TESSCO Technologies Inc (TESS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2014 TESSCO Technologies Incorporated earnings conference call. My name is Whitley, and I'll be your operator for today. (Operator Instructions).

As a reminder this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. David Calusdian with Sharon Merrill. Please proceed, sir.

Good afternoon, everyone, and thank you for joining TESSCO Technologies third-quarter 2014 conference call. Joining me today are Robert Barnhill, TESSCO's Chairman and Chief Executive Officer, and Aric Spitulnik, the Company's Chief Financial Officer.

Please note that management's discussions today 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 containing 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 to the call over to Bob Barnhill, TESSCO's Chairman and CEO. Bob?

Thank you, David. Thanks everyone for joining us today.

On today's call I'd like to share a few comments on our performance during the quarter, our thoughts on the Company's strategic direction and strategies, and highlights of our recent business activities. Aric will follow with the review of our results and then we will open the call to questions.

Let me first give a quick review of our results. Revenues were $145 million.

Operating margin increased to 4.9% from 4.3% last year. Net income was $4.4 million or $0.53 per share, and EBITDA was $1 per share.

We're also pleased to announce an 11% increase in the quarterly dividend to $0.20 per share. This increase demonstrates our strong financial position, increased cash generation, and the Board's confidence in our ability to execute on our strategic initiatives.

During the third quarter we continued our total focus on serving the public, government, and private wireless system operators and commercial resellers and retailers in providing these customers with the knowledge, the products and supply chain solutions required to support their wireless deployment and making great progress in enhancing our strategies to gain new customers, monthly total source buyers and operational productivity and profitability. Our overall strategy is what we call high touch-high tech and it's founded on five key areas.

First, developing strong one-on-one personal relationships with our customers; second, continuously enhancing our value proposition and offering; third, providing the knowledge and products to configure specific end-to-end solutions to meet customer requirements. An example for more effectiveness we're now building out our solutions development and our architect design teams to work closely with our relationship executives to interface with the customer.

The fourth area is expanding into new customer segments. To that end we created our new customer acquisition and develop unit, which will focus solely on acquiring new customers in new segments, which should drive significant growth opportunities for us. These segments, by the way, include oil and gas, transportation, utilities, mining, manufacturing, service centers, healthcare, hospitality, education, data centers, and other enterprise private network operators.

And lastly, the key strategy is the foundation of our new business development efforts is building and executing on an iMarketing system, what we call the iMarketing system. This system drives new customer traction, acquisition, knowledge delivery, opportunity development, and productivity for not only the customer but for TESSCO. I can't emphasize enough the importance of this system to the goal of achieving sustainable profitable growth.

TESSCO.com is the foundation of the iMarketing system. The customer's primary source of knowledge and the ability to design and configure a solution, to make a purchase, direct delivery, and control their supply chain.

Our robust and growing database of prospects and customers and their profiles, roles, preferences and privileges integrate all of our go-to-market campaigns and customer service. Then our one-to-one guidance system presents our business generation team with a roadmap for activity, opportunity pursuit, outstanding task and customer interchange conversation guidance.

Two new critical components, which are very exciting and TESSCO's iMarketing system were launched this past quarter -- the intelligent alternatives and advanced product recommendation engine. These advanced capabilities are built on the strength of big data and analytics and deploy sophisticated algorithms to improve the customer experience, drive cross-sell, and enhance margins.

Presently, alternatives at the time of order entry -- presenting the alternatives at the time of order entry prevents a lost sale when a desired item is out of stock by offering the relevant alternatives. The recommendation engine presents a high probability complementary suggestion in real time. Typically these capabilities are offered only by B2C companies and large-cap companies but TESSCO's technology and analytics capabilities have taken a substantial step towards reaching our total iMarketing vision.

Looking on some of the products side. The successes during the third quarter, our Ventev product development and manufacturing group achieved 19% growth.

In December the wireless infrastructure unit of Ventev announced its new line of integrated outdoor wireless enclosure systems. These pre-configured plug-and-play battery-operated enclosures are ideal for utilities and the oil and gas industry, which require integrated systems to power and protect essential communication equipment in remote and often challenging environments.

