Bright Point Inc. Q1 2008 Earnings Call Transcript

|
 |  About: Brightpoint, Inc. (CELL)
by: SA Transcripts

Brightpoint Inc. (NASDAQ:CELL)

Q1 2008 Earnings Call

May 6, 2008 5:00 pm ET

Executives

Robert Laikin - Chairman and CEO

Tony Boor - EVP and CFO

Mark Howell - President of Brightpoint Americas and Co-COO

Michael Koehn - President of Brightpoint International and Co-COO

Analysts

Ittai Kidron - Oppenheimer

Brian Modoff - Deutsche Bank

Matthew Hoffman - Cowen & Company

Thomas Walkley - Piper Jaffray

Robin - Jefferies

Marianne Godwin - Octagon Capital Corporation

Robin Nazarzadeh - Weiss Multi-Strategy

