Brightpoint, Inc. Q3 2008 Earnings Call Transcript

Nov. 5.08 | About: Brightpoint, Inc. (CELL)

Brightpoint, Inc. (NASDAQ:CELL)

Q3 2008 Earnings Call

November 5, 2008 8:00 am ET

Executives

Robert Laikin - Chief Executive Officer and Chairman

Tony Boor - Executive Vice President and CFO

Mark Howell - President of Brightpoint Americas

Analysts

Ittai Kidron - Oppenheimer

Mike Walkley – Piper Jaffray

Jonathan Goldberg – Deutsche Bank

Jim Suva – Citi

Matthew Hoffman – Cowen

Bill Choi – Jefferies & Co.

Peter Wright – Paw Partners

Operator

(Operator Instructions) Welcome to the Brightpoint Third Quarter 2008 Earnings Conference Call. At this time for opening remarks and introductions I’d like to turn the call over to Brightpoint’s Chief Executive Officer and Chairman, Mr. Robert Laikin.

Robert Laikin

Thank you for taking the time to participate in Brightpoint’s quarterly earnings release conference call to discuss the results of the third quarter ended September 30, 2008. With me today are Tony Boor, the company's Executive Vice President and CFO and Mark Howell, President of Brightpoint Americas.

Certain statements made during this conference call may be forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. A variety of factors could cause the company's actual results to differ from the results implied or expressed in such forward looking statements. Please refer to the cautionary statements in the company’s earnings release and exhibit 99.1 and the risk factors discussed in the company’s most recent Form 10-K and Form 10-Q. These cautionary statements and risk factors are incorporated into this conference call by reference.

I’m pleased with our performance in the third quarter. Our third quarter revenue was $1.2 billion representing an increase of 4% over the same quarter in 2007. Our income from continuing operations was $6 million. On an adjusted basis our income from continuing operations was $10.9 million or $0.13 per diluted share.

Brightpoint handled 20.3 million wireless devices in the third quarter which represents a decrease of 8% over the units we handled in the third quarter 2007. Based on the results in our third quarter and our current outlook for the fourth quarter we are revising our expected units handled estimate in 2008 to be in the range of 85 to 90 million units.

I expect the global handset unit selling range for the full year 2008 to remain at 1.25 billion to 1.3 billion units. However, due to ongoing economic uncertainty and expected reduction in consumer spending on a global basis the selling range could come in at the low end of this range.

While our visibility in the overall wireless handset shipments for the global wireless device industry remain good, in the future Brightpoint will no longer provide an industry outlook for the overall wireless handset shipments. These estimates are widely available from various reliable sources. I believe that based on our increasing opportunities in the wireless distribution and customized logistic space with manufacturers, network operators, MB&O’s and retailers on the global basis that Brightpoint will grow faster in the wireless handset industry in terms of units handled.

I’m very pleased with our debt reduction of $46 million during the quarter. We exceeded our annual debt reduction target by the end of the third quarter due to the focus and hard work of our team. We will continue to focus on our balance sheet for the remainder of the year. Tony Boor will discuss this further in his comments later.

I remain confident in our company’s fundamentals and growth opportunities on the global basis. We are focused on the following areas that we believe will positively impact our EPS and ROIC. These areas include focusing on managing our strong balance sheet, successfully executing on our previously announced restructure plan and we will continue to drive cost out of our business model on a global basis. We are positioned well to win new business from leading network operators and manufacturers.

I firmly believe that companies with the low cost structure and strong balance sheets will be rewarded by both network operators and manufacturers specifically during uncertain economic times. These groups are looking to aggressively turn certain portions of their fixed costs into variable costs. We are seeing high levels of interest from both these groups. I believe that our recent announcements involving AT&T, Verizon, HTC, RIMM, Nokia, Samsung and others are direct results of our expertise in wireless and our strong balance sheet as well as our market position.

Our goal is to achieve returns on invested capital of approximately 15%. Brightpoint remains focused on our commitment to enhancing long term shareholder value and profitability. I am confident in the entire Brightpoint team’s ability to execute on our growth strategy.

Now I’ll turn it over to Mark.

Mark Howell

I will speak for a few minutes about our current business activities in Q3 and I will then turn it over to Tony to discuss our financial performance. Amidst challenging economic conditions we remain committed and focused on achieving our overall business objective. Our priorities continue to be improving our market position, enhancing our relationships with customers and suppliers, expanding geographically and effectively managing our working capital.

During the third quarter we handled approximately 20.3 million wireless devices. This compares to 19.9 million wireless devices in Q2 2008 and 22 million wireless devices in Q3 2007. We experienced a slight sequential increase in unit volume from Q2 to Q3 in each of our three regions; the Americas, Asia/Pacific and EMEA due to normal seasonality.

The year over year decline for Q3 is related to volume declines in the US and Asia which were partially offset by an increase in unit volume in Europe. The Q3 year over year decline in units in the Americas was the result of the impact of industry consolidation, soft retail demand resulting from current economic conditions and the unit volume impact of the expiration of our logistic services agreement with Comtel in Columbia.

The year over year decrease in Asia/Pacific was due to lower availability of high demand products in India and overall weaker market conditions in Singapore. The year over year increase in unit volume in Europe was the result of the acquisition of Dangaard Telecom.