Ventev also secured an agreement with a major airline carrier to support the build out of its tarmac Wi-Fi network. Also, Ventev won a contract to provide a major automobile manufacturer with high density antennas for its factory-wide Wi-Fi network to track inventory and provide data to maintenance and line workers that are utilizing tablets to track their work orders. It also made progress with a new line of ceiling tile bubble enclosures for healthcare and medical applications.

Then on the mobile accessory unit side of Ventev, we continue to gain market share particularly in the dealer and regional retail channels as well as some successful placements in mass consumer electronics. Earlier this month Ventev launched three unique mobile device chargers at Pepcom's Digital Experience in conjunction with the consumer electronics show in Las Vegas. These announcements include a combination wall car charger for versatility, a combination battery and wall charger that can charge two devices at once, a dual-port car charger specifically for the high power needs of the next-gen tablets.

We also signed two new international distributor partners to take Ventev beyond the United States. And lastly our Ventev.com B2C site is reaching the beta test completion and will be aggressively promoted shortly to drive consumer direct sales.

Overall we're very pleased with the progress we made thus far during this transitional year. The convergence of wireless and the Internet is creating new opportunities and challenges for the system operators and we, TESSCO, are providing the solutions to help our customers make wireless work.

As we look ahead to the fourth quarter we believe TESSCO will make further gains in enhancing our strategy and execution. This should place us in a solid position for new growth in next fiscal year. And with that I'll turn it over to Aric for a review of the financials. Aric?

Thanks, Bob. Looking at the third-quarter results, revenue for the quarter were $145 million compared with $147 million in Q2 and $204 million a year ago. Core revenues, which exclude the transition from the 3PL relationship were essentially unchanged from the year-ago quarter and down only about 1% from the second quarter.

Revenues from our public carrier customers increased 15% from a year ago as a result of the ongoing aggressive spending to enhance their systems and meet the surging demand for wireless broadband coverage and capacity. That market continues to be strong and we have also been successful in expanding our market share through deliberate focus on selling full solutions.

We did see some build slow down a little earlier than we expected in the third quarter and we've yet to see those builds ramp up in the fourth quarter. But we have many great opportunities ready to get underway, it's just a matter of the timing. Also, as Bob mentioned, Ventev sales were up 19% from a year ago on strong sales in both the infrastructure and mobile accessory side of the business.

Core gross profit was up about 2% and gross margins increased 40 basis points in the ongoing business. The 19% growth in the Ventev business provided a partial lift to gross margin as did efficiencies in our logistics processes. Meanwhile the transition out of the 3PL business resulted in an increase in overall gross margins from 19.1% to 24.9%.

SG&A was down about $1.3 million, or 4% from the third quarter of 2013. Again, as a result of the 3PL business and some of the marketing expenses that are no longer associated with that business, as well as due to lower expenses around such areas as bad debt expense and bonus expenses. Overall the loss of about $59 million in revenue from the transition of the 3PL relationship resulted in a decline in operating income of just $1.6 million.

On a percentage basis operating margins rose to 4.9% from 4.3%. Net income as a percent of revenue grew at 3.1% from 2.6% in the same quarter a year ago.

Both of these increases were largely due to the transition of the 3PL business. Earnings-per-share totaled $0.53 this quarter as compared to $0.65 in last year's third quarter, again the decrease related to the 3PL business.

So back to the markets. The public carrier space that I discussed earlier continues to produce good results. We are continuing to see activity and we are also believe we are winning market share.

I'll use as an example, in just over one year we've doubled the number of large public carrier customers we serve. We now have about 25 customers generating at least $1 million in revenue, in annual revenue.

Revenues and gross profits from that market both grew about 15% year-over-year. Our value proposition, logistics expertise and inventory management continue to land very well with these contractors, program managers and integrators working out of these large builds.

In the commercial dealer and resale market revenue and gross profit were essentially flat. However, for the year we are tracking at a 5% increase.

In the private and government system operator market, revenue declined less than 1% while gross profits declined 3%. The temporary government shutdown did have an impact on our sales during the quarter. In fact, some projects that we were set to participate in still remain delayed.

In the retail market revenues and gross profits decrease 11% and 3% respectively. As I mentioned last quarter, the carriers have made changes in their business models that have impacted indirect sales and direct sales to the carrier independent agents.

