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Collectors Universe Inc (CLCT)
Q2 2020 Earnings Call
Feb 4, 2020, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe's Financial Results for the Second Quarter Ended December 31, 2019. Today's conference is being recorded. 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 forecast 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 risk and uncertainties, in addition to other risk, 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.
With that, I would like to now turn the conference over to Joe Orlando. Joe, please go ahead.
Joseph J. Orlando -- President and Chief Executive Officer
Thank you, and welcome to today's second quarter conference call for fiscal 2020. I want to summarize the results for the quarter and then give you some commentary on the outlook going forward into our third fiscal quarter of the year.
Collectors Universe finished Q2 with strong overall results. Revenues in the second quarter were up year-over-year to $19.5 million from $15.7 million, a 24% increase from a year ago. The $19.5 million figure also established a new Q2 record for the Company. The strong performance was driven by double-digit growth within both major divisions as PCGS and PSA improved substantially from a year-over-year perspective. Our primary division showed an increase of 21% in our overall coin business, and 35% in our trading card and autograph business from the previous year.
Within the PCGS division, our US vintage and show services were up a combined 13% or $0.6 million compared to last year. PCGS Bulk was up approximately 15% or $0.3 million for the quarter compared to Q2 last year, continuing the positive momentum generated over the last 12 months as we head into our busier Bulk season in Q3. Overall, PCGS US was up 11% or $0.8 million versus last year in Q2.
Within our PCGS International services, while the Paris office was down about $0.3 million as a result of hosting one grading event instead of two compared to last year in the same quarter, the Hong Kong and Shanghai offices posted positive results in Q2. Hong Kong revenues improved over last year by a modest 2%, but our Shanghai office turned in a standout performance, eclipsing Q2 and fiscal 2019 by 185% or about $1.3 million. The coin business continues to gain steady traction in China.
After some restructuring, this part of our Company has generated operating income through the first half of our fiscal year, which is an important milestone. Once again, and even with the impressive performance in China, PCGS finished the quarter with a strong International coin backlog entering Q3. We are encouraged by the gradual growth in this region during the last few quarters, as it remains one of our more intriguing opportunities.
Turning our sights to the Company's other major division. The PSA and PSA/DNA business set another quarter-specific revenue record for the service. The division finished at $8.1 million and surpassed last year's Q2 revenue by approximately $2.1 million. This includes all-time record output for the division in any quarter, shipping over 770,000 total collectibles, surpassing the prior record of roughly 735,000 items set in Q1 earlier this fiscal year.
Some of the early modifications made during our operational revamp are helping improve efficiency, but the backlog continues to grow to unprecedented levels. The faster we have returned the product to our customer base, the faster the submissions come back to us. In Q2, PSA receiving averaged over 68,000 submissions per week with peaks north of 85,000 units toward the end of the quarter, the highest weekly figures in our history. As we stand here today, the PSA backlog has surpassed the 1 million unit mark. While this trend is extremely positive for the growth of the business, our Company continues to invest in people and technology, which can help improve turnaround times for our loyal customer base.
Returning to our overall business, gross profit margins were 56% for the quarter, which was the same a year ago. Our operating income for Q2 after non-cash stock-based compensation was $3.3 million compared to $2.2 million in the previous year. Net income was $2.6 million for the second quarter of fiscal 2020 or $0.29 per diluted share, which was up from $1.5 million and $0.17 per share in the prior year.
Now, let me turn it over to Joe Wallace for a more detailed review of our financial performance in Q2. Joe?
Joseph Wallace -- Senior Vice President and Chief Financial Officer
Thank you, Joe. I will now give a brief overview of the financial results for the second quarter and first six months of fiscal '20. In this year's second quarter, the Company generated record second quarter revenues of $19.5 million, earned operating income of $3.3 million and net income of $2.6 million or $0.29 per share. This compares to quarterly revenues of $15.7 million, operating income of $2.2 million and net income of $1.5 million or $0.17 per share in the second quarter of fiscal '19.
In the first six months of fiscal '20, the Company generated record first half revenues of $39.7 million, earned record first half operating income of $7.9 million and net income of $6.2 million or $0.69 per share. This compares to quarterly [Phonetic] revenues of $33.2 million, operating income of $5.0 million and net income of $3.6 million or $0.40 per share in the first six months of fiscal '19.