In response to current economic conditions we are committed to continuous improvement in the efficiency of our business model. Margin expansion resulting from improvements in our cost structure is a key performance metric on which we evaluate our effectiveness. We remain focused on achieving operating margins in the range of 2.5% to 3% and ROIC of at least 12% to 15%.

Initiatives related to process improvement, increased automation and the deployment of next generation information technology solutions are contributing to our margin expansion. As previously announced we have implemented several key initiatives to streamline our business and improve the efficiency of our overall business model in Europe. These initiatives are focused on organizational realignment, a cost reduction plan, facility optimization and consolidation, standardized technology deployment, and a streamlined go to market organization.

We are on track to attain the objectives that we established with these initiatives. We remain committed to lowering our cost structure in Europe and achieving annualized savings of $25 to $30 million. We continue to make good progress in the areas of inventory management, working capital management, debt reduction, spending reduction and business development opportunities.

We have three core lines of business; product sales and distribution, logistic services, and activation services. We believe we have a strong market position in each of these lines of business and we also believe that there are expansion and growth opportunities in each of these. Although current market conditions can negatively impact demand for wireless products these same difficult economic conditions can often increase the value of the services that we provide to our OEM and network operator partners.

Brightpoint service capabilities help our customers and suppliers by creating new channels, accelerating speed to market, improving asset efficiency, converting fixed into variable cost business models and creating more efficient supply chains. In the current economic environment these services become more valuable to our current and prospective partners.

In product sales and distribution our responsibility is to expand our product offering for our customers and to develop new channels and points of sale for our suppliers. We are actively engaged in working with our manufacturer, network operator and retail partners on portfolio and channel expansion opportunities and programs.

During the third quarter we expanded our product portfolio with new suppliers and new markets including new distribution agreements with Samsung in South Africa and Nokia in the United Kingdom. We are also expanding our relationship with RIMM within Europe and throughout Asia/Pacific and the Americas.

In addition to traditional mobility products we are accelerating our migration into new data centric mobility products. In the third quarter we announced a new distribution agreement with CradlePoint for mobile broadband products in the US market. Most recently we entered into a distribution agreement with Apple in Australia to distribute the iPod product range and iPod genuine accessories. By moving into the portable music space with iPod we are creating a new product category for Brightpoint.

In addition to portfolio expansion a critical component of our growth strategy is to expand our geographic reach. We continue to advance this objective as we deploy personnel and begin in country commercial activities in both Guatemala and Argentina. Guatemala will serve as Brightpoint Latin America’s hub for Central America and we view Argentina as a critical market in which we must have a physical presence to accomplish our share objectives in Latin America.

We are confident that we are in a market position to deliver definitive value to our key suppliers and to the sales channels and markets in which we operate. On the logistics service area we are deeply involved with both mobile operators and OEMs and outsourcing opportunities as the macro economic conditions are causing everyone to focus on supply chain optimization and evaluating our fixed costs compared to more attractive variable cost structure available through outsourcing to Brightpoint.

We believe that there will continue to be numerous logistic services opportunities in wireless as both network operators and OEM continue to seek ways to reduce the costs and increase the effectiveness of their supply chains. As new entrants such as cable companies begin to implement very efficient go to market strategies in wireless. Through our activation services line of business we are developing new subscribers for our network operator partners, facilitating the processing of subscriptions for non-traditional channels and providing incremental revenue streams to our retailers.

New business opportunities in activation services are being realized to the addition of new network operator partners and the development of new channels. Examples include contact center and online driven activations in support of enterprise, e-tailers and for data centric embedded devices. To support these opportunities in activation Brightpoint has entered into a relationship with Synchronous. Synchronous is a leading provider of on demand transaction management solutions to the communications service provider market.

The relationship with Synchronous has launched in the US to support both Dell and Nokia.com with the intention to migrate this end to end solution to additional Brightpoint markets around the world. We believe that by remaining committed to the efficiency of our overall business model, staying focused on our balance sheet metrics and converting the opportunities in our sales pipeline that we will continue to improve our overall market position and increase long term shareholder value.

Now Tony Boor will provide an overview of our financial performance in Q3.

Tony Boor

For further detail on the items discussed in this call please refer to our webcast presentation available on Brightpoint.com and today’s earnings release. I am pleased with our overall results for the quarter despite a turbulent market and challenging global economic condition. We were able to deliver adjusted earnings per share in the quarter of $0.13 per diluted share while also making significant progress on many of our key initiatives.

I know that many of you listening today and have questions about the progress we have made relating to our debt reduction initiatives as well as our available borrowing capacity and liquidity. Therefore I will spend the majority of my time today providing you with pertinent debt and liquidity related information as well as some brief updates on our ongoing spending reduction initiatives and the measures we are taking to mitigate our risks in light of ongoing economic uncertainty.

Our existing debt structure is comprised of a US term loan, a European term loan, a global revolver and various small in country credit lines. At the end of the third quarter we had largely only term debt outstanding. As of October 31 we had paid down our term debt in Europe to a point such that we do not have required principle payments due until 2010. The outstanding term amount in Europe was $91 million. We paid down our US term debt to points such that we do not have required principle payment due until 2011. The outstanding term amount in the US is $75 million.

