Collectors Universe Inc. (CLCT) Q4 2020 Earnings Call Transcript

Collectors Universe Inc.  (NASDAQ: CLCT) Q4 2020 earnings call dated Aug. 26, 2020

Corporate Participants:

Joseph J. Orlando — President and Chief Executive Officer

Joseph Wallace — Senior Vice President and Chief Financial Officer

Presentation:

Operator

Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe’s Financial Results for the Fourth Quarter and Year Ended June 30, 2020. With us today from management are Joseph J. Orlando, President and Chief Executive Officer and Joseph Wallace, Senior Vice President and Chief Financial Officer. Management will provide a brief overview of the quarter and then open the call up to your questions.

Comments made during today’s call may contain statements regarding the company’s expectations about its future financial performance, including forecasts and statements concerning business trends and profitability that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company’s actual results in the future may differ, possibly materially, from those forecast in this call due to a number of risks and uncertainties. Certain of these risks and uncertainties, in addition to other risks, are more fully described in the company’s filings with the Securities and Exchange Commission.

The forward-looking statements are made only as of the date of today’s conference call and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. And as a reminder, that today’s program is also being recorded.

And with that, I’d now like to turn the call over to Joseph Orlando. Joe?

Joseph J. Orlando — President and Chief Executive Officer

Thank you and welcome to today’s conference call to review our fiscal 2020. First and foremost, we hope all of you are safe and healthy. Before I summarize the results for the quarter and the full year, I would like to give a brief overview of the Collectors Universe business for any new listeners on today’s call.

Collectors Universe is a leading provider of value-added services and content to the collectibles market. We authenticate and grade collectible coins, banknotes, trading cards, autographs and various types of memorabilia. We have two major business services: Professional Coin Grading Service or PCGS; and Professional Sports Authenticator or PSA. Since 1986, PCGS has examined and certified millions of U.S. and world coins, banknotes, medals and tokens.

PCGS had a solid performance in the fourth quarter despite the pandemic. PSA is the world’s largest trading card, autograph and memorabilia authentication and grading service. Since 1991, PSA has examined and certified millions of collectibles. As our fastest growing segment, PSA set an all-time revenue record in the fourth quarter and has grown annually by about 26% since 2018. As of the end of fiscal 2020, Collectors Universe had certified more than 81 million total collectibles, with over 5 million of those certified in just the past year.

Let’s move on to the fourth quarter and fiscal 2020 results. While the COVID-19 crisis presented our company with a host of challenges, our team quickly adjusted to the current operating environment and we achieved record revenues for Q4 and fiscal 2020. Beginning with the complete shutdown at the start of Q4 and transitioning to a skeleton crew a few weeks later, we gradually ramped up capacity under the new safety guidelines and were able to finish the fiscal year at a terrific run rate. As was the case during our last earnings call, context will be key as we move through the details of our Q4 performance.

Collectors Universe finished Q4 with $20.5 million in service revenues, up 4% from last year, despite the lost time at the beginning of the quarter due to the pandemic. As noted earlier, this performance represents an all-time revenue record for any quarter, not just Q4. For the year, Collectors Universe finished with $78.9 million in service revenues, which was up from $72.5 million in fiscal 2019. The performances in 2019 and 2020 represent back-to-back record revenue years for the company.

In addition to setting a new annual revenue record, Collectors Universe met and exceeded the 5 million collectibles certified mark during the fiscal year for the first time in our history. Furthermore, our cash position increased from $22.2 million at the end of Q3 to $28.6 million at the end of Q4. The single quarter cash generation figure from ongoing operations of $6.4 million in Q4 also represented an all-time quarterly record for the company. Given the continued strength of our results and our ability to execute in these challenging times, we remain excited about our business prospects moving forward.

Now let’s take a deeper look at the performance within each division. Our PCGS division finished at $10.2 million for the quarter, which was down slightly from $10.9 million or 6% year-over-year. PSA surpassed last year’s Q4 performance by $2 million, finishing at $9.6 million and was up by 27% year-over-year. Even though the PCGS performance was solid overall in Q4, it is important to note that our coin business continues to deal with more pandemic-related challenges that our trading card, autograph and memorabilia business.

