhanced cellular coverage. I mean, just think about trying to make a call inside of a building or inside of a stadium, a sports stadium and you can't get a signal. And these are called the distributed antenna systems. And this architecture is allowing us to put -- install into these buildings or arenas where they can have the enhanced coverage without the carriers having to build new towers.

Remote monitoring and control that we've talked about, the railroads, Positive Train Control, and energy, people are looking at how do I control something that I'm not close to, whether it be a security system or an oilfield or a railroad, so that you can control that from a remote position.

Fixed wireless, we talk a lot about the mobile wireless, but the fixed wireless, this is where you eliminate the leased fiber or copper wire. Point-to-point, point-to-multipoint is really growing and also at our markets.

There is a growing emphasis on enhanced fleet and in-vehicle communications where trucks and cars are becoming the hot spots for handling high-speed data, and streaming video in addition to voice services.

And then this machine-to-machine communications. And this is where we say that ultimately everything is going to be connected. We are seeing a lot happen in the home, where you can control your security system, your video surveillance, your refrigerator and your thermostats.

So then the other piece -- so you got the public systems, the private systems, and obviously then you have got the mobile device. And here I think we all just know from our personal uses there is continued expansion of the smartphone, the tablet. And we're in all of those markets, both in the retail side and the commercial side. And this is -- we're seeing the emergence of the connected home in all the products around the security and entertainment systems.

It is also interesting, I think it is -- we are all looking at this new iPhone 5 coming out, and it is probably going to impact sales until the fourth quarter. People are saving their dollars to move into the new iPhone, which is going to be very, very exciting.

So all these trends, and we have talked about before, but I thought it was worth talking about again today, are creating these new systems, these new devices that must be built and maintained and used. And we are there as the -- Your Total Source of the product and value chain solutions to make wireless work.

So before I turn the call over to Dave, I would like to give you more -- turn it over to Dave to give you more details on our financials -- I would like to note that we have reaffirmed our business outlook for the year. Our guidance calls for earnings per share to be $1.80 to $2.15 in fiscal year 2013. And this strong indication of what we -- is that we can leverage these opportunities to overcome the challenge of this transition we have been talking about and then today's uneven economy.

But, David, you want to get into the details, if you will?

Great, thanks, Bob, and good morning. We made $0.51 per share this quarter. That is our third-best quarter ever. This in the face of the declining business in the Tier 1 customers.

So just for a quick summary of the quarter, our revenues totaled $192 million. That is an 18% increase compared to last year. And if you don't include the Tier 1 customers, our revenues grew by 6%. The Tier 1 business grew by 41%.

Our gross profit totaled $35 million, which is a 5% decrease. Not including the Tier 1 customers, gross profit was essentially flat for last year. So obviously, we had a decline in gross profit and gross profit margin from the Tier 1 business. Gross profit was down by $1.8 million and gross margin was 9% compared to 16% last year.

And this revenue and increase in margin decline is related to the temporary expansion of the 3PL relationship with our large customer. But as expected, we didn't see any impact of the upcoming transition in this past first quarter. And the transition is, again, set to begin in the September quarter.

Our SG&A decreased by $1 million or 4% during the quarter, totaling $29 million. This decrease is the result of lower pay-on-performance bonus accruals, partially offset by increases in other strategic expenses, mostly IT and sales promotion expense.

So, accordingly, our operating income for the first quarter was $7 million. That is down about $600,000 compared to last year's first quarter, and our operating margin is 3.6% compared to last year's 4.6%.

Net income was $4.2 million and $0.51 a share compared to $4.6 million or $0.57 in last year's first quarter. EBITDA reached $8.2 million this quarter. That is $0.99 per share.

And now a little bit more detail on the segment results. We will start with the Commercial segment. Revenues totaled $81 million. That is up 4% compared to last year. Our gross profit in this segment was $21 million. That is a 2% decrease.

We are particularly encouraged by the results we drove in the commercial dealer and reseller market, and in the public carrier contractor and program manager market.

So revenues and gross profit in our commercial and reseller market increased 9% and 8%, respectively. Our VAR integrator channel is very important to us, and it is encouraging to see growth here, because in addition to the everyday business that we continue to see, there are projects out there that we are helping our VARs to win.

In our public carrier contractor market revenues increased by 10% and gross profit increased by 3%. We are starting to see some movement in this market. We are encouraged by the discussions that we have been having with our customers, and we continue to see -- to expect to see continued positive momentum in this market.