The interest rate on our global revolver and term debt is based upon relevant currency Libor rate plus 100 to 200 basis points. The additive basis points are dictated by a pricing grid that’s based upon our leverage ratio at the end of each quarter. For Q4 2008 our pricing will be Libor plus 125 basis points or slightly less than 6%.

Our debt structure is covenant light the two most applicable covenants are leverage and interest coverage. Our leverage ratio is based upon bank defined EBITDA on trailing 12 month basis and is currently capped at a maximum of three times debt to EBITDA. At September 30 our calculated leverage ratio is approximately 1.3. Our trailing 12 month bank defined EBITDA was approximately $147 million as of September 30. That would imply a maximum quarter end debt balance allowable of $440 million.

It should be noted that this covenant is only measured at the end of each quarter. Therefore we are allowed to borrow incrementally higher amounts throughout the quarter so long as we repay those amounts so that by the end of the following quarter we are at or below our cap on it.

Our interest coverage ratio is a net cash interest coverage ratio and is set at 4:1 as measured by a trailing 12 month net cash interest expense and the previously defined bank EBITDA. Our trailing 12 month net cash interest expense as of September 30 was approximately $26 million which required we have a minimum of approximately $105 million in trailing 12 month bank defined EBITDA.

Our current bank group is very well diversified and is comprised of 13 of the largest financial institutions from around the globe including RBS ABN, Wells Fargo, Citibank, Nordea, GD Capital, Bank of America, Deutsche Bank, DnB Nord, BTMU, Fifth Third, HSH Nordbank, BMO and National City. The largest positions are held by Bank of America and Nordea and RBS ABN.

We currently don’t believe that any single or even small group of bank failures within the group of participating banks would cause us a business limiting constraint as we are currently utilizing only a small periodic draw downs on our global revolver. We are continually monitoring the participants within our bank group and their related financial strength and willingness to fund.

As I look back over the past nine months I’m reminded of the tremendous progress we have made towards our debt reduction initiatives. In mid January we had debt in excess of $500 million and we ended the third quarter with total debt of approximately $185 million a reduction of more than $300 million or 60% plus. We also ended the quarter with cash on hand of $102 million.

We accomplished this significant reduction by improved management of our balance sheet, renegotiation or termination of programs that did not provide an adequate rate of return, discontinuing our European policy of taking early paid discounts offered by our vendors, negotiating more favorable terms with our vendors and through positive earnings.

As I look forward we will continue to pursue further debt reductions through the following initiatives. Additional renegotiations and/or termination of programs that do not provide an adequate rate of return, additional inventory aging improvements, increased accounts receivable factoring, negotiation of reverse factoring arrangements and continued profitability.

However, I should note that we will carefully analyze our cash and liquidity requirements before making any further debt payments as we now are retiring term debt which is not easily replaced in today’s market.

One of the key initiatives that helped us reduce our debt balances was our program to reduce our total inventory levels while simultaneously improving the aging of that inventory. We continued to make very good progress on this initiative which resulted in the $72 million reduction in inventory from last quarter end. The majority of this reduction came from selling inventory that was aged greater than 90 days which has resulted in a significant improvement in our overall aging of our inventory.

Although we still have some room to improve our overall aging of inventory I believe we have significantly reduced the risk of any material obsolescence charges associated with aged products. This improvement in inventory helped us achieve a cash conversion cycle of 10 days. This represents our lowest cash conversion cycle since the beginning of 2006 and a dramatic improvement over the prior cash conversion cycle that we initially delivered with the purchase of Dangaard Telecom approximately 12 months ago.

Our average daily debt outstanding during the third quarter was approximately $300 million which represents a decrease of $112 million for the average daily debt for the second quarter. I’m very pleased with our progress in initiatives has also resulted in a sequential decline in net interest expense of $2.3 million in the third quarter.

In addition to our inventory debt reduction initiatives we continue to employ best in class credit granting and credit monitoring processes supplemented with credit insurance to mitigate our risk on accounts receivable. Currently we estimate that approximately 88% of all our accounts receivable balances are covered by credit insurance and a large portion of the risk on the remaining uninsured balances has been mitigated through the use of bank guarantees, standby letters of credit and rights of offset.

We also have a portion of our outstanding receivables that are not insured by choice due to the strong underlying financial profile of the related companies. As a result of our balance sheet improvements I believe we are well positioned for the ongoing economic uncertainty from a liquidity standpoint. We have borrowing availability of over $350 million US dollars between our global credit facility and other local credit facilities. Combining this borrowing availability with the $100 million of cash on hand at the end of the quarter we had over $450 million of available liquidity.

I look over our global balance sheet in the mid term and see that there still remain several opportunities to generate at least another $100 million of cash by negotiation of better terms with our customers and suppliers and exiting programs that do not generate what I consider to be a reasonable return for stakeholders.

Reasonable returns in my opinion are in the 12% to 15% ROIC range. We will continue our proactive disciplined approach to managing our business and our deployment of capital. We also made significant progress on our previous announced realignment of our European operations during the third quarter. As a result of these initiatives our SG&A expenses decreased nearly $8 million in comparison to the second quarter.

We will continue to implement additional cost reduction initiatives throughout the remainder of 2008. I also expect additional cost savings next year as we continue to drive costs out of our global supply chain. Our goal is to be the worlds most efficient and lowest cost provider of distribution and logistic services to the wireless industry.

