TESSCO Technologies Inc (TESS) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 TESSCO Technologies Incorporated Earnings Conference Call. My name is Karen and I am your operator for today. At this time all participants are on listen-only mode. We will conduct a question and answer session toward the end of the conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposed. And I'd like to turn the call over to 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, and good morning, everyone. As we all know, the last few days have been very difficult for many of us. And if you've been impacted by Hurricane Sandy I wish you a safe and speedy recovery, and I sincerely appreciate those of you that joined us today.

As I believe you saw on the earnings release we had an outstanding quarter. We generated 33% revenue growth over the last year, and set new record earnings per share of $0.64. We're very pleased that the revenue in our core markets grew 21%.

As we exit our 3PL logistics business with a tier one carrier, our focus on growing profitable revenue and productivity is showing strong results. We are gaining more business with existing customers by driving category share, and we are focusing on attracting new customers as well as cross sell.

The transition out of the high revenue, low margin, third-party logistics business with the tier one carrier that we discussed in our past calls is progressing according to schedule. We expect it to be completed by the end of this fiscal '13 which ends in March. We continue to maintain a strong relationship with this customer, supporting its other programs and supplying them with our own manufactured Ventev products.

As we transition, we've been shifting 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.

Let me take just a minute and summarize the growth drivers of the business which I discussed last quarter. The new systems applications and devices are driving immense demand for wireless broadband capacity, both for fixed and mobile platforms in our homes, offices, stores, distribution centers, hospitals, schools, operation centers, factories and on and on. Everything is being connected wirelessly.

Delivering this voice, data and video required is very challenging and is a huge opportunity for us. The existing mobile network simply can't sustain the growth on its own. Tomorrow's mobile communications and Internet will span multiple networks to deliver seamlessly the high secure mobile experiences that people want.

We are focusing on a diversity of systems. Carrier network enhancement is beginning to move out; in-building WiFi and mobile-enhanced WiFi is going to become the universal wireless connectivity; point to point and multi-point outdoor where you can eliminate the leased fiber-copper wire communications; cellular capacity and coverage enhancement systems, where you are installing these in buildings or arenas where they can have enhanced coverage and capacity without the carriers having to build new towers; remote monitoring and control, especially for railroads, utilities, oil and gas, security; enhanced fleet and in-vehicle wireless communications; machine to machine communications; and then, the smart device is becoming the platform, the hub.

And, we are seeing that we are taking our accessories into the commercial markets as well as the retail markets. Bottom line, we're there, we're positioned as your total source of everything required for building, using and maintaining these systems and devices.

Before I turn the call over to David to give more details on our financials I'm pleased to announce that our $0.18 per share dividend will be paid on November 28th to holders of record on November 14th. And I also would like to note that we've updated our business outlook for fiscal year '13, raising the bottom end of our guidance to reflect this quarter's strong results. We now expect full diluted earnings per share to be in the range of $1.90 to $2.15 compared to our $1.80 and $2.15 guidance previously.

We believe our leverage of the many opportunities being created by the convergence of wireless and the Internet will enable us to continue to grow revenues and profits from our core markets.

So, David, you want to take it over?

Great, thanks, Bob. Good morning. So we are very pleased with the strong results this quarter, a record $0.64 earnings per share, that's a 45% earnings growth that came exclusively from our core business. The gross profit dollars from the 3PL carrier business were flat compared to last year's second quarter.

So, for a quick review, the revenues totaled $197 million, that's a 33% increase from last year. Not including tier one customers, our revenues grew by 21%. The tier one business grew by 65% due to the temporary expansion of the major tier one carrier customer. But revenues here were down sequentially from $80 million last quarter to $65 million this quarter.

In Q2 we began to see the beginning of the 3PL business transition, and as Bob mentioned we continue to expect that business to be fully transitioned away from us by the end of the fiscal year.

Gross profit totaled $39 million. That's 14% increase. Not including the tier one customer our gross profit was up 15%. Gross profit from the tier one business was up 6% and, as I said before, the 3PL business with the main customer was flat, so that all these growth in the tier one business was attributable to strong results with our other tier one carrier customer.