For example, the pandemic has resulted in the cancellation of numerous trade shows and on-site grading events, restricted international travel and it has impacted some production at the U.S. Mint. Traditionally, PCGS has been more dependent on these types of things than PSA. That said, we are adjusting to the new environment.

Let’s start with a look at PCGS domestic and how we are responding. In Q4, PCGS Vintage was up 17% year-over-year, finishing at $3.6 million versus $3.1 million in fiscal 2019. Some of that gain was due to the lack of trade shows in the quarter, as a portion of potential trade show submissions were re-routed to our offices. Coins of this nature still need to be certified with or without the presence of shows, and we have services available at our corporate office to accommodate them. As expected, all three major coin conventions scheduled in Q4 were canceled, including our own trade show in Long Beach, California.

So while no industry events of this nature took place during the quarter, about $220,000 of show revenue was technically recorded by PCGS, primarily as a result of shipping coins left over from a show that occurred late in Q3. In response to the lack of trade shows, PCGS has already begun to schedule smaller trading events to help, at least in part, fill that void. While some potential show submissions can be re-routed into our Vintage service line, creating a safe meeting environment for dealers, auction houses and collectors can help create more coin trading activity. This can ultimately lead to more submissions for PCGS. Four such smaller events have been scheduled and are being hosted by PCGS in Q1. We are optimistic that the smaller events can be an important catalyst to safely bring together our customers and generate incremental revenue in the process.

Turning to PCGS Bulk, we are pleased to report that this part of the business finished Q4 with $3.6 million in service revenues and was up 36% year-over-year. PCGS International, on the other hand, was another area impacted by COVID-19 in a more meaningful way than some other parts of our coin business. While PCGS China and Hong Kong finished with respectable performances versus the same quarter last year, combining for $1.7 million in service revenues compared to $1.9 million in fiscal 2019, the restrictions on travel prevented more submissions from being processed.

As we detailed on our last earnings call, enabling our Shanghai office to become more independent will give us the ability to process more coins over time. This process has already begun, but the inability to send some of our top experts to China to handle higher value coins, along with the cancellation of our loan on-site grading event did have a material impact. The good news, along with the fact that we continue to move towards greater operational independence in China, is that our Shanghai office backlog is the highest it has ever been. Although COVID-19 has created some short term challenges for our team, we are very pleased with the progress that we’re making in that market.

Finally, the Paris office was virtually shut down for the entire quarter, but it finished the quarter with slightly over $0.1 million in service revenues versus $0.4 million last year in Q4.

Let’s turn to PSA. As mentioned earlier, the PSA and PSA/DNA services had an all-time revenue record for the quarter and year. This includes record Q4 output for the division. We shipped over 715,000 total collectibles surpassing the prior Q4 record of about 680,000 items set in fiscal 2019. As a reminder, we achieved this despite losing working days associated with the COVID-19 shut down and the challenge in ramping up operations in a safe and measured manner in the early part of the quarter.

Returning to our overall business, gross profit margins were 60% for the quarter, which was up from 59% a year ago. Our operating income for Q4, after non-cash stock-based compensation and the impairment charge for the Long Beach Expo business was $3.5 million compared to $4.5 million in the previous year. Net income was $2.6 million for the fourth quarter of fiscal 2020 or $0.29 per diluted share, which was down from $2.8 million and $0.31 per share in the prior year. We also returned $6.3 million to shareholders during fiscal 2020 in the form of our ongoing dividend.

Now, let me turn it over to Joe Wallace for a more detailed review of our financial performance in Q4. Joe?

Joseph Wallace — Senior Vice President and Chief Financial Officer

Yeah. Thank you, Joe. I will now give a brief overview of the financial results for the fourth quarter of fiscal ’20. Despite the COVID challenges that impacted our third and fourth quarters that Joe just discussed, the company announced strong results from the fourth quarter and for the year. In addition, as of June 30, ’20, we continue to have a very strong balance sheet.