It was a soft quarter in the private system operator and government market. Revenues and gross profits were down 5% and 13%, respectively. This market had a great year last year, and so while we continue to see choppy conditions, ones where customers are still hesitant given the overall economic condition, we continue to be very positive about our opportunities here. It is obviously a very big market. Manufacturers, utilities, governments, transportation companies, education, health care, energy, they are all using wireless networks to gain efficiencies in their business, and so we should see the benefits of that.

Our Commercial segment expenses for the first quarter were approximately $10 million. That is up less than 1% compared to last year's quarter. And consequently our profit contribution in this segment was $11 million. That is down about 5%.

Now to the Retail segment. Our revenues for the quarter were $111 million. That is up 31% from the prior year, but gross profit totaled $14 million. That is a decrease of 8%.

If you look at our core retail market, our revenues increased by 10% and gross profit increased by 9%, so very good, strong results here. And this really is our -- this is our bread and butter. This is our expertise, serving independent carrier agents and other retailers through exceptional customer service and high-value add.

Revenue grew by 41% in our Tier 1 carrier market, but gross profits were down 19%. And both of these were primarily a result of the temporary expansion of our low-margin business with our large customer. As we have discussed, they will be transitioning out during this current fiscal year.

Direct expenses in the Retail segment were up 5%, and retail segment net profit contribution was $7 million. That is a 19% decrease.

Below the segment profit contribution line our corporate support expenses declined by 12%. That is primarily due to the lower pay-on-performance bonus accruals we talked about a minute ago.

And so on the balance sheet we used $2.3 million in cash from operations during the quarter as we paid out last fiscal year's bonuses, but we still ended the year -- the quarter with $14.3 million in cash, no outstanding balance on the revolving credit facility. Our inventory turns are very good and AR collections were strong. As we announced yesterday, our quarterly dividend, the $0.18 per share, will be paid on August 22.

And as Barney mentioned, we are reaffirming our earnings guidance for fiscal year 2013, the $1.80 to $2.15. That is essentially a flat year despite the transition business. And the $0.51 first-quarter puts us in good position to end the year within that range.

There are no changes to report relating to our expectations around the transition of the 3PL business. Everything that we told you last quarter is still the case. The transition is set to begin in the September quarter and to be complete by the end of our fiscal year in March.

So just in conclusion, we are happy with this quarter. I think we would categorize it as a good, solid quarter. The Tier 1 business is right about where we expected it to be, and we showed nice results in most of our core markets. We expect continued growth in the core business as we go through the year. And we believe that we are very well-positioned for another really good year. So thank you, and we will now open the line for questions.

Anil Doradla, William Blair.

A couple of questions. You are talking about the phaseout of this Tier 1 customer, can you share with us what would be the trajectory of this ramp down? Do you expect it to be pretty linear throughout the fiscal year or is it more front-end loaded?

I think from what we have -- the plan that is in place right now is going to see a good portion of the volumes start to transition in the August/September timeframe. Some of the higher dollar items though are set to transition later in the year, so on a revenue basis I would expect it to be kind of linear throughout the rest of the year.

When I look at the growth opportunities Bob laid out, the multiple growth drivers, but if you were to pick up one or two key areas, what excites you guys most at this stage?

I tried to -- first of all, mobile devices and mobile devices accessories, we have obviously been strong in our retail channel, but our commercial channel is really starting to get some momentum, where we are taking the device accessories into everything from governments and into the enterprise, into the other core markets that we serve.

The DAS system -- the distributed antenna system for enhanced cellular coverage, we have got some -- we have done some exciting projects and we've got some ahead of us.

The remote monitoring and control, the railroads are still -- we are still working on the Positive Train Control, but they have expanded the whole remote monitoring and control into other areas. We're getting some great traction with some of the oil and gas as far as their monitoring.

And then really this buildout of the carriers. We are starting to see some very good buildouts. And as we mentioned, the sites are smaller. They are easier to install. But we have got a good offering for that overview.

I would say those are the primary drivers. And then also the -- just the continued focus on not only the builds, but the backend maintenance. And the maintenance, whether it be lightning hitting or -- I mean, that is a big piece of our business. And as these systems become more and more expanded there is more and more maintenance to be done.

And then the other thing is just in building Wi-Fi. We have had some great wins in terms of some of these major projects where people are bringing Wi-Fi into their buildings or into their stores. We have seen some great things with retail, where they are powering their scanners and powering their -- you know, scanning to do inventory control, as well as giving to the customer the Wi-Fi service.

And so Wi-Fi expansion, and as I mentioned, the vehicle fleets, we are going to see it where you're going to -- there's going to be very quickly here where you actually have Wi-Fi in your car where you're accessing a satellite signal or these pico and nanocells as you drive down the road. So it really all ties together.