SG&A was increased by a million seven, that's 6% during the quarter, to total $30 million. This increase is a result of higher pay and performance bonus accruals driven by the really strong quarter, as well as higher investments in IT, new product development and business generation.

So accordingly, our operating income for the second quarter was $8.7 million. That's up nearly $3 million compared to last year's second quarter. And our operating margin reached 4.4% compared to last year's 3.9%.

Net income was $5.3 million, $0.64 per share, compared to $3.5 million and $0.44 per share in last year's second quarter. EBITDA reached $10 million this quarter at a $1.21 compared to $7 million or $0.87 per share last year.

Now, to a little bit more detail on the segment results. For the commercial segment revenues totaled $96 million. That's up 16% compared to last year. And our gross profit in this segment totaled $25 million or a 12% increase.

We are particularly encouraged by the results we drove in the public carrier contractor and program manager market, as we continue to execute on our strategy of increasing our involvement in system build all the way from the OEMs to the carriers, to the contractors. These builds are going on and we are taking part in that. Revenues in this market grew by 29% and gross profit grew by 31%.

The results in our commercial dealer reseller market were also strong, revenues and gross profit increased 14% and 9% respectively. Revenues and gross profits in the private system operator and government market rebounded this quarter; we were up 10% and 5% respectively.

Our commercial segment expenses for the second quarter were approximately $10.7 million. That's up a little bit less than 4% compared to last year's quarter. So for the commercial business 12% gross profit growth, 4% expense growth, that yields a segment profit contribution of $14 million up about 19% compared to last year's quarter.

Now to the retail segment, revenues for the quarter were $102 million. That's up 53% from the prior year. Gross profit totaled $14 million. That's an increase of 17%. In our core retail market, revenues were up 35% and gross profit increased by 28%. Very good strong results here. And this really is our business in this retail market, serving the independent carrier agents, other retailers really with high customer service and value add.

In our tier one carrier market, revenue grew by 65% but gross profits were up only 6%. The revenue growth was primarily a result of the temporary expansion of the low margin business with our largest customer. As we've discussed, we'll be transitioning out this year. Gross profit from this relationship was essentially flat, so, again, the growth was related to other tier one carrier customers.

Direct expenses in this segment were up 10%. The retail segment net profit contribution totaled $7 million. That's a 25% increase. Then below the segment profit contribution line, our corporate support expenses grew by about 5%, primarily due to the higher pay and performance bonus accruals that I discussed a little bit earlier.

The balance sheet -- we generated a little over $6 million in cash from operations during the quarter, ended the quarter with $17 million in cash and no outstanding balance on the revolving credit facility.

Our inventory turns slowed down a little bit as we ended the quarter with higher inventory levels but that's really an effort to support our higher sales to increase our service levels to customers. We also brought in some product for the iPhone 5 launch and we're starting to prepare for the retail holiday season.

The AR collections, cash collections were very strong. And as Bob mentioned earlier, the dividend will be paid on November 28. And then for the earnings guidance as Bob mentioned, we increased the bottom end of the earnings guidance for fiscal '13. We're now at $1.90 to $2.15. Previously, we were $1.80 to $2.15.

And so, with $1.15 in EPS for the first half of the year, this guidance projects between $0.80 and $1 for the second half of the year. We believe that we're in a very good position to achieve this range of earnings which would bring this year's earnings to a very similar level to last year's $2.03 in earnings per share, despite what will be a substantial decline in revenues and gross profit from the major customer in the second half.

So we think that the second quarter was really an excellent quarter. We showed some very nice growth in the core business. We except continued year over year growth in the core business as we go through the year, and the 3PL carrier business is right where we expected it to be. The transition began in the second quarter and we expect it to accelerate in Q3 and wrap up in Q4.

Given our momentum in the core business and our very strong balance sheet, we believe we're very well positioned as we go forward.

Thank you. And we'll now open the line for questions.

Thank you.

