Spoke with Brightpoint CFO. We were all totally confused about what this line item is. The writer at SFC, Herb Greenburg, never even talked to the CFO, nor did I, about the the line item up until now. Greenburg only asked the CEO what he thought about the short interest in CELL and its Asia exposure, and referred to the CFO to talk about the meat of CELL's finances. The CFO was out of town until today, so the author went ahead and published the article based on guesswork (a.k.a. BS).
It is good to see some contrarian opinions, but boy, did everyone, including myself, miss the boat on this line item.
As the original poster pointed out, "Herb does have a long history of being very wrong..." and this time is no expection. Read through some of Herb's other chose articles... he's pretty bearish across the broard. That doesn't matter though, it seems pretty clear that his article had an underlying goal of finding fault in Brightpoint. Well, if that was his goal, it is reassuring that he was unable to cite a single fault, and he was only able to raise a single question, which was in regards to "contract financing receiveables". A valid question...
What is Contract Financing Receiveables?
After speaking with Phil Bounsall (CFO) at length today, let me correct some of my earlier statements about what this line item actually is. Phil set me straight and provided a detailed description on "contract financing receiveables". If Herb Greenburg had spoken with Phil, Herb would now understand what it is, and may have decided not to even bother wasting his time writing the article. Phil spoke at length with analysts and institutions about the line item last quarter. Analysts and institutions understand what "contract financing receiveables" is, they support it and they are not concerned with Greenburg's article. Those of us not involved in last quarter's conference call (which includes me and Greenburg) were working off false assumptions that this line item represented credit extended to customers to purchase product when in fact, it is actually a horse of an entirely different color.
Frist, "contract financing receiveables" is not credit extended to customers to buy product. Brightpoint is not providing alternative lending institution services. Second, contract financing receiveables is completely restricted to contracts with "US carriers". It is for big name US "carriers" only. It is not an option for mom-n-pop shops and non-US companies. Third, all the receiveables are secured by equipment in their warehouses. Forth, it is basically another form of inventory with much less risk than normal inventory.
As I understand it, here is the way it works. Brightpoint provides two forms of inventory in their US warehouses. One type of inventory is equipment Brightpoint buys and Brightpoint re-sells. This is accounted for as normal inventory. The other type is equipment they acquire from contracts with US carriers. Brightpoint buys, holds and services this equipment, which US carriers re-sell (Brightpoint does not do the re-selling, the carrier does). This second type of inventory is the contract financed receiveables. Under the contracts with US carriers, Brightpoint basically buys the equipment from the carrier at wholesale, warehouses it, and performs value-added services on the equipment (programming, inventory management, battery testing etc.). The money Brightpoint spends to buy the equipment from the carrier goes into contract finance receiveables. The "carrier" then resells the equipment to retailers. Brightpoint distributes the equipment to the end buyer, and the carrier reimburses Brightpoint for the equipment, plus pays service fees to Brightpoint (at a higher margin). The money the carrier pays Brightpoint then becomes "cash" which it uses to but more equipment, and the cycle repeats itself.
This inventory has less risk to Brightpoint than normal inventory. With normal inventory, Brightpoint buys equipment and it sits in the warehouse until Brightpoint sales resells it. CELL bares the risk of reselling what they bought. With contract financed inventory, the carrier bares the risk of resale which limits the risk and cost to Brightpoint. The carrier is concerned with getting the phones out to retailers to collect airtime charges (and a small handset margin) and doesn't want to be burdened with inventory, testing etc. This inventory moves out the door with no re-sales effort on Brightpoint's part. When a carrier resells to a retailer, Brightpoint collects their original wholesale price on the handset plus a higher margin service fee for all the value-added services they performed for the carrier. We are talking about contracts with only US "carriers" here (you know - the big ones) so you know the deals are backed by steel. There is less risk in Contract Financing Receiveables than monetary receiveables (which is waiting for checks) because the money is secured by equipment in their own warehouses. This is one reason why it merits its own line item on the balance sheet (it is a lower risk receiveable). If the carrier cannot find a home for the equipment, Brightpiont can and will resell it by their own means to convert the receiveable into cash.
Contract Financing Receiveables may be different. It may be innovative. But one thing is definte for sure: it reduces inventory risk, which ultimately reduces risk for shareholders. The business is with solid US carriers, the carrier bares the burden of re-sale and in the odd event of a default, the receiveables are secured (convertible to cash) by equipment. For a company like CELL that has cash, it is an attractive service to offer to big US "carriers". It certainly helps the bottom-line by strengthening their higher margin value-added services.
Noone likes to see accounting questions come up in pubs, especially when they don't bother to wait to print the answers from the company (a shrewd attempt to stir the pot). But hey, a valid question, and now an accurate answer from the company. If anyone else is interested, Phil said that he will be happy to elaborate and answer any questions in more detail during the conference call next week.
Regards,
David G.
P.S. On a side-note, spoke to Phil a little more about Asia. He clarified the makeup of their Asian numbers. 30% - China (government, military and execs). 10% - Australia. 2% - Phillipines. All strong and 0% in the troubled economies of Korea, Indonesia etc. |