I’d like to thank all of our employees worldwide for their continuing contributions to our successful performance during these very difficult and challenging times. I’d also like to thank you for joining us today. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ittai Kidron – Oppenheimer

Ittai Kidron - Oppenheimer

Congratulations and great job especially on the balance sheet I never believed it but you’re delivering on your targets, very good. I wanted to ask about the incremental cost savings you expect in ’09 out of the realignment of the European operations. What hasn’t been done already that there is still to be done that can give you around $15 million plus or minus on an annual basis to go there.

What else can you do in order to get that and how do we see those improvements is that mainly if I look at that on a quarterly basis that’s around $3 or $4 million for quarter. Should I think of that mainly going forward as a gross margin improvement or more of an OpEx improvement?

Tony Boor

I think the easiest way to look at that is what we did in Q3. We’ve implemented I’d say the vast majority of the planned reductions in Q3. There’s still a bit of additional headcount reductions and other spending initiatives that will ramp through Q4 but you can see that in SG&A alone we decreased SG&A almost $8 million, $7.5 to $8 million from Q2 run rates.

I would expect there will be another small incremental increase in the spending reductions during Q4 but if you annualize those numbers we’re definitely on track to hit the $25 to $30 million probably towards the high end of that range for 2009 on an annualized basis going forward. Only thing remaining to do as I said is there are still a few heads that need to be addressed in specific countries because of certain statutory requirements that are required in terminating folks and/or because of waiting for the business to ramp down that we terminated or renegotiated.

As far as the breakdown between margin and SG&A we haven’t given that kind of granularity and don’t intend to. I will tell you that the largest majority of the spending reductions would come in the SG&A area with the smaller portion being above the line.

Ittai Kidron - Oppenheimer

Can you give us a little more color on what is other expenses you had around $1.8 million of other expenses this quarter it doesn’t seem to be a consistent line item for you guys on the P&L from one quarter to another how should we think about that?

Tony Boor

The majority of that would be FX or currency exchange.

Ittai Kidron - Oppenheimer

You’ve mentioned a long list of opportunities in contracts that you’ve signed could you highlight perhaps the one or two that you think are the most important and that potentially could have the biggest impact on your business and also which one of those is more nearer term versus longer term.

Robert Laikin

I think that the Verizon opportunity that we announced has a tremendous up side. It’s contributed in the third quarter very little. It is still in its early stages of ramping up. We also hope to grow the Verizon business to be a bigger piece of the pie at Verizon. The RIMM business also is just ramping up and I think as we look out over the next couple years as the business becomes more smart I think that that provides a lot of opportunity.

We continue to grow with HGC as well. That’s providing a lot of opportunity. I think our close ties to Nokia historically I think as Nokia and all the manufacturers look to outsource more in these impossible economic times I think that that flows right to our business model. We’re seeing a tremendous amount of interest from operators and from manufacturers looking to take what are historically fixed expenses and turn them into variable expenses by outsourcing.

I think some of the releases that you’ve seen from major operators in the US are all saying the same thing. It’s all going to be about outsourcing. I think that our business model is set up to provide a low cost solution for that.

Operator

Your next question comes from Mike Walkley – Piper Jaffray

Mike Walkley – Piper Jaffray

Are you seeing anything of just natural share gains given the credit crisis are you seeing some your smaller competitors having trouble accessing credit and maybe you could just build on some areas or regions of the world where you see particularly attractive longer term growth opportunities?

Robert Laikin

I think that our competitors are having tremendous capital constraints. How we see that lot of we hear stories of competitors going on credit hold with manufacturers but the way we verify that is opportunities given to us whether its territory, product allocation, or other opportunities from manufacturers.

We certainly are seeing that. I think that our recent announcement with Samsung in South Africa as well as other wins that we’ve had with the big five manufacturers I believe they’ve been a direct result of manufacturers saying we want to align with the people who are going to lead on the distribution side or the logistic side and the people with the best balance sheets.

We put an incredible focus this year on our balance sheet and we’re not going to stop as Tony said on the results this quarter. We’ll continue to focus on having the best balance sheet in the industry because we believe that drives the business development pipeline.

Mike Walkley – Piper Jaffray

Congratulations to everybody on the balance sheet. A follow up question on the inventory is this at the right level, it sounds you did a lot of good work lowering the older aged inventory so should we think about inventory at these levels going forward. That would depend too on the growth opportunities. A follow up on the debt reduction, just to clarify you said don’t expect further reductions right now because of term debt, did I hear that correctly?

Robert Laikin

On inventory levels first we got inventory down to a level that we’re very comfortable with in the aging, probably more importantly is much better than what it’s been especially much better than what we started the year with. I think we’ve mitigated the majority of our risk. We’re still going to push to continue to make improvements in the aging although there’s a lot less opportunity there, there still is some and we’ll do the same thing on the receivables side of the balance sheet.

Inventory levels going into Q1 that’s the biggest thing we’re focused on right now to make sure that. It’s interesting times in this market, to understand what the seasonality is for Q4 and then what impact it will have if any for Q1. We’re trying to be very focused going into January that we have the right levels for those volumes.

From a debt reduction standpoint the thing we’re wrestling with right now is we have the availability and opportunity to reduce debt further. Obviously we had $102 million of cash on hand at the end of the quarter and we believe there is opportunity as I said to generate probably another $100 million of cash through renegotiations and additional balance sheet improvements.