(Operator Instructions)

The first question we have comes from the line of [Arnel Dirolda] at William Blair.

Hey, guys. Congrats, on the results, good showing on the public carrier markets, but can you once again go over what were the key drivers? And I had a couple of follow-ups.

Well, sure. In the carrier market, I think, the build-outs particularly from Sprint and AT&T, we're really starting to see some action there. And we really -- our strategy has been to really penetrate that whole ecosystem from the OEM to the carrier to the program manager to the contractor.

If you look historically, we've been strong at the contractor level and also at the carrier level but we've really penetrated this other -- these other parts of that -- of that build out ecosystems. So, I think, that's -- the execution of our strategy there has really driven that.

And then we've seen -- we saw good results in the VAR business as well. There are a lot of projects going on out there that the VARs are working and we're helping to supply. So, I think -- and then on the user market as well the private system in government we saw some nice growth there, too. So, there seems to be a lot going on that we're able to capture.

Now, if I look at the North American carrier spending patterns, would you characterize Sprint and AT&T being the most active, or it just happens that you're more exposed to those 2 carriers?

I think it's the latter. I think all the carriers are really starting to -- I mean, they just have to continue to build out this capacity that's being demanded by all these smart devices. And I think, again, we all know that the capacity as well as the coverage is lacking for most of us on a consistent basis.

And when I look at TESSCO and their exposure to these markets, I mean, do [any] products stick out as kind of flagship products with these guys, or it's across the board product exposure?

I think it's across the board, base station infrastructure still remains the mainstay. We're also seeing the [DAS] systems getting a lot of attraction. You know, these are the systems that where you take specialized areas, we talked about stadiums, that where they're building an enhanced coverage and capacity system.

The one that we talked about last quarter is 1,000 antennas inside of a stadium to make sure that people have the cellular coverage that they want and the capacity they want. And the next layer, they're going to start adding WiFi on top of it.

We're looking at the transit systems as far as -- again, the carriers they're taking in the systems into the tunnels and bridges, subway. So it' -- it continues -- to answer your question it continues to be the core base station products within the enhancement of these other areas.

And, guys, after this unfortunate storm in the northeast, does that impact your business one way or the other in the near term, and where do you see the impacts?

Absolutely. It's at -- we're already seeing an uptick. We're working with customers to get them what they need to get their systems back on the air. You know, there are some up in the impacted areas, 25% of the cell sites were impacted, one, primarily because lack of energy. They were running on their generators and starting to run out of fuel. So, that's number one.

We didn't -- we're not doing anything there, but then there's a lot of wind damage we're going into. Also that we're seeing safety equipment, and then the mobile devices. I mean, the demand for chargers and backup batteries for devices has been very strong.

So it's going to be -- it's going to drive opportunity we're driving 24 by 7 support. We're -- one of the things we've been challenged is just the -- transportation in and out of all of the affected areas. So a lot of customers are starting to pick up. We're starting to arrange for them to get the product. So we've been on -- we were impacted in our Baltimore operation. We diverted into Reno and San Antonio to make sure that we could continue to satisfy the customers' requirements.

All right. Thanks a lot, guys.

Thank you.

Thank you.

Thank you for that question. The next question we have comes from the line of Bentley Offutt from Offutt. Please, go ahead.

Hey, good morning. How are you?

Good morning. I am fine. And I just want to congratulate you and your management for doing a great job in the quarter. I know it's a major challenge considering the loss of the AT&T business. It gives your investors and investors-to-be a great opportunity because it certainly signals your ability to make this transition and grow the Company in the right area and the right business. So, congratulations, to you.

Thanks, Bentley.

I have a question relating to your balance sheet. You talked about it -- David talked about it briefly, but your inventories year-over-year were up roughly 32% which is a significant increase, even though the fact you're going into the Christmas season. It seems larger than one would expect. And I'm wondering if that reflects some of your business related to the iPhone sales and in particular, Ventev?

Yes, it does. We've -- we had very strong results with the Ventev sales around the iPhone launch. That product is -- a lot of that product is on back order, actually. But some of the OEM products that we brought in for the iPhone. You know, the iPhone -- the dealer channel -- the independent dealers have had a hard time getting their hands on the iPhone.

