Some analyst comments:
Warburg Dillon Read LLC April 30, 1999
Jeffrey Schlesinger 212-821-4715 Scott Searle CFA 212-821-3468
Ann Northrop 212-821-2410
Brightpoint, Inc. (CELL - NASDAQ) - Hold
US Electronic & Elect. Equip.
Price: 7.16
Target: 8.50
52 Week: 20.00 - 5.56
Dividend: Nil
Yield: Nil
5yr EGR: 15 %
Mkt Cap: 372m
Shrs O/S: 52m
Avg Vol(000): 1528
BV/Shr: 4.35
Debt/TC: 55%
ROE: 5%
Ent Val: 631m
CV Sec: No
Fiscal Year Quarterly Estimates - Earnings Per Share
1Q 2Q 3Q 4Q
1998: 0.16 A 0.17 A 0.18 A 0.24 A
1999: -0.02 E 0.02 E 0.07 E 0.17 E
2000:
Fiscal Year Estimates - Earnings Per Share
Prior EPS P/E Rev(m)
Dec/ 1998 A: 0.74 9.7 1629
Dec/ 1999 E: 0.23 31.1 1800
Dec/ 2000 E: 0.56 12.8 2160
CELL: DOWN, BUT NOT OUT
Summary:
We have confidence that Brightpoint will recover from its current woes, however it will likely take time. Ultimately, if the
company can replicate its successful US value-added logistics model in other markets, the company should have a more
predictable financial model with favorable operating leverage, and a significantly stronger balance sheet. We reiterate our Hold
rating, however we think that in all likelihood the stock will bottom out in the $6-$7 range.
Highlights:
· As expected 1Q99 results fell far short of the mark. Revenue of $372 million and EPS (excluding one-time charges) of
($0.02) were negatively impacted by various problems in the company‘s international markets. Significantly higher than
expected operating expenses added to the weaker than expected bottom-line.
· Revenues of $157 million in North America were ahead of our estimate of $140 million and were up over 100% from the year
ago period. Strength was seen in all segments of the company‘s business in this region. Operating profitability of the region was
negatively impacted by the ramping of infrastructure to support future value-added contracts.
· Problem of insufficient product from key manufacturers impacted results in Asia/Pacific (namely China and Taiwan) and
Latin America. This situation should improve in the coming quarters. Pricing pressure in Latin America and Asia due to
competitors‘ trading activities had material impact on gross margins which were 100 basis points below our estimate of 8.6%.
· If there is a brightside to this situation, it is that the company has assessed the situation and begun to implement changes
necessary to restore revenue growth and profitability in its international markets. Product supply problems should ease in the
coming quarters while a more normal pricing environment in many markets may take somewhat longer to materialize. We have
no doubt that the current situation will improve, the only question is how long it will take.
· Lowering revenue and EPS estimates. We are lowering our 1999 and 2000 revenue estimates from $2.1 billion and $2.6
billion to $1.8 billion and $2.1 billion, respectively. Lower revenues with materially higher SG&A expenses than previously
forecast yield significantly lower EPS expectations in 1999 and 2000 of $0.23 and $0.56, respectively. These revised estimates
represent a "base" case scenario.
· Reiterate Hold rating, however we think that in all likelihood the stock will bottom out in the $6-$7 range. Those long-term
oriented, patient investors that "bottom-fish" at current levels or lower will likely be rewarded over the next twelve months. We
would likely review our rating on signs of improving fundamentals in international markets. Near-term price target of $8.50.
Analysis:
As Expected, 1Q99 Proves Difficult for Brightpoint -
As expected, Brightpoint reported 1Q99 revenue and EPS results well blow expectations. Revenue for the quarter was $372
million, up 8.6% versus the year ago period, however materially lower than our estimate of $445 million. Excluding a $14.1
million one-time charge for the write-off of unamortized start-up and organizational costs associated with acquisitions and
establishment of logistics services, the company reported a loss of ($0.02). Including the one-time charge, the company
reported a loss of ($0.29). Gross margins were negatively impacted by price pressure from competitors‘ trading activities. Gross margins in the quarter were 76%, well below our estimate of 8.6%. Also contributing to the poor performance in the quarter
was significantly higher SG&A costs due to the ramping up of infrastructure in preparation for additional value-added logistics
business. DSOs were 46 days in the quarter and inventory turns of 9x was below the company‘s stated goal of 10-12x. Net, net,
it was expected to be a tough quarter, and by all accounts it was.