Right now we’re going to hold off paying down any further debt for the most part or at least analyze that very closely because we’re down to term debt which is not easily replaceable and we have very favorable terms right now compared to the market.

Mike Walkley – Piper Jaffray

I know we’re only a month into the fourth quarter but could you just give an update on maybe some macro trends you’re seeing in terms of how this Q4 is shaping up relative to normal seasonal patterns. Are we seeing any signs of a material slow down in Q4 yet given the credit crisis?

Robert Laikin

The analysts and the people who talk about the fourth quarter all are kind of in a consensus that sequentially the fourth quarter will be up from the third quarter 5% to 10%. I think that right now it’s looking to be in the high side of that number, towards the 10% sequential gain. On an historical basis that’s as low as it’s ever been. On a relative basis in a horrible economy I think that the wireless industry has been as recession depression proof as any industry. Its still growing and I think the companies that manage their inventory levels and their spending, their business they’ll do fine.

Operator

Your next question comes from Jonathan Goldberg – Deutsche Bank

Jonathan Goldberg – Deutsche Bank

I was wondering if you could talk a little bit more about the state of the industry how you see it what do you think the industry is going to do for units in Q4 and talk about what you’re seeing for 2009?

Tony Boor

As it relates to Q4 again I think it will be up sequentially towards 10%. As far as 2009 we put in the press release and in the comments we are not going to give industry forecasts for the full year any more starting in 2009. We think that it’s irrelevant to our business. We think we’re going to grow faster than the market. There’s widely published disseminated forecasts for the industry that are out there. We’re not going to be the place that people are going to call for the industry outlook.

I will tell you with the pipeline that we have on new deals and the partnerships with Nokia and HGC and RIMM and Google and others I think that we are pretty firm that we believe we’ll grow faster than the market grows. That’s the Brightpoint story it’s not about the overall wireless market any more.

Jonathan Goldberg – Deutsche Bank

On that note could you talk about some of those, I guess you can’t talk about customers specifically but those new conversion of SmartPhone customers what you’re thinking about trends for their adoption on a geographic basis?

Robert Laikin

I think that Apple this year has forced all operators and all manufacturers to accelerate the SmartPhone trend from being a five year trend where 75% of the phones in five years will be Smart where it will be closer to three years now. I think the whole world is going Smart. If you look at any ads whether it’s in the newspaper, TV, etc. it’s all about Smart. SmartPhones drive data usage and consumers are willing to pay a premium for data service. I think we’re in the infancy of the application side and the use side of SmartPhones.

When the ARPU for AT&T on Apple devices went up significantly it opened everyone’s eyes up in the US and then as Apple rolled out globally it opened up the eyes of the operators who weren’t handling the Apple products. What’s happening is because the ARPU is higher the operators are willing to subsidize significantly higher on SmartPhones because they just do their math and say okay a consumers going to stay online for 18 months and they’re going to pay $30 extra a month for a SmartPhone or $20 so that’s $360 to $500 extra in ARPU over an 18 month period so we’re willing to give a $200 extra subsidy to the consumer to buy a SmartPhone.

Operator

Your next question comes from Jim Suva – Citi

Jim Suva – Citi

It seems like you made a tremendous progress on the restructuring and reduction of SG&A if my math is right it’s down close to $8 million quarter over quarter. If you annualize that that actually takes you actually slightly above your $25 to $30 million goal. Could you maybe talk about that $7.8 or $8 million decline was it all related to European operations or was there a little bit of something else there or am I just really looking at the next chapter in Brightpoint’s success story of really the restructuring and efforts in Europe are going better than expected?

Robert Laikin

The efforts in Europe are going well. I would certainly say that we obviously had very good results in Q3. I think back to Ittai’s initial question we have some additional reductions yet to make in Q4. We announced that we have terminated the lease in the headquarters, what was the old European headquarters in Denmark. Although that won’t have a significant impact on the P&L we will have some good cash savings from that in excess of $1 million a year because that charge was mostly taken to goodwill because it was part of the restructuring in the purchase accounting.

We are not resting on our laurels from a spending standpoint maybe to get to your question we are looking for opportunities around the world to reduce our spending and become more efficient and gain leverage and productivity. This is not going to be solely related to Europe. I think the story right now where we’ve seen the biggest chunk of this savings is clearly the European restructuring. We will continue to focus on opportunities on a global basis to make sure we’re the lowest cost provider for the market.

Jim Suva – Citi

Aren’t you already ahead of your run rate of $25 to $30 million?

Robert Laikin

Assuming that trend continues you’re absolutely correct.

Jim Suva – Citi

I’m a firm believer of all the phones going to Smart too but can you maybe give us some quantifiable examples of when you handle SmartPhone you get ‘x’ dollars for logistics versus a non-SmartPhone just so we can help quantify because I believe there’s a material economic benefit to Brightpoint. Maybe help us quantify or give us an example.

Robert Laikin

When you have a non-SmartPhone typically our fee is a distribution fee only. On a SmartPhone we have the opportunity to have a distribution fee along with a logistics fee along with an activation fee. Typically an accessory sale on SmartPhones people don’t have accessories on new products when they go from a non-SmartPhone to a SmartPhone. There’s typically three or four different ways for us to make money. Typically on SmartPhones we’re making money in more than one way.