Most of the iPhones are -- 5s are allocated to the corporate stores. And so, once that unloads -- and so we are a little bit low on some of that inventory. But, yes, the inventory is really is -- a good bit of the inventory was a build up of the infrastructure and test and maintenance and networking products as well, where we just are seeing some increased demand and we ratcheted up some safety stocks in order to meet some customer demand.

So it's really, Bentley, across the board, that inventory growth.

And yet, you, despite the buildup of the inventory, you still ended up with a very high level of cash.

Yes. Yes, and I think --

So, I guess my question is looking at you're receivables and looking at the build up of the inventory which will probably ratchet down by the end of the quarter this would suggest another good quarter or even a better quarter for cash generation that you have been had last quarter.

Yes, I mean, I -- yes, I mean, you look at the accounts payable. You know, that number is pretty high too, though. So, we're offsetting the inventory growth was with payable growth.

Okay, good.

But, yes, I mean, I don't expect us to have a material change really on to the negative side in our cash balance.

And you'll also see -- this quarter is typically a very strong quarter in the retail markets as these retailers get ready for the holiday season. So we're expecting good results there. We've got a whole new power charging offer -- Ventev's that we'll be launching in this quarter.

The iPhones 4 and the other products, the Galaxy, continues to be very strong, and as David was saying, the iPhone 5 has been a -- for the independent channel a disappointment and in fact, even for the carrier channel, they haven't gotten a product that they really need as far as the demand is concerned. So the iPhone 4 continues to sell through and driving demand for the accessories that we supply to these stores.

Going back -- one last question and -- on the Ventev -- going back to the Ventev. Ventev was a disappointment in the prior quarter. If I remember correctly, actually it was weak to down. What -- how is it doing now?

Well the -- on the infrastructure, if you look at it, there's two pieces, we report them both together. There's on the infrastructure side, it's been strong. On the mobile device, it's -- you're going to start to see some upticks as we get these new products out.

Yes, Bentley, the Ventev numbers, this quarter, did come back a little, about flat to last year second quarter, so getting some more momentum in that Ventev businesses is very important for us.

Okay, fine. Thank you very much.

Okay, thank you.

Thanks, Bentley.

Thank you for that question. The next question we have comes from the line of (inaudible). Please go ahead.

Yes. How much of your revenue is derived -- total revenue is derived from any one customer or percentage?

Once you take the 3PL business out which is obviously a huge percentage, then you're looking at single digits in terms of the next largest customer. Right, David?

Yes. In this quarter AT&T, the largest customer, represented about 31% of our total sales.

And how long have you been with AT&T?

We've been working with them for about seven years.

This is the business that is on its way out though.

Okay.

This is a 3PL business and low margin.

How much of your profit is derived from that area? What percentage?

Yes. And, you know, we don't disclose profitability on customer level.

Okay. Right.

But as we've said, it's a much lower profit contribution than the rest of the business, so we've reported that.

Okay, then. All right. Thank you.

Thank you.

Thank you.

(Operator Instructions)

Okay, operator?

There's no questions coming through currently.

Okay. Well, let me wrap up then. All right, operator?

Yes, yes. You can go ahead.

Okay, great. Sorry, thank you. Well, again, thank you for joining us today. And we really appreciated the opportunity to go over our quarter two results. And we certainly appreciate your participation in the questions that we've had the chance to answer.

Hopefully, we communicated our excitement about the trends in the industry as well as our performance this year. And we've created a great foundation for growth and as TESSCO's talented employees have demonstrated in the recent years and just to, again, to highlight, the disaster response that we took over the last couple of days to make sure that we are serving the customer was extraordinary.

But we're continuing to execute on our strategies. and these strategies are all about delivering value to the customer, the manufacturer and to shareowners. So, again, thank you very much, and we look forward to talking to you next quarter.

Thank you.

Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. That's concludes the presentation. You may now disconnect. Have a good day.

Thank you.