North America Remains the One Bright Spot in the Quarter -
Despite the significant shortfall in the quarter, the US operation performed very well with revenues of $157 million, ahead of
our estimate of $140 million. Handsets accounted for $10 million of the upside and accessories were ahead of our forecast by
approximately $14 million. Without the pressures of reckless trading activities, pricing in the US market remains relatively
stable. In addition, the company continues to build on its value-added and accessories business. Revenues from value-added
services were up over 40% from the year ago period. Accessory revenues were up over 300% in the quarter. We expect the
company will continue to build on this business in the coming quarters. The recent value-added services contract with Airtouch
is perhaps the most significant contract of its type in the US, and should contribute to earnings towards the end of the year and
into 2000. More important, this contract is evidence that Brightpoint is the industry leader in terms of value-added services. The
only negative in the quarter with respect to this region is that operating profitability was likely negatively impacted by the
ramping of infrastructure for future value-added business.
International Markets Experiencing Growing Pains -
While the US continues to show solid growth, the company is experiencing growing pains in its international markets. While
the problems the company faces in these markets are primarily due to temporary issues, we also believe that poor management
decisions at the regional level led to poor positioning in several markets (namely Latin America and China). In the first quarter,
Asia/Pacific accounted for $101 million in revenue, 33% below our estimate of $134 million. This shortfall was primarily in the
distribution segment of the business and resulted primarily from an inadequate supply of "hot" products from Nokia for the
Taiwan and Chinese markets. In addition, lower ASPs on distribution products resulted from competitors‘ trading activities.
Latin American revenues of $42 million were significantly below our estimate of $72 million due to the devaluation of the Real
and the temporary shortage of in-country products from key manufacturers. Revenues from EMA were $72.5 million, also well
below our estimate of $106 million. Revenues in EMA were impacted from the company‘s inability to get sufficient
direct-to-operator business to replace the loss of revenue associated with the decision to exit the trading business. In addition,
aggressive price competition from competitor‘s trading activities impacted results in this region. Combined, EMA and
Asia/Pacific generated operating losses of $4-$5 million.
Diagnosis Made and Now in the Recovery Phase -
By all accounts the company‘s performance in the first quarter was disappointing. However if there is a bright side to this
situation in that the company has assessed the situation and begun to implement the changes necessary to restore revenue
growth and profitability in its international markets. We are confident that the company‘s product supply problems will ease in
the coming quarters. More normal pricing (i.e. reduced trading activities) in many markets may take somewhat longer to
materialize. Most important in the turnaround of this story is that the company has made significant changes to regional
management to insure that new programs are properly carried out, efficient and profitable distribution strategies are developed
and manufacturer/operator relationships are improved. We have no doubt that the current situation will improve, the only
question is: what will be the rate of recovery?
Lowering Revenue and EPS Estimates -
In light of the poor performance of the company‘s international divisions, we are lowering our 1999 and 2000 revenue
estimates from $2.1 billion and $2.6 billion to $1.8 billion and $2.1 billion, respectively. Lower revenues with materially higher
SG&A expenses than previously forecast yield significantly lower EPS expectations in 1999 and 2000. We have lowered our
1999 and 2000 EPS to $0.23 and $0.56, respectively. While we acknowledge that these revised estimates represent a "base"
case scenario, we believe it is prudent given the recent string of disappointing quarters, charges, and the fact that many of the
events required to turn this story around are to some extent beyond the company‘s control. We have confidence that Brightpoint
will recover from this fall, however it will likely take time. Ultimately, if the company can replicate its successful US
value-added logistics model in other markets, the company should have a more predictable financial model with favorable
operating leverage, and a significantly stronger balance sheet. We reiterate our Hold rating, however think that in all likelihood
the stock will bottom out in the $6-$7 range. Those long-term oriented, patient investors that "bottom-fish" at current levels or
lower will likely be rewarded over the next twelve months. We would likely review our rating on signs of improving
fundamentals in international markets.
|
