TESSCO Technologies Inc (TESS) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Fiscal 2014 TESSCO Earnings Conference Call. My name is Ashley and I will be your coordinator for today.

(Operator Instructions)

I would now like to turn the conference to your host for today. Ms. Harriet Fried with LHA, please proceed.

Morning, everyone, and thank you for joining TESSCO's conference call. With us today from management are Robert Barnhill, Chairman and Chief Executive Officer, and Aric Spitulnik, 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 thank you all for joining us today. First, I would like to announce Aric Spitulnik, that I am sure you all have heard from over the past several quarters, that he was elected to the position of Chief Financial Officer.

Aric joined TESSCO in 2000 and he has served as the Company's comptroller since 2005. Over the past year, he had an expanded role in all financial and strategic areas of our business so I am very delighted to recognize his contribution and talent with this appointment and I am confident that his in depth knowledge and experience will contribute to our ongoing success. So, congratulations Aric.

Thank you, Bob.

As you know, TESSCO started a new chapter at the beginning of this fiscal year. And during this, our second quarter, we made great progress transitioning our business to single focus on being a total solutions provider and replacing the profit contribution from the $213 million in annual revenues we have generated from a third party logistics relationship that we all know ended in fiscal year 2013.

As you look at our results, the 59% growth in purchases from our public network operator customers and the 22% growth in the sales of our Ventev proprietary products really demonstrate that our customers recognize that the benefit of a partner that can bring the right products and solutions together to deliver everything that is required to build, use, and maintain wireless systems, when and where they need it, at the lowest total cost.

The strong 59% growth from our carrier and tower owner customers is a result of the aggressive spends that they are making to enhance their systems and meet the surging demand for wireless broadband coverage and capacity.

The market is very strong right now but we also believe that we are being successful in expanding our market share through deliberate focus on selling full solutions and our outstanding offering and execution.

The 22% growth in the sale of our Ventev proprietary products came from both the infrastructure and the mobile accessory side of this division. This division is where we design and manufacture products that fit unmet market needs.

Ventev infrastructure introduced several new products -- outdoor wifi antennas that support the major radio manufacture access points in very challenging environments. We also introduced compatible antennas in support of the new 802.11ac radio technologies. And we are having great success in education, healthcare enterprise markets, oil and gas and utility, in addition to our carrier and bar markets.

On the Ventev mobile accessories side, we continue to expand our business with the introduction of several new mobile device accessories, primarily cases and power. And we made continued penetration into current accounts and we developed new markets and new customers. Power products such as wall chargers and car chargers, backup battery cases, drove much of the growth.

While we maintain strong carrier customer inventive results, our goal is to expand this level of success into our other customer markets, namely the industrial and enterprise system operators, government and resellers. Our confidence in achieving these goals is high because of the strength of our value proposition, product offering, marketing sales and delivery strategies, and the new opportunities that we are seeing in the expanding world of voice data, video, and wireless connectivity.

Let me just take a minute and review some of the additional highlights of the quarter. We put our offering and value on full display earlier this month when we hosted a national innovation showcase at the Ravens' Stadium in Baltimore. This event is really the Mecca of what is happening in wireless. We showcased all the products and systems that make wireless work in one single location in two days.

In addition to displaying the innovative products, we held workshops on the future of DAS, distributed antenna systems, that are used for signal coverage and capacity enhancement. Which, by the way, as the Ravens' Stadium was showcasing our supply of all of these 2,000 some antennas that provide enhanced coverage and radius in Ravens' Stadium, we also had seminars in the emergence of the small cell systems and field testing, RF, fiber, and then issues in public safety and the mobile workplace.

Every year the showcase grows and this year we had representatives from more than 100 of the leading manufacturers in the industry, 500 key customers, and in total we had 1,300 professionals experience how TESSCO makes wireless work for them. Our manufacture partners thought it was the best forum in the industry.

For next year, we want to add an investor day to give you and the other analysts and shareowners an opportunity to meet our talented team as well as hear from our manufacturers and customers.

Also, in looking at the highlights during this quarter, we created a new market and customer acquisition and development unit that is entirely focused on finding and on-boarding new customers in new segments.

We are also creating a new team focused solely on the enterprise private system market, exclusively. Historically, we have been primarily focused on the industrial private system markets, oil, gas, transportation, utilities, mining, manufacturers, and service centers. And we are going to keep this focus but add this new enterprise unit that will focus on the healthcare, hospitality, education, retail, data centers and other enterprises. [While] we know that this segment has vast needs for our products and solutions that TESSCO delivers.

We are also creating a solutions development team. This team will accelerate the assurance that we can offer the customer in end-to-end solution for the build, use, and maintenance of the emergent system. In concert, we are expanding our proactive solution sales engineering team that works closely with our sales executives to assure that we build the right and total solution for the customer.

As we have talked in the past, we are continuing to expand our i-marketing system, our internet databased marketing system, which is a combination of TESSCO and Ventev websites and what we call our one-to-one communications and sales activity guidance system.