In the fourth quarter, the company generated record quarterly revenues of $20.5 million and earned operating income of $3.5 million and net income of $2.6 million or $0.29 per share. This compare to quarterly revenues of $19.8 million, operating income of $4.5 million and net income of $2.8 million or $0.31 per share in the fourth quarter of fiscal ’19.

In fiscal year ’20, the company generated record annual revenues of $78.9 million, operating income of $14.1 million and net income of $10.8 million or $1.19 per share. This compare to revenues of $72.5 million, operating income of $14.3 million and net income of $10.0 million or $1.11 per share in fiscal ’19.

The operating results in this year’s fourth quarter were impacted by higher G&A expenses and an impairment charge that we will discuss in more detail below. The total revenue increase of $0.7 million or 4% in the fourth quarter, and $6.4 million or 9% in the year, were driven by increases of $2.0 million in Q4 and $7.3 million for the year in the cards and autographs revenues, representing growth of 27% in both periods, and record fourth quarter and fiscal year revenues for that business. Cards and autographs has achieved quarter-over-quarter revenue growth in 39 of the last 40 quarters.

Total coin revenues were down $0.7 million or 6% in the fourth quarter, but were substantially unchanged for the year. In China, coin revenues increased by $1.0 million or 24% for the year. And that revenue growth was generated in the first half of the year prior to COVID.

Combined coins and cards and autographs represented about 95% of revenues for the year, and reflects the continued importance of those two businesses to our overall financial performance. Cards and autographs finished the year with a record backlog and therefore, we expect continued growth in that business as we continue to increase authentication and grading capacity. As discussed earlier, the coin business in the U.S. is facing some COVID-related challenges. However, we are continuing our efforts to identify and take advantage of revenue opportunities in that business, much like we did in the fourth quarter.

With respect to our China coin operation, which ended the year with a relatively high backlog, we are focused on making that business less reliant on U.S. personnel to offset the impact of the travel restrictions between the U.S. and China.

The gross profit margins were 60% and 57% in this year’s fourth quarter and for the year as compared to 59% and 58% in the same periods of last year. Overall, gross profit margins were up slightly in each quarter of the year, except Q3 when we abruptly closed operations in March due to COVID, while continuing to pay all employees. The gross profit margin for the year also reflected the continuing build-up of capacity to address the record backlog in the cards and autographs business. As previously disclosed, there can be ongoing variability in the gross profit margin due to the mix of revenues and the seasonality of our business. On a quarterly basis, during the three years ended June 20, our gross profit margins varied between 53% and 62%.

Our combined operating expenses, including the impairment charge, represented 42% and 39% of revenues in this year’s fourth quarter and for the year as compared to 36% and 39% of revenues in last year’s fourth quarter and fiscal ’19.

Selling and marketing expenses were 9% and 12% of revenues in this year’s fourth quarter and for the year, versus 13% and 14% of revenues in last year’s fourth quarter and fiscal ’19. The lower selling and marketing expenses in dollar terms primarily erodes in the fourth quarter and reflected lower trade show and travel costs in the quarter due to COVID. More generally, for the year, we incurred lower business development costs on our overseas coin operations, partially offset by higher selling and marketing expenses in our growing cards and autographs business.

G&A expenses represented 31% and 27% of revenues in this year’s fourth quarter and for the year, as compared to 23% and 24% in last year’s fourth quarter and fiscal ’19. The dollar increases in G&A expense of $1.9 million and $3.6 million in the current year periods included higher pre-trial legal settlement expenses of $0.8 million and $1.0 million, and higher non-cash stock-based compensation expense of $0.4 million and $0.6 million. The non-cash impairment charge of $0.5 million related to our Expos business and reflects uncertainty as to the viability of that business due to COVID, which has resulted in the cancellation of shows and expected social distancing concerns that will limit the number of attendees and dealers at future shows.