We have seen the carriers become more competitive in trying to win the indirect agent business. While our value proposition is still being well received and we have undertaken steps to enhance our connection to these customers, we've also been more active in pursuing opportunities in the mass consumer electronics in similar channels. While we've won some nice new business in these sectors it will take some time to build up our presence there.

Turning to the balance sheet, as compared to the second-quarter inventory declined almost $4 million to $62 million this quarter. Given the slowdown in the public carrier builds we typically see this time of year as well as the end of the holiday resale season, we were able to reduce the overall inventory.

Cash collections remain strong during the quarter and our cash increased $5 million totaling more than $8 million. Overall we generated $7 million of cash from operations during the quarter.

As Bob mentioned, we also set our dividend of $0.20 per share with a record date of February 5, and a payment date of February 19. The $0.20 represents an 11%, or $0.02, increase from the previous quarter.

Based on the steady results we achieved this quarter we are also reforming our fiscal 2013 EPS guidance in the range of $1.90 to $2.10. As we said in the press release, the top end of this guidance range assumes a faster than currently expected commencement of carrier builds and a faster than expected benefit of our investments in our business generation engine.

In closing we've made solid progress in the core business this quarter. We continue to target new customers and new markets and we've successfully transitioned away from the major 3PL relationship.

Thank you for your support of TESSCO. Operator, we'll now open the call for some questions.

(Operator Instructions). Steve Shaw, Sidoti.

Aric, can you repeat -- you guys doubled large public carriers to, what number was that?

We have 25 today that are on pace to do more than $1 million in revenue. That's about double where we were about a year ago.

Okay. And then can you guys just give an update on the train industry and the Positive Train Control and demand for that product?

Yes, the demand and the need is high. The deployment rate still remains at the pace, we see some tests, but the railroads are not committing at this particular point.

You would've hoped that some of the tragedies we've had, the one in New York in particular, would start to drive it more, but we're not seeing that as yet, but there's a promise for the future. It also, though, the product that we developed and the relationships we've built are helping us in other areas, not just the Positive Train Control area.

Okay.

Tom Kerr, Singular Research.

Could you go over it again that 11% decline in the retail and independent dealer space? I wasn't following that.

Was that a temporary type deal or a new strategy shift that's going to keep going? I didn't quite understand that.

The carriers have implemented a, from the corporate point of view, a direct factory acquisition strategy, and then they are going back to offering their independent channel the opportunity to buy products directly from the central carrier operation. And so that's having an impact on some of the business that we and others have gotten from the independent channel.

Recognizing, though, that the carrier offering is a narrower offering than the products we can provide and also our value proposition of being able to help the stores with the products they offer from a choice of brands and then our ability to assist them in selling through and then also to make sure that they have product on hand due to our speed of delivery, is going to help us task the competition with the carrier direct. But it's still going to have an impact, and it's one of the areas that we're really expanding into other areas, bookstores, other types of retail outlets to replace some of that business.

We'll probably, as the industry continues to grow, the opportunity to maintain the volume and grow the volume is there. But the market share of the independent dealers will be less.

Okay. I think that helps. I think I got it. All right, that's all I had.

(Operator Instructions).

Anything else, operator?

There are no further questions on the queue.

All right, well let me just wrap up then. As far as I, I really want to thank you all for being with us today.

As you can see TESSCO is well positioned financially, operationally and strategically to seize on the opportunities in our rapidly expanding markets. We're making great progress as we've strived to increase new customers, monthly buyers and operational productivity and profitability.

We're investing in customer acquisition in the technology to support our aggressive business development goals. We're seeking increased adoption of our Ventev products and we've grown market share amongst our carrier and tower owner customers and expect to continue to grow in that segment in fiscal year 2015.

As we look to the future it's a very exciting time for us. The convergence of wireless and Internet is creating new opportunities and we're energized to pursue them to build sustainable profitable growth.

I thank you again for your support and for being on the call. Have a great evening and I look forward to talking to you again in our fourth-quarter call. Thank you.

Ladies and gentlemen that concludes today's conference. Thank you for your participation.

You may now disconnect. Have a great day.