It’s different by country, by region, depending on our relationship with the operator or with the manufacturer if it’s more distribution then logistics. It is impossible to quantify it. I wish I could, I can’t. I will tell you as the business goes smarter it is positive for our business model. So much of our costs are fixed that as we ramp up our utilization of our services in our facilities that’s where we make the most money.

Jim Suva – Citi

Is it too difficult to say on average logistics could give you ‘x’ dollars and activation ‘y’ dollars on the Smart side?

Robert Laikin

It’s too difficult right now.

Jim Suva – Citi

On Argentina you made some comments there about you need to have a presence there. Can you maybe discuss with us or let us know what your presence is there in Argentina now? When you talk about increasing your presence is it more like office or are we talking like a big warehouse like you have there at your corporate headquarters or how should we think about Argentina?

Robert Laikin

So far we’ve hired a country manager there and several sales people. Actually one of our suppliers in Argentina has seconded several of their outside sales force to us as we’re calling on operators there jointly. One of the reasons that Argentina is important to us is its relatively low risk market but it also provides great entry into the other southern cone countries. We have very little infrastructure there currently but have plans to establish more substantial presence as our revenues ramp up and we will make investments there ratably that allow us to continue to meet our ROIC requirements.

Jim Suva – Citi

Do you see this over the next one year or is it like multi-year that you need to figure presence?

Robert Laikin

Because we’re going to make the investment ratably with the growth in revenues our hope is that it is next year. We see that level of opportunity but we’re not going to invest ahead of the realization of those opportunities.

Operator

Your next question comes from Matthew Hoffman - Cowen

Matthew Hoffman – Cowen

Your average daily debt for the third quarter I think you said it was $300 million. What do you anticipate that doing for the fourth quarter what should we be modeling that number at?

Tony Boor

For October it was roughly $230 million down from the $300 million in Q3 assuming that we’re not going to pay any further debt down because its termed as I spoke about earlier I would say its somewhere in the $230 to $300 million range because obviously we’ll have fluctuations on inter-day, inter-week, month basis.

Matthew Hoffman – Cowen

You gave us Libor plus 125 basis points for the fourth quarter what was it for the third quarter?

Tony Boor

150

Matthew Hoffman – Cowen

That worked out to what effective, I could probably work it out but what was the effective interest rate?

Tony Boor

It’s going to be a little under 6% for Q4, where rates are I think, 6.4% for Q3.

Matthew Hoffman – Cowen

I’m just trying to figure out the interest rate was higher or lower sequentially, the 6%.

Tony Boor

Lower. As we’ve brought down our leverage we’ve come down in the pricing grid throughout the year. Our rate has been dropping. Obviously you’ve got a couple in what Libor in Europe is doing versus Libor in the US and the various other countries as well. It’s a bit of a mixed bag its kind of hard to quote one specific rate because you’ve got such fluctuation in different continents on the rate.

Matthew Hoffman – Cowen

If I use something around 6% on $230 million we should be fine?

Tony Boor

Yes. Just slightly over depending on what rates do. Another thing I should note is obviously while debt may not go down I would expect that cash will increase because we will continue to make improvements from a balance sheet perspective.

Matthew Hoffman – Cowen

Let’s talk about gross margins; the inventory is newer now you’ve gotten rid of the some of the older stuff. Your gross margins were actually pretty strong in the quarter given all that should we expect the gross margins with a higher revenue base in the fourth quarter continue to trend up especially with the more attractive inventory now on the balance sheet?

Robert Laikin

Top line revenue I can’t speak to but the margins as far as the rate goes I think the last three quarters we’ve had some negative impact to our margins because of trying to deal with aged inventories probably more specifically. We had, as you’ll see in the Q approximately another $4 million worth of negative impact due to low margins and obsolescence trying to move through the aged product. I think margins excluding that impact probably would have been closer to 7.5% versus the 7.2%.

I can’t tell you we won’t have any further charges because we haven’t sold through all of the aged inventory and it’s a very difficult market but I do believe that we reduced our risk in our inventory significantly because of the improvement in aging. I would expect the margins would hold unless we saw significant change in the mix of our revenue.

Matthew Hoffman – Cowen

Less risk in a tough environment rather than expansion in a good one. At the mid point of the units handled guidance I’m coming up with, check my math here, about 25% sequential units handled increase given a market that I think you said was about 10%. How should we think about that number, are you thinking really it’s more toward the lower end the $85 million than the $87.5 million mid point? Could you also speak about mix and whether you’re anticipating more on the product distribution side and less on the logistics side that will help us model gross margins forward?

Robert Laikin

As Tony said we would expect gross margins to continue at the level they’re at. To reiterate we’re not chasing a top line revenue. We’re not chasing deals that don’t provide reasonable returns for the shareholders. We are very disciplined and very focused whether it’s a manufacturer, a dealer agent business or an operator business. On the distribution side we probably could have sold another $100 million worth of product in the third quarter if we wanted to make a very low margin with a lot of risk. We’re not going to do that. We are not focusing on top line revenue.

If the fourth quarter is up 10% sequentially from the third quarter that should give you an idea if we stay flat with the industry versus outgrowing the industry that should give you an idea of how you might decide you want to model the fourth quarter for us. Whether it’s top line or EPS or what have you. We are going to stay disciplined, we think we’re going to outgrow the industry, we think the deals we have with the manufacturers we think we’re getting more mind share from the existing customers as well as new customers as they look to outsource in a bad economy I think it all plays into our business model.