I think the other pieces that we continue to look at the carrier market, but we are showing some -- and the area that was slow this particular quarter was the -- what we call the self-maintained user, which are the enterprise, the hospitals, the cruise ships that we are doing business on a direct basis with those people.

Bob, I just wanted to pick up on that thing that you talked about these new small cell sites. So can you give us some color? Are you witnessing an increased activity on the 4G front? And any kind of qualitative color will be great by geography or by end customer on the service provider, wireless infrastructure.

The 4G, the pico and the nanocells are just starting to -- where you're going to be putting those into, whether they be coffee shops or Starbucks or -- but so we're starting to see the LTE buildout, and it is pretty -- would you say, David, in terms from geographical, I mean, we are --?

Yes, I think it is pretty well spread out. It is probably most concentrated right now, at least for us, with Sprint. We're starting to see a lot of activity out of Sprint, but the other carriers as well. So, yes, I don't think it is particularly geographically focused.

Would you guys say that this -- the rollouts and the buildouts are kind of a surprise on the upside or it is being played out pretty much consistent with your expectations?

It continues to be herky-jerky in terms of what we are seeing. And just as I tried to paint the picture, it has got to be buildout. They have got to get the buildout. When this new iPhone comes out and the other Samsung and LGs and whatever, the bandwidth consumption is just gigantic. And they need these enhancements or they're just going to continue to disappoint customers.

And we had been, because we have been having conversations with the carriers, the OEMs, the contractors, the program managers over the last couple of years, we have been -- we have been expecting this day to come. And so I think that it is pretty much, at least right now, in line with our expectations. It is still choppy, but there is business out there.

Great, thanks a lot guys.

Bentley Offutt, Offutt Securities.

A couple questions. Did TESSCO repurchase shares in the recent quarter?

No.

Did not.

No.

Okay. And also I was wondering as far as going back to the Positive Train Control item, which I think is an enormous opportunity for you, have you -- can you give some more color on the relationship with General Electric and TESSCO? And when do you think this will really start -- if it does start, when will it start and to what extent will it start?

A great question. The relationship is that we developed in conjunction with GE the -- what we call the power and RF propagation station. So just visualize that this is something that can be installed in the middle of nowhere. Basically it has a corkscrew type of a foundation. And then it has a tower. It has a box that where the GE controller goes in. And then it has solar panels, which again comes from us, and the backup battery inside of this enclosure.

It is an articulating tower that we came up with one of our manufacturers, where you can do the installation and/or the repair without a bucket truck, again, when you're in the middle of nowhere.

So we are comarketing with GE. We go in with GE to present to the railroads this solution. So it is basically a turnkey solution from us and from GE combined. There is everything they need to install. Obviously GE is using the controller and taking care of the work with a locomotive.

And we have already got -- we have got sites that are on test with major railroads, and we continue to do these test installations, which are adding up to some good business. And I think now it is that they have moved the date to, what, 2015?

2015.

so we're going to start to see -- and these have to be in place by that -- we are going to start to see them ramp up.

Now the other thing that is great about this product and great about the relationship is first of all we are taking this product, which is a Ventev product. It is a single SKU product that customers are buying from us. We are taking it into other applications for the railroad, as well as for like security companies where they want to put a remote video camera out on a ranch, or an oil company putting it -- monitoring a wellhead. So it is the development we have done of the product that is -- we're taking it into other markets as well.

But you are right, the Positive Train Control, once it starts to go, once you get the locomotive moving, it is going to be some substantial business.

My understanding is that the period of lab testing will move into field testing late this year, but certainly in 2013, and then you really start to see it ramp up. And I was very interested in getting your insight as to what you feel your success will be in placing these solar-powered towers that, I guess, there are 15,000 so-called dark --.

Dark sites, right. Yes.

I am just wondering what your feeling is towards the future success of this product.

And then secondly, what -- I don't know if you have given a rough price tag. Is it $50,000 for a unit or whatever? So that people can start to get a better feel of the opportunity.

Yes, the -- I believe that what we are seeing, we should in conjunction with GE -- you know, looking at a pretty large market share. And the price of the product depends upon the amount of solar panels and batteries that you need based upon the -- we have -- we can determine where this is going to be and whether there is a lot of sun or no sun or whatever, and then that defines the amount of solar panels you need and batteries. But I think the average cost is --.

Yes, it is less than $50,000, more than $10,000. So it is kind of in that (multiple speakers).

$25,000 ticket based upon what is needed.