The second quarter revenue increase of $3.8 million or 24% to $19.5 million for the quarter included increases of $2.1 million or 35% in cards and autographs, and $1.8 million or 21% in coins. The cards and autographs increase represented record second quarter revenues, and that business has achieved quarter-over-quarter revenue growth in 37 of the last 38 quarters. The coin increase of 21% included improved US revenues of 11%, mainly from vintage coins. China coin revenues in Q2 increased by $1.3 million or 185% to $2.0 million for the quarter. France and Hong Kong revenues were down by about $0.3 million, reflecting one less grading event in France in this year's Q2.
The six months revenue increase of $6.5 million or 19% to $39.7 million included increases of $4.1 million or 34% in cards and autographs, and $2.7 million or 14% in coins. The cards and autographs increase represented record first half revenues for that business. The coin increase of 14% included improved US revenues of 7%, mainly from modern and vintage coins. China coin revenues in the first six months increased by $1.5 million or 86% to $3.3 million. France and Hong Kong revenues were up by about $0.1 million in Hong Kong. Combined, the coin business, and the cards and autographs business represented 95% of revenues in the first six months of the year and reflects the continued importance of those two businesses to our overall financial performance.
As discussed in prior years, our third fiscal quarter is typically our seasonally strongest quarter of the year in the United States for coins due to the release of Gold and Silver Eagles by the US Mint in that quarter, and we expect that trend to continue this year. In addition, we expect that our cards and the autographs revenues will continue to grow in a stable manner as that business continues to have a record backlog of submission for authentication and grading.
With respect to China, which was about 8% of revenues in the first six months, our expectation had been that we would see improved revenues in this year's third quarter as compared to last year's third quarter based on strong submissions of coins at our China grading events and finishing the second quarter with a strong backlog. However, the recent coronavirus outbreak in China with related travel restrictions and business closures could slow the momentum we are currently experiencing in China, at least in the near term. For completeness, we added a risk factor for this matter in our Form 10-Q that was filed with the SEC today.
The gross profit margins were 56% and 58% in this year's second quarter and first six months as compared to 56% and 57% in the same periods of last year. The higher gross profit margins in this year's second quarter and six months was due to improved margins in our coin business due to the higher revenues, partially offset by lower gross profit margins in our cards and autographs business as we build capacity to reduce the record backlog in that business. As previously disclosed, there can be 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 '19, our gross profit margins vary between 54% and 64%.
Our combined operating expenses represented 39% and 38% of revenues in this year's second quarter and six months as compared to 42% of revenues in last year's second quarter and six months. Selling and marketing expenses were 13% of revenues in this year's second quarter and six months versus 16% of revenues in last year's second quarter and six months. In dollar terms, selling and marketing expenses were substantially unchanged due to lower business development costs incurred at our overseas coin operations, for the most part, offset by higher selling and marketing expenses in our growing cards and autographs business.
G&A expenses represented 27% and 25% of revenues in this year's second quarter and six months as compared to 26% in last year's second quarter and six months. The dollar increase in the current year periods include higher payroll related related costs, including higher performance-based incentives due to the improved performance of the business, higher legal related expenses and higher non-cash stock-based compensation expense. Primarily as a result of the increased revenues and improved operating leverage, the increased operating income of $3.3 million and $7.7 million in this year's second quarter and six months represented an increase of 48% and 57% over the $2.2 million and $5.0 million earned in Q2 and the first six months of fiscal '19.
Our operating margins were 17% and 20% of revenues in this year's Q2 and six months as compared to 14% and 15% in the same periods of last year. Adjusting for non-cash stock-based compensation expense, the operating margins were about 19% and 21% in this year's second quarter and six months as compared to 15% and 17% in last year's Q2 and six months.
Turning to our balance sheet. The Company's cash position was $22.2 million at December '19 as compared to $19.2 million at June '19 and $12.4 million at December '18. Net cash generated of $3.0 million in the first half of the year included cash generated from operating activities of $7.9 million, partially offset by cash dividends paid to stockholders of $3.1 million, $1.4 million used for capital expenditures and capitalized software costs, and $0.4 million used to pay down the Company's term loan.
On January 3, -- I'm sorry, on January 23, we announced our third quarter cash dividend of $0.175 per share, which will be paid on February 28 to stockholders of record on February 14.