Operator

Your next question comes from Bill Choi – Jefferies & Co.

Bill Choi – Jefferies & Co.

If there was an FX loss on the other expenses here what was the FX benefit on the top line? Was it more on the logistics or distribution?

Robert Laikin

We don’t provide that granularity. If anything there FX would be related to inventory typically which would be cost of goods.

Bill Choi – Jefferies & Co.

You commented about what you thought about Q4 shipments here. You have a pretty good perspective on what the inventory is currently out there can you comment where we are relative to Q4 at this point in time and how stringent have the operators become in keeping inventory low heading into a recession.

Robert Laikin

This entire year inventory levels on a relative basis the previous years are at historical lows. Nokia being a leader in the market with about a 40% market share they have always been the most effective, efficient manufacturer and they manage their business with the least amount of inventory. They’ve kept the inventory in the channel relatively conservative. Motorola having the problems in restructuring and uncertainties there they haven’t built a tremendous amount of inventory either.

The other manufacturers historically the Samsung, LG’s, the Kyocera’s typically build to order they don’t really build inventory on spec. Apple and RIMM have traditionally sold out everything they can make as they gain market share from very low levels up to something more significant as more of the business goes Smart. Is there excess inventory in the global channel? I don’t think so. Are there pockets of inventory that are higher than what they should be in certain countries? Absolutely. Is it anything that concerns me on a global basis? No.

Our inventory levels are very conservative and I think that the channel is at a reasonable level of inventory going into a fourth quarter. Typically people expect the fourth quarter to be up sequentially 20% to 30%. If you had a quarter where that’s what you thought going into the year and then you changed that outlook to be up 10% sequentially from the third quarter to the fourth quarter you’d have a tremendous flood of inventory on a global basis that would lead to ASPs going down at a very rapid rate. We are not seeing that.

That tells us that there’s a reasonable amount of inventory in the channel for an up 10% sequential quarter.

Bill Choi – Jefferies & Co.

Can you mentioned which countries you do see that stock in inventory?

Robert Laikin

I would say, I can’t go by country but I would say by region I would say in certain Northern Asia regions there’s a little bit too much inventory but it’s selective by manufacturer so it might be some locally manufactured product you could figure out what country I’m talking about. In a few European countries I think inventories are a little higher but it’s selective with a few manufacturers it’s not across the board.

Bill Choi – Jefferies & Co.

You guys mentioned cash conversion cycle 10 days which would be phenomenal going back a couple years ago but I guess when I look at some of the main components of that cash conversion I guess I come to more like 20 days. This is just looking at DSOs, days in payables, days in inventory. Can you just reconcile this? I come to like about 20 days based on my calculation how do you get to 10?

Tony Boor

I don’t know that might be something we have to take offline and go through the calculation of 10 is accurate. We can do that after the call if you’d like and I can try and help you reconcile that.

Bill Choi – Jefferies & Co.

How do you look at cash conversion cycles going forward?

Tony Boor

Ten obviously is very, very good performance. I’d say we’re industry leading again where we were a couple years ago. Considering we’re only just a year out from the Dangaard acquisition I feel very, very good about that. Can we hold 10 day? We’ll certainly try and we’ve got some other things that we’re working on yet for balance sheet improvements. Like I said we still hope to generate another $100 million cash to pay down debt or fund new business opportunities.

Ten days is a very low number. Our target has always been somewhere in the 10 to 15 day range. I would certainly expect we would stay somewhere south of 15.

Bill Choi – Jefferies & Co.

With your cash that you’re generating you just mentioned maybe funding the business. If you’re not paying down debt any more how do you look at with your stock down here potential share buy back which you guys did some two years plus back? Any thoughts around uses of cash?

Robert Laikin

Keep in mind this comment I’ve made in announcing that we’re not paying any debt is only a very short term perspective. The reason we’re doing that right now is just because the uncertainty in the credit markets. I’m hopeful with what the bailouts around the world and some stability will come to the credit markets and things will get back a bit closer to normal.

Assuming things move back that direction we will certainly look at repaying some of this term debt as our first priority because that will de-risk our business and if we’ve got the cash that would be my first priority outside of if we have good business opportunities that we need to fund. We still have more than ample liquidity so it’s not a liquidity issue in my opinion.

I believe we have over $400 million when you include the cash and borrowing availabilities and then on top of that we still have a fairly significant portion of a basket within that agreement that we can sell additional receivables. I think liquidity is not an issue. We’ll look at that further at the end of the year in Q4.

Tony Boor

As far as uses of this capital and this liquidity as cash should increase on the balance sheet, we are not going and we’re not planning on going out an acquiring any businesses with the cash. We do not anticipate taking $100 million or $50 million as we’ve done in previous years and entering a new market. Don’t expect for us to enter China in 2009 and invest in receivables and inventory $50 to $100 million. We’ve analyzed the opportunities that are out there today and we associate risk to the different country opportunities.

We are focused on the continued integration of the Dangaard properties. We’re focused on lowering the SG&A globally. We’re focused on keeping inventory down. We are very risk adverse right now of putting too much of this cash out there. What does that mean we’ll do with the cash? I’m not sure. I can tell you that our Board from time to time over the last 10 years has bought stock back with excess cash. I’m sure they’ll look at that as one opportunity

Bill Choi – Jefferies & Co.