So they continue to adopt the so-called dark sites.

Right.

But there are also additional other sites that it would be available, because they have many other sites. Is that correct?

Absolutely. In the dark sites, for the other listeners on the call, is that Positive Train Control is basically the air-traffic control system for a railroad. And especially in these dark territories -- and dark means they are not connected to the grid to get A/C current -- is they assess the condition of a switch. And if that switch is in the wrong position it is either going to cause a derailment or a collision.

So the GE controller will assess the condition of the switch and assess the condition of the locomotive and the traffic coming. And basically Positive Train Control means that it will seize the control of the locomotive and actually shut it down if there is a possibility for a collision or derailment.

So it is an interesting business, and it is going to be -- these 15,000 dark sites where they don't have power, they need our product. Now GE is going to be in other areas as well where they can hook up to the grid, but we even have some product there where we can hook up -- our box can be used to -- and antenna system can be used when you still have the A/C grid power.

Thank you. Have you -- are you willing to discuss the importance of Ventev in the most recent quarter as far as sales?

Yes, Ventev, a lot of what we sell -- a lot of the infrastructure product that we sell of Ventev goes into that self-maintained user into that private system and government market. And so that being soft, we had -- the Ventev numbers were a little bit softer this quarter as well. So those two track one another to some extent.

So I think that we have got a good pipeline. We have got other initiatives. We got a lot of good products from Ventev that are coming out, some power products on the accessory side that we feel good about Ventev for the rest of the year. This first quarter wasn't the -- it was a little softer than (multiple speakers).

We had some major -- on the mobile accessory side some major wins this past quarter with two of the Tier 1 carriers with our power product. We have got some -- and when we say power, we're talking about the chargers, the wall charges and the vehicle charges.

And we have got a major new product that we are launching here in September/November that has just some fabulous -- people don't understand the power requirements for a tablet versus a smartphone. And so we have created this entire EZ system where you have got multiple ports that you can hook up multiple devices. And we have engineered it all the way from the cabling point of view -- you know, flat cable, easier to manage in your briefcase or in your purse.

We are even going to be moving towards color-coded. And with the new iPhone 5 coming out that is a whole new connector. As well as we have cases -- our case line is very exciting for the mobile devices, and that is going to be a whole new market, because it is a whole new form factor for that new iPhone 5.

Okay. I'm going to step out and then I would like to have a backup question after anybody else's.

Hey, Bentley, real quick, to get back to your question about treasury stock. What you are seeing on the balance sheet, the increase in treasury stock, was related to a portion of our equity award -- employee equity award.

Okay. That is what I saw, and that is what I thought David said. I think about $1.6 million worth or something like that.

Okay, and I have one backup question. I will just step out of line right now.

There are no further questions at this time.

Operator, I have one more question.

Please proceed with your question.

Thank you. Hello? Robert? Operator?

One moment.

Okay, you can hear us now. Okay. Sorry about that. We had a malfunction or something.

You had a Wi-Fi problem. (laughter).

That is right.

Anyway, I had one further question I thought was particularly interesting and that is, you have announced this spring two important new opportunities as far as cooperatives. That they are largely with a firemen's group and also with the state and federal governments. And I was interested in your -- how you felt that was going to ramp up. In other words, how you focus your salespeople in this new area of opportunity, and when you felt that was going to start to feel play a greater role?

First of all, we got our account managers on this business. The one that we've talked about, the WSCA, is very exciting in that it has got a combination of selling to the agencies directly, but then we have got an employee program as well, that they will be able to come on a website and they can buy accessories correctly.

But it is -- so in many ways as typical of working with these type of projects, they take a long time to come together and ramp up. But they are -- they just show the type of opportunities, as with mobile devices in particular, that where you're getting into the government, you're getting into the enterprises, as well as to the retail store.

So you think the real impact will be years down the road not in the next six months?

It is not going to be years. We are hoping that this is going to start -- come online pretty soon.

Okay, fine. Okay, well, that was my my question, and I thank you very much.

(Operator Instructions). And if there are no further questions, I would now like to turn the call back over to Mr. Bob Barnhill for closing remarks.

Okay, thank you. Sorry about that malfunction. I don't know what happened. But we appreciate you for joining us today. And as always we are appreciative of your participation and the questions, the good questions.

Hopefully you can see that we are energized about the platforms that we have in place for profitable growth. And we are confident that we have got the right capabilities, the right people, the right commitment to grow the business in the months and quarters to come.

So enjoy the rest of your summer, and we look forward to speaking with you again when our second-quarter results are in. So thank you very much.

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