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Summary

  • Revenue was up 3% sequentially but down 1% Y/Y. Backlog increased 8% Q/Q. EPS fell 41% Y/Y and 16% Q/Q to $0.25.
  • After four weeks, it is too early to evaluate the contrarian turnaround thesis. However, there are green shoots of organic growth in the North American markets and several investments areas.
  • I reiterate my long thesis. I keep the target price at $32, offering a 60% total upside within several years. However, BBOX has yet to prove the turnaround is working.

Black Box Corporation, Inc. (NASDAQ:BBOX) reported uninspiring Q1 FY2015 results (SEC filing, earnings call, press release). The company delivered revenue of 245M, a 3% increase Q/Q and down 1% Y/Y but at the high end of its own guidance. The six-month order backlog now stands at 198M, up 8% Q/Q, attributable to large contracts in the commercial services business within North America. Net income was $3.9M, down 43% Y/Y. Diluted EPS was $0.25, down 41% Y/Y. Non-GAAP operating net income was $6.4M, down 27% Y/Y and down 16% Q/Q. Non-GAAP operating EPS was $0.41, down 24% Y/Y and down 15% sequentially. BBOX provided $4.4M to shareholders by repurchasing $3.0M of common stock and paying $1.4M in dividends. For the second quarter of fiscal 2015, the company is targeting revenues in the range of $250M to $255M and non-GAAP operating EPS in the range of $0.50 to $0.55. For fiscal 2015, BBOX is targeting revenues in the range of $990M to $1.01B and non-GAAP operating EPS in the range of $2.07 to $2.27.

BBOX's recent results are uninspiring. However, there are some green shoots of organic growth, in line with the company's strategy of delivering organic growth in fiscal 2015. The sequential revenue was up 3% and the backlog grew 8% Q/Q. In the services business BBOX generated both sequential and Y/Y revenue growth which was entirely from North America. The core telephony and UC business, which has been under pressure for the last few years, was essentially flat with the prior year. The flat, stabilized sales provide an opportunity to grow just moderately in other segments and still end up growing overall sales. The Cisco and wireless solutions practices both delivered double-digit Y/Y growth. The Cisco pipeline continues to expand. 40% of the Cisco backlog is from outside the original core region, showing some signs of the regional expansion strategy starting to bear fruit. The wireless practice has seen significant increase in opportunities. Although this go-to-market approach comes with lower gross margins than the enterprise sales, BBOX plans to continue pursuing these opportunities in order to grow sales and expand its market presence. The pipeline for wireless opportunities has increased over 30% since year end. Overall, there have been several new investment activities with upfront costs which are expected to bear fruit in the upcoming quarters as they transform into sales. This should help achieve positive organic growth in several quarters.

My long thesis is very recent, being just one month old. So for now, I reiterate my long thesis and my $32 price target. However, due to the past mediocre BBOX stock performance, it is unclear when the stock will reflect the higher valuation, so it can take several years to reflect the value. With Black Box trading at a multi-year low of around $20, it is a good time to enter a small long position here. However, investors should note that this is not one of my high-conviction long stock bets due to BBOX's mediocre past performance. Management has yet to prove it is serious with its new strategy of primarily organic growth and value generation for shareholders. It is not very convincing when I see falling margins partly due to rising stock-based compensation when investors who purchased before my thesis lost 30% of value in the past six months. Until several years of solid performance, investors should keep this position relatively smaller than my other recommendations.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.