You talked about phones getting Smart and obviously opportunities with activation. Can you quantify how big activation fees are at this point and of course part of the negative here is that phones get Smart you’ve got the relatively dumb voice only phones where you did participate quite nicely on the prepaid card sales? Where is that headed? How big is that today and talk about the mix shift there?

Robert Laikin

On the activation fee side activation fees were trending toward the $150 to $200 level. That was before Apple showed operators that you could generate considerably higher ARPU. We have seen in certain markets activation fees increasing. Our business model on the activation fee side is we pass on to the dealers 85% to 90% of the activation fee. Whether the fee is going to be $150 or $300 we’re not sure in how that flows through. In our income statement obviously the higher the fee the more money we’ll make.

There are all kinds of debates from industry leaders whether subsidies will go away completely or whether they will grow. As I sit here today I think they will stay stable over the next couple years given that the SmartPhones will grow as a bigger percentage.

Bill Choi – Jefferies & Co.

The prepaid cards?

Robert Laikin

Prepaid it’s so new the SmartPhone trends I think it’s too early to figure out what’s going to happen with prepaid. Certain countries and certain regions specifically in emerging markets prepaid is the only way they go. That leads me to believe that prepaid whether to SmartPhone or non-SmartPhone they’ll still stay prepaid.

Operator

Your next question comes from Peter Wright – Paw Partners

Peter Wright – Paw Partners

Going over your savings on your press release you said you still had SG&A be flat and you think units will be up 5% to 10% you think that you’ll grow faster than units. If gross margins are flattish it means you should be able to get significant earnings operating leverage in the fourth quarter am I reading that right?

Robert Laikin

SG&A we have stated that will be relatively flat. I think it’s the assumption on the revenue and the units. Margin I believe is, unless mix changes, will be relatively flat. It all depends on what happens on the top line.

Peter Wright – Paw Partners

Because SG&A will be flat I assume it’s because the top line is going to be up a little bit, selling will be up a little bit. Does that mean we should expect SG&A to be down sequentially in the first quarter?

Robert Laikin

SG&A when we talk about being relatively flat was on the dollar basis.

Peter Wright – Paw Partners

In the fourth quarter true, I’m asking now does that mean since probably selling will be up because units will be up does that mean first quarter will be sequentially down from the fourth quarter is that the right direction we should think about?

Robert Laikin

We don’t provide that kind of granularity. I would let you know that as we stated before on numerous call our cost base is relatively fixed our SG&A is not nearly as volatile to revenue volumes as what other companies may be.

Tony Boor

If you look at our top line this year it’s basically been 1.2, 1.2, 1.2, the typical volatility that we would see are seasonability I think its slowly going away. We won’t see these up 30% quarters and then down 20% quarters because of seasonal quarters. It just feels that way right now.

Peter Wright – Paw Partners

On the SmartPhone opportunity you talked about new revenue sources. Looking at that in a vacuum will SmartPhones actually increase gross margin, keep gross margin flat or hurt gross margin?

Tony Boor

I think it really depends on which services the mix trends toward. If the SmartPhone which is a higher dollar unit if it all goes in the mix as 99% distribution then its unlikely we’ll make a 7.2% margin on distributing a $400 SmartPhone. It would be a lower gross margin on the distribution side. On the logistics side typically our margins are 15% to 30% which is a higher margin on the activation side are more in the 10% range. The beauty of SmartPhones for our business model is the incremental cost to handle a SmartPhone isn’t significantly more because our costs are more fixed than variable.

The more services we provide to the same unit the more touches we have theoretically we should make more money and it’s good for our business.

Peter Wright – Paw Partners

So it could be more dollars of gross profit in any case. You had on the front page the write off of $900,000 relating to a sale in Columbia and some realignment of some European write off. Were there any other write offs in Europe in particular that you could point to that are either in the earnings number or aren’t in the earnings number?

Robert Laikin

Probably the best place is look in the 10-Q. We give some more granularity, one I think I talked to earlier on the call was the roughly $4 million worth of obsolescence charges we took in Europe. Then obviously there’s a good portion that went to goodwill as part of the restructuring. A lot more granularity given in the Q on those.

Peter Wright – Paw Partners

Is that $4 million included in the $0.13 or that would be on top of the $0.13?

Robert Laikin

That’s included in the $0.13 that’s not added back. That was a negative impact to our gross profit and gross margin.

Peter Wright – Paw Partners

One might argue that you could have added that back and your earnings would have been slightly higher?

Robert Laikin

Yes, is that a one time or unusual obsolescence its unfortunate beast of our distribution business then we’re trying to mitigate it and reduce it going forward. Part of it’s an impact of just trying to improve the aging and reduce our debt. I hope that that will be lower in the future but I’m not comfortable saying that.

Peter Wright – Paw Partners

Now that your inventories are down would you say that you’re inventory the cost of your inventory is in good shape, better shape the amount of write offs on inventory going forward should be shrinking?

Robert Laikin

I believe we’ve significantly reduced our risk in inventory.

Operator

This does conclude today’s question and answer session. Brightpoint would like to thank you for your participation in the third quarter 2008 earnings conference call. (Operator Instructions) That concludes today’s conference call you may disconnect at this time.

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