This system integrates all our go-to-market campaigns, our customer interchange conversation guidance, opportunity development. It is the customer delivery profile, preference, privilege, and results data center. It drives new customer acquisition, attraction, acquisition and development. And it is the customers' primary source of knowledge and the ability to design and configure a solution, purchase, and direct delivery and control their supply chain. It also offers substitutes, alternatives, and companion items when a customer is shopping, and then it guides -- it gives the business generation team -- it guides them with their further activity, opportunity pursuit and [tasks].

Bottom line, this system will greatly improve our customer service, cross sell, new customer development, and our marketing and sales productivity. So there is a lot happening at TESSCO all to better serve our customers' challenges and requirements and provide extraordinary service, and then drive, obviously, sales and profits.

So with that, I will turn it over to Aric, our new CFO, to give you the details of the financials.

Thanks Bob. Good morning. Before I get started, I just wanted to take the opportunity to thank Bob and the Board for this great opportunity. I am very excited to continue to work on putting TESSCO in the very best position to grow in a profitable manner.

So I will get into the quarters results. As Bob said, we are very encouraged by the strong half of this fiscal year. Revenues for the quarter were $147 million. The core revenues, which exclude the transition 3PL relationship, were up 5%. Overall, revenues declined 26% but that is entire due to the transition 3PL business.

Gross profit for the core customers was up 7%, so gross margin did tick up slightly in the ongoing business. The growth of the Ventev business that Bob discussed certainly helped us keep those margins stable.

That helped to offset the growth in the public carrier space, which is great. That market, though, generally carries a slightly gross margin than the other markets. So the Ventev is helping to offset that. At the same time, the transition out of the 3PL business drew up an increase in over all gross margins, from 19.6% to 24.9%.

SG&A was down about $1 million or 3% this quarter. Now, it is primarily again a result of the 3PL business and some of the marketing expenses that are no longer associated with that business. So, overall, a loss of about $58 million in that transition 3PL revenues resulted in operating income down about $1 million.

On a percentage basis, operating margins rose from 4.4% to 5.2%. Net income as a percent of revenue grew from 2.7% to 3.1%.

While the comparisons to last year's second quarter are certainly skewed by the 3PL business, we did see sequential growth in revenues, gross profit, new income, and earnings per share. And we see that as a validation that our strategy's executions are working to continue to build a healthy, well positioned business.

So a little bit more on the markets. The public carrier space, as Bob said, continues to produce tremendous results. We do see increased activity and we also believe we are winning higher market share. Revenues and gross profits in that market both grew about 60%.

We continue to see growth in the commercial dealers and resale market, as well, with 2% revenue growth and 3% gross profit growth.

The private and government systems operators market posted a 9% revenue and gross profit decline. However, for a second straight quarter we did see sequential revenue growth in that market. So while things are not where they need to be yet, we are building some strong momentum.

In the retail market, revenues and gross profit have decreased by 13% and 4% respectively. We have been seeing some changes in the business models of the carriers themselves that have impacted the indirect sales and direct sales to the carrier and also the independent agents. However, our value proposition continues to play well and we are taking steps to get more connected to these customers, including more sales training, improved supply chain solutions, merchandising and product support.

Also, we are beginning to be more aggressive in attacking the retail market outside of those carriers. We have seen some small ones already in that space and we are working on several more opportunities as we speak. And of course, as Bob mentioned, our new customer acquisition team will help support that effort.

So for the balance sheet, inventory was essentially flat this quarter; however, it does remain a lot higher than historical levels mostly to support those bills in the public carrier market. This is high dollar inventory; we are holding it a little longer than we normally do, but we still do believe this is essential to our strategy of growing market share in that space.

However, due to the strong cash collections we saw this quarter, we were able to pay off the balance on the line of credit we had last quarter and ended about $3 million of cash on the balance sheet. Overall, we generated just under $15 million of cash from operations during the quarter.

We also set our dividend of $0.18. The record date is November 6, 2013; the payment date is November 20, 2013; and we did raise our guidance from $1.75 to $2.05 up to $1.90 to $2.10.

So, in closing, we are very proud of this quarter. We made great progress in the core business and we have many growth opportunities in front of us for the rest of this year and beyond. Thank you and, operator, we will now open the line for some questions.

(Operator Instructions). Your first question comes from the line of [Emile Daratla] with William Blair. Please proceed.

Hello guys. Thanks for taking my question. Aric, congratulations on your appointment.

Thank you.

So when I look at the Ventev products, I think it was up 17% this quarter, 37% last quarter. What is driving this? Is this just a new way of procurement? Or the way you market the products? I know, Bob, you were talking about some i-marketing and some of those efforts, but can you help us understand this?

Sure. I think, first of all, on the accessories side, we have a very innovative power offer, which -- all the way from the product itself, to the cabling, to the packaging -- which is gaining great success. We just had a major Big Box company take on the product. The dealer channel has been very good for us. So that is driving significant increases.

And then on the infrastructure side, these new technologies, as I mentioned, where we are introducing the new antennas for this new technology. And then this what I was saying the hostile environment -- how do you take wireless outside? And how do you have an enclosure that is going to protect the access point?