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 Q2 and the outlook moving forward into our third quarter of the fiscal year. Q2 marked the fourth consecutive quarter where Collectors Universe set a new revenue record for the respective quarter. As I stated during our last earnings call, we continue to be focused on fundamentals and that focus has a lot to do with our positive performance over the past year.
Our operational revamp is at the top of the priority list. This is how we move the millions of submissions we receive each year through the system. Any efficiency gains we can make here will not only help our throughput and financial performance, but it will also help our customers who depend on our service to help move their inventory.
At PCGS, we have now entered what has traditionally been our busy Bulk season, as 2020 Silver and Gold Eagles among other coins hit the market [Indecipherable]. Interestingly, one of the more noteworthy coins of the season is scheduled to be unveiled in April as the Naismith Memorial Basketball Hall of Fame Coin hits the street. PCGS is in the process of developing a diverse menu of customized packaging to accompany the coins once received.
In addition, PCGS officially launched domestic banknote grading in January to complement our US coin and International banknote services. This logical extension of our brand should prove to be a valuable addition for our customer base, especially for those who sell both collectible coins and paper money, which is fairly common.
As noted earlier, our coin business in China has been steadily gaining traction during the last several quarters. That said, our business in Shanghai may be adversely affected by the coronavirus outbreak and the related travel restrictions in the short term. While China revenues are not a material part of our overall revenues at this time, the outbreak could impact some of the momentum generated in previous quarters. The significance of the impact will, of course, depend on a number of factors, including the ultimate geographic spread of the virus and the duration of the outbreak.
Turning to PSA, the division keeps growing as renewed interest in modern card collecting has been driving our submission volumes to new levels. This past fall, PSA reached an interesting milestone in the non-sports market. In October, PSA certified its 1 millionth Pokemon card. And most of those million cards have been graded inside the last three years. Shortly after reaching this milestone, a single Pokemon card, a PSA Mint 9 1998 Japanese Promo Illustrator card, sold for $224,250 at auction in November.
Pokemon is merely one category inside the increasingly popular non-sports genre. But it has become a material contributor to the business as youngsters who started playing this popular game in the late 1990s are now entering their 30s. Like baseball cards were for me as a child, Pokemon is nostalgic to an entire generation. The franchise, which is known worldwide, continues to produce product. The submission volumes and prices paid for rare or exceptional Pokemon card shows how real this market is.
As much of a contributor as Pokemon has been to PSA, it hasn't been the main driver of the business. That driver is the market for PSA-graded modern sports cards. This rejuvenated segment of the market is more robust that at any point in our Company's history as younger generations of collectors are becoming more active. In fact, around 80% of our approximately 1 million [Phonetic] count backlog are of the modern variety at PSA. And the vast majority of that 80% are sports cards. This extremely encouraging -- this is extremely encouraging not only for PSA but for the industry at large.
In the second half of our fiscal year, the management team continues its focus on maximizing efficiency in operations as we delve further into our busy Bulk coin season. In addition, new anti-counterfeiting security features are being incorporated into our 2020 PCGS and PSA products. A security chip, otherwise known as NFC or Near Field Communication technology, will be embedded into some of our products, so collectors and dealers can verify the product has, in fact, been certified by our Company. This kind of technology is currently being used in a variety of industries, including the world of luxury goods, but it has never been used in the collectibles world for this purpose.
By simply touching our certified product with a current smartphone, a verification link will instantaneously appear on the screen. The link will provide the exact information of the certified collectible in our database. The embedded security adds a new level of sophistication to the validation process and next-level protection for our certified products. PCGS has already announced the addition of this new technology and PSA will be doing the same in the coming weeks.
Finally, we are exploring new opportunities that can help us profitably grow the Collectors Universe business in the future. Of course, 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 US, 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
Thank you. [Operator Instructions] At this time, I'm showing no questions in the queue. I'll turn it back to Joe Orlando for closing remarks.
Joseph J. Orlando -- President and Chief Executive Officer
We would like to thank everyone for joining us today and we look forward to talking with everyone at the close of Q3.
Operator
[Operator Closing Remarks]
Duration: 21 minutes
Call participants:
Joseph J. Orlando -- President and Chief Executive Officer
Joseph Wallace -- Senior Vice President and Chief Financial Officer