The resulting operating margins were 17% and 18% of revenues in this year’s fourth quarter and for the year, as compared to 23% and 20% in the same periods of last year. Collectively, the higher G&A expenses and the impairment charge discussed above, represented about 8% and 3% of revenues in the fourth quarter and for the year.

Turning to our balance sheet. The company’s cash position was $28.6 million at June 30, ’20 as compared to $19.2 million at June ’19, and $22.2 million at March 31, ’20. Net cash generated for the year was $9.4 million, including cash generated from operating activities of $19.2 million, partially offset by $6.3 million of cash dividends paid to stockholders, $2.7 million used for capital expenditures and capitalized software costs, and $0.8 million used to pay down the company’s term loan. Our cash dividend of $0.175 per share for the first quarter of fiscal ’21 will be paid this upcoming Friday, August 28, to stockholders of record on August 14.

In summary, our fourth quarter turned out better than expected as we ramped up our operation in May and June, and we finished Q4 with strong momentum primarily in the cards and autographs business. With the continued backlog in that business, we intend to build on that momentum as we enter our fiscal year ’21.

With that, I’d like to thank you for your attention. Joe?

Joseph J. Orlando — President and Chief Executive Officer

Thanks, Joe. Before we conclude, I would like to make a few comments about the close of Q4 and the outlook moving forward into our first quarter of the new fiscal year.

While we ended the quarter with a record revenue performance, Q4 was very challenging for Collectors Universe as it was for so many companies coping with the current crisis. That said, our team did a remarkable job amidst all the uncertainty and I would like to take this moment to publicly thank them and acknowledge the tremendous effort they put forth under very difficult circumstances.

As we discussed during our last earnings call in May, the collectibles market has displayed incredible resiliency during the most challenging economic climate our country has faced in decades. The demand for collectibles has not only remained strong, but it has increased in some markets, reiterating the need for our PCGS and PSA services. As more businesses shift towards e-commerce strategies, some as a direct result of this pandemic, the demand for the certifications we provide should increase. Certified items are more easily traded in the marketplace and hence more liquid. We are confident that Collectors Universe will remain a critical resource to the asset classes and customers we serve.

By the end of Q4, and as a direct result of the increased interest I just mentioned, our trading card submission backlog also rose to a record level. As a result, we have accelerated our on-boarding efforts substantially to better handle the demand for our services. There is no question that the need for social distancing has put pressure on the operation. In response, our team has reconfigured the relevant departments and introduced new shifts to help spread our employees out each day. In the short term, some efficiencies have been reduced, but the need for greater capacity is more important than ever.

I’m proud of how our team has risen to these challenges. In addition to our focus on people and process within our operational revamp in the short term, our team believes technology can help with efficiency and accuracy in the long term. In fact, we plan on introducing robotics into our process in the coming months for image recognition and capture. We have received our first prototype for testing and look forward to using this capability more widely. This represents our first major move into automation. We continue to believe that there are more opportunities to leverage technology to improve our operations. We remain focused on finding the best possible solutions for our customers.

Overall, our top priority has been, and continues to be, stabilizing and growing our core businesses in the current operating environment. While pandemic-related challenges remain, we are eager to find new ways of expanding our business and driving better returns to our shareholders. We enter fiscal 2021 with a robust market for collectibles, and we’re excited about the opportunity in front of us. As a reminder, all our expectations are governed by several factors not in our control, such as the price of precious metals, the market for collectibles and the overall state of the economic climate, primarily in the U.S. and the possibility of changing international trade policies worldwide.

Thank you for joining us today, and I look forward to speaking with you next quarter. Now I would like to open the call to any questions you may have.

Questions and Answers:

Operator

[Operator Instructions] All right. Gentlemen, it looks like I don’t have anything in the queue right now. I’d like to turn it back over to you for any additional or closing remarks, that being the case.

Joseph J. Orlando — President and Chief Executive Officer

We would like to thank everyone for joining us today and look forward to reporting our Q1 results later this fall.

Joseph Wallace — Senior Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]