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Collectors Universe Inc (CLCT)
Q3 2020 Earnings Call
May 6, 2020, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, good afternoon, everyone, and thank you for joining us to discuss Collectors Universe's Financial Results for the third quarter ended March 31, 2020.
[Operator Instructions]
With us today from management are Mr. Joseph J. Orlando, President and Chief Executive Officer, and Mr. 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 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.
With that, I would now turn the conference over to Mr. Joseph Orlando. Please go ahead, sir.
Joseph J. Orlando -- President and Chief Executive Officer
Thank you, and welcome to today's third 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 fourth quarter of the year. First and foremost, the Collectors Universe team hopes that you and your loved ones are safe and holding up through the COVID-19 crisis. It has been a challenging time for everyone, but the health of the people that matter most to us takes priority, crisis or no crisis. We appreciate the effort that so many people have made to help all of us navigate this difficult situation.
Turning to the business. And as we move forward through the earnings call, context will be of the utmost importance due to the fallout from the pandemic. Please keep in mind that our domestic authentication and grading business was shut down entirely for the last two to three weeks of March. The fallout included the cancellation of some major trade shows as well. In addition, while it is not yet a material part of our overall revenues, the PCGS China operation was also impacted earlier in the quarter as this region wrestled with the same virus-related issues. Unfortunately, all of the aforementioned issues and more make year-over-year comparisons to last year's third quarter less meaningful. That said, what we will focus on during this call is what we have done and will continue to do to adapt to the COVID-19 situation. So with that in mind, let's proceed with a review of the quarter and our approach moving forward.
Considering the circumstances, Collectors Universe finished Q3 with solid overall results. Revenues in the third quarter were $18.7 million, despite the aforementioned obstacles. In fact, even though we ceased operations at our headquarters after the Governor of California issued a shelter-in-place order on March 20, we only fell short of last year's Q3 record of $19.5 million by about 4%. Again, for better context, our company was still experiencing double-digit growth in the quarter prior to the shutdown. Our PCGS division finished at $9.7 million, which was down from $11.5 million or by 16% from the prior year, while PSA actually eclipsed last year's Q3 performance by $1.1 million and was up by 17% year-over-year, even though we were unable to finish the quarter. When factoring in the lost time, the PSA performance provides a real indication of how much momentum that business had heading into the shutdown.
Back at PCGS, as I stated earlier, the cancellation of a few grading events had further impact on the quarterly performance. Some of those were domestic, such as the Baltimore show near the end of the quarter, while others were of the international variety. In China, our sole Q3 grading event was canceled about midway through the quarter. Furthermore, the dangers of and restrictions on international travel barred our company from rescheduling the event at a later point in Q3. COVID-19 crisis aside, overtime, our goal has been to make the China operation less and less dependent on assistance from the US-based staff. Our ability to independently process more coins in China has improved, but some limitations remain on higher-value submissions.
That said, we believe the progress PCGS has made during the first half of this fiscal year will continue as things start to stabilize globally. The submission backlog at our Shanghai office remains robust due to current demand, and our team remains very positive about the long-term opportunity in the Chinese coin market.
Turning our sights to the company's other major division, as mentioned earlier, the PSA and PSA/DNA business set another quarter-specific revenue record for the service. This includes record Q3 output for the division, shipping over 730,000 total collectibles, surpassing the prior Q3 record of about 620,000 items set last year in fiscal 2019. As a reminder, this was achieved after losing all the working days associated with the initial shutdown. On a positive note, some of the early efforts made during our operational revamp are helping improve efficiency, but the PSA submission backlog continues to grow to unprecedented levels. Currently, the trading card backlog alone remains north of 1 million units.
Just a few months ago, in the fall of 2019, our average Q2 receiving capacity was roughly 68,000 units per week in PSA. Just prior to the shutdown, PSA had three consecutive weeks receiving more than 100,000 units. Perhaps the most important takeaway from this increase in receiving capacity is that it was achieved with the same number of people. Our receiving department was the first one tackled in our lean manufacturing revamp, and we are very pleased with the improvement. Of course, due to the challenges before us, it will take time to get back to that level of production, and we do expect to experience some inefficiencies as we ramp up the operation.
While stabilizing the business during this COVID-19 crisis is the top priority in the short term, we are committed to staying on course with our operational efficiency focus. The application of these efficiency concepts will continue. Our team believes the combination of the lean approach, coupled with technology improvements, will ultimately get us to where we need to be. Returning to our overall business, gross profit margins were 53% for the quarter, which was down from 60% a year ago in Q3. Had the company finished the quarter under normal circumstances, our anticipation was to close Q3 with fairly similar margins to last year.
Our operating income for Q3 after non-cash stock-based compensation was $2.6 million compared to $4.8 million in the previous year. Net income was $1.9 million for the third quarter of fiscal 2020 and or $0.21 per diluted share, which was down from $3.6 million and $0.40 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 Q3. 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 third quarter and nine months of fiscal '20. The company's worldwide operating results for the third quarter and its financial condition as of March 31, '20, were negatively impacted by COVID-19 in what is typically our strongest quarter of the year. Despite the COVID-19 closures, we continued to pay and did not lay off any of our employees in the quarter. At March 31, we continued to have a strong balance sheet that will enable us to ramp up our operations. In this year's third quarter, the company generated revenues of $18.7 million, earned operating income of $2.6 million and net income of $1.9 million or $0.21 per share. This compares to quarterly revenues of $19.5 million, operating income of $4.8 million and net income of $3.6 million or $0.40 per share in the third quarter of fiscal '19.
For the nine months of fiscal '20, the company generated record nine-month revenues of $58.4 million, operating income of $10.6 million and net income of $8.2 million or $0.90 per share. This compares to nine-month revenues of $52.7 million, operating income of $9.8 million and net income of $7.2 million or $0.80 per share in the nine months of fiscal '19. The third quarter revenue decrease of $0.8 million or 4% to $18.7 million for the quarter related to COVID-19. There was an increase of $1.2 million or 17% in cards and autographs, more than fully offset by a decrease of $1.8 million or 16% in coins. The cards and autographs increase represented record third quarter revenues, and that business has achieved quarter-over-quarter revenue growth in 38 of the last 39 quarters, although the growth in this quarter -- in this year's third quarter was curtailed by COVID-19.
The coin decrease of 16% included lower US coin revenues of $1.2 million or 12%. The nine-month revenue increase of $5.7 million or 11% to $58.4 million included increases of $5.2 million or 28% in cards and autographs and $0.9 million or 3% in coins. The cards and autographs increase represented record nine-month revenues for that business. The coin increase of 3% includes improved China revenues of $1.1 million or 41%. Combined, the coin business and the cards and autographs business, represent 95% of revenues in the nine months and reflects the continued importance of those two businesses to our overall financial performance.
As discussed in more detail in our Form 10-Q filed with the SEC today, our US operations remained closed until April 15 due to COVID-19, and there is uncertainty as to the level of authentication and grading submissions that will be received in the fourth quarter. However, at the end of March, we had a record backlog that will facilitate us in ramping up our US operations in the fourth quarter. Although our coin -- excuse me, although our China operation in the fourth quarter-to-date is operating at a higher level of activity than in the third quarter, it will be difficult to ramp up our operations in China to pre-COVID-19 levels due to the continuing travel restrictions that prohibits our US coin experts traveling to China in support of authentication grading events.
The gross profit margins were 53% and 56% in this year's third quarter and nine months as compared to 60% and 58% in the same periods of last year. The lower gross profit margins in this year's third quarter and nine months reflects the effects of COVID-19 and the decision to continue paying all personnel through March 31, '20. And also reflected in the case of our cards and autographs business, the buildup of capacity to reduce record backlog in that 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 '19, our gross profit margins vary between 54% and 64%.
Our combined operating expenses represented 39% and 38% of revenues in this year's third quarter and nine months as compared to 35% and 40% of revenue in last year's third quarter and nine months. Selling and marketing expenses were 13% of revenues in this year's third quarter and nine months versus 13% and 15% of revenues in last year's third quarter and nine 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 represent 26% and 25% of revenues in this year's third quarter and nine months as compared to 22% and 25% in last year's third quarter and nine months. The dollar increase in current-year periods include higher payroll related costs, including higher performance-based incentives due to the improved performance of the business, higher legal-related costs, higher consulting and outside services focused on improving our operational processes and productivity and higher non-cash stock-based compensation. The resulting margins were 14% and 18% of revenues in this year's third quarter and nine months as compared to 24% and 19% in the same periods of last year.
Turning to our balance sheet. The company's cash position was $22.2 million at March 31, '20, as compared to $19.2 million at June '19. Net cash generated was $3.0 million in the nine months, despite the effects of COVID-19 and included cash generated from operating activities of $10.3 million, partially offset by cash dividends paid to stockholders of $4.7 million, $2.0 million used for capital expenditures and capitalized software costs, and $0.6 million used to pay down the company's term loan. Today, in our earnings release, we announced our fourth quarter cash dividend of $0.175 per share, which will be paid on May 29 to stockholders of record on May 15.
In summary, our third quarter did not turn out as expected, based on the strong momentum we carried into the quarter from Q2. With the effect of COVID-19 continuing to evolve and as disclosed in our 10-Q filed today, we expect it will have a greater impact on our business in the fourth quarter than in the third quarter. However, management is actively engaged in ramping up our operations in order to minimize the negative impact on the fourth quarter. We recognize the need to be flexible and adapt to changing conditions with the objective to get into a more normalized level of activity as we progress through the fourth quarter.
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 Q3 and the outlook moving forward into our fourth and final quarter of the fiscal year. As we noted in an April 15 press release, we resumed our coin, trading card and memorabilia authentication and grading operations on a limited basis. As we have previously stated, we believe that our authentication and grading services add value to these assets by enhancing their marketability and thereby increasing liquidity to the dealers and collectors that buy and sell them. That said, protecting the health and safety of our employees and our community remains our top priority. As a result, we resumed operations only after having implemented a number of health and safety measures, including changing the configuration of our operation in order to maintain social distancing, regularly sanitizing the workspaces at our offices and adopting other health and safety protocols.
Since that time, we have gradually increased our capacity while continuing to abide by the safety protocols we have implemented. This has been achieved in part by limiting the number of people at the office at any given time. We have accomplished this by spreading out the staff through additional shifts as well as keeping those employees at home who can work remotely based on their job duties.
So far, this approach has gone as well as we could have expected. As we navigate this crisis, it is important that we continue to focus on the fundamentals because that focus is what put us in such a good position prior to the pandemic. In terms of what we view as important or priorities in the business, nothing has changed. We are not going to veer from the course that led us to increase success. If anything, this crisis has underscored the importance of these priorities. Our operational efficiency revamp, which is at the top of our list, will continue. Our customers send us their assets, and those assets, whether they are made of metal, paper, leather or wood, have market value.
What we do at Collectors Universe enables dealers, auction houses and consumers all over the world to liquidate those assets when they choose. We help facilitate commerce, the kind of commerce that can continue to function and thrive even during economic climates like this. The collectibles market has a track record of resiliency during difficult times, such as the 2008 financial crisis and the post 9/11 period. While this can certainly change at any time, currently, we see no decline in the demand for our services or waning interest in the markets we serve. In fact, auction and retail prices for items certified by our PCGS and PSA brands have ranged from solid to record-breaking even during this pandemic.
In the month of April, the Collectors Universe website set all-time traffic records for total monthly sessions and page views at a time when the entire world is dealing with the fallout associated with COVID-19. It would be a stretch to call any market or business recession proof. But the remarkable resiliency of this market has been on full display in the last several weeks. As counter-intuitive as it may seem to those not familiar with our industry or the drive behind collecting, this market has historically powered through crisis relatively unscathed.
Looking ahead to the finish of Q4, while the limited operational capacity has been helpful to us, Collectors Universe will be impacted this quarter as a result of the pandemic and its corresponding fallout. The situation continues to evolve, so our operating results will depend on a number of variables that are outside of our control, including the ultimate severity and duration of the crisis. In a crisis like this where there is no perfect playbook to adhere to, it is important that Collectors Universe plans for as many different scenarios as we can, so our company can adjust as new information becomes available.
Speaking of Q4 as it relates to PCGS, originally, the Mint was expected to launch their highly anticipated Naismith Memorial Basketball Hall of Fame coin in April. Due to the complications associated with the current crisis, the organization has delayed the release date. We will continue to monitor the situation closely and are focused on maximizing the opportunity when the coin is released. As a reminder, PCGS signed an exclusive agreement with the Basketball Hall of Fame for this new coin project. As part of this partnership, PCGS will act as the Hall of Fame's exclusive grading service. Our company will work with the Hall of Fame on designing special labels, including autographed inserts that will accompany the certified coins.
Heading into the COVID-19 crisis, the great news for Collectors Universe and its shareholders is that the performance over the past year and the strength of our balance sheet have enabled our company to weather the storm so far during this unprecedented time. Finally, we will not be deterred from exploring new opportunities that can help us profitably grow the Collectors Universe business in the future. Our vision remains unchanged. 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
[Operator Instructions]
Speakers, at this time we have no questioners in queue.
Joseph J. Orlando -- President and Chief Executive Officer
I would like to thank everyone for joining us today. Please stay safe, and we will talk next quarter.
Operator
[Operator Closing Remarks]
Duration: 23 minutes
Call participants:
Joseph J. Orlando -- President and Chief Executive Officer
Joseph Wallace -- Senior Vice President and Chief Financial Officer