And then also the power systems that we are coming up with that are primarily a derivative of what we developed for positive train control, but is not yet -- we are seeing some of that business, some of the trial systems -- that still hasn't materialized. But we have leveraged what we developed into the other markets -- security, oil and gas, pipelines.

Also to answer your question, we have each unit accessories as well as the infrastructure has their own sales management team that work directly with the TESSCO account managers as well as develop business on their own when they are out in the field.

Yes, just to add to that a little bit, over the last couple of years we have done a lot of investments in the people in Ventev, both on the sales and on the product side. And that is really starting to pay off. We are really doing a lot more innovation now than we ever had in the past and the market has definitely responded and very well to some of these new products that they are not seeing from other manufacturers.

Yes, we have got a very aggressive product road map on both sides and we are gaining acceleration in development and execution of these products.

Now, when I look at your Ventev products, do you participate in the manufacturing of some of these products? Where I am going with this question is, given the rise in cost of labor in emerging countries, in China mostly, does that have any margin impact on Ventev products going forward?

Everything is contract manufactured. However, we do a lot of the assembly, the final assembly, especially in the Ventev infrastructure power products. We are always scanning where is the best place to have these products manufactured? Still most of the products are coming from China and we have been able to hold costs pretty well. It is a function of the total landed costs -- the material costs, the labor, but then also the freight to get the product in. But so far, everything is good, but we continue to scan the rest of the world in terms of where we can go.

Fortunately or unfortunately, it is that China still continues to have the manufacturing expertise to manufacture the products that we are developing.

So when you look at next 12 months to 24 months, are you confident on maintaining your margin profile on Ventev.

I belie so. I think it is going to -- the infrastructure products definitely, as we get into some of these Big Box retailers the margin, might be squeezed a little bit, but I think overall based upon or procurement as well as our design, we will be able to maintain those margins.

When I look at the long term growth of your proprietary products, do you think that you can sustain 20% growth or do you think that is going to moderate over time?

No, I think that is certainly our goal, in excess of 20%. It is still a small number. I mean, we are what -- 13%, Aric?

Yes, 13% of the total.

13% of the total volume, but our goal is to get to 30% very quickly. And so with the new products, the new markets we expect robust growth.

Now, switching to the public carrier market, 59% growth, that is pretty strong. Obviously, we have had these issues around fiscal cliff and all those macro related issues, so how do you look at that space over the next quarter or two?

We believe it is definitely going to modulate a little bit. I think we have seen a real boom. One of the strong areas has been the DAS system -- signal enhancement, especially with tower owners that are putting together the DAS systems for the carriers.

But also LPE has been driving. We have had great success in terms of working with we call it the entire ecosystem, whether it be the carrier direct or with the contractors, program mangers, or the tower owners. But we are not projecting that exaggerated growth that we have seen over the last two quarters.

And coming back to the gross margin. With 3PL relationship coming out of the mix and obviously the proprietary products are growing -- you have the Ventev stuff coming in -- when I look at the core business, gross margins appear flat. I am just trying to understand, what is going to limit the gross margin expansion or is that something we can expect going forward?

Well, I think, one, it is a combination of the mix with proprietary products and we have got a very sophisticated and continue to advance pricing system, that we are looking at market based pricing. We expect that we can pick up a couple of basis points as we really get dialed in to each market's price sensitivity.

And as Aric said, the margin at the carrier space is definitely lower than our other channels, so it also depends up on the mix of the customer base that we are selling to.

Yes, I think outside of that public carrier space, I think we have done a real good job of maintaining the margins across all the product lines. It is really just. -- the carrier space is really just a combination of their product mix, including the DAS which is just a little bit lower margins for us. And the carriers themselves, the bigger customers we are selling to.

But outside of that pocket, generally we have been able to maintain or even grow even most of our product margins.

You know, when we say that we are going to be intentionally solution-focused, that is another way to drive cross sell. And part of the -- the more that we can cross sell, the other areas' tools and shop supplies and training, that is going to definitely drive margin. Obviously, as we are getting the business from the high volume items which are price sensitive, but these other areas that we can cross sell into to build that total solution out are much higher margin products.

Great. Well, thanks a lot, guys, and congratulations, Aric, once again.

Thank you.

Thank you and good talking to you.

(Operator Instructions). I would now like to turn the conference over to Bob Barnhill for closing remarks.

Great, well, thank you and thank you all for being with us today. I think it is obvious that we are in a very exciting and dynamic marketplace. There are just a tremendous amount of new opportunities being presented to us. I mean, we're -- you are going to be hearing as we go forward machine-to-machine, and advanced remote monitoring control systems, and [sim building systems].

And as we discussed, we really believe that this second quarter results and results from the first quarter are really demonstrating the strength of our value proposition, our product offering, our marketing sales delivery strategy, and our execution, as I mentioned before. This is the foundation for our continued growth.

So I thank you again for your support and being on the call and have a great day and I look forward to talking to you in another couple of months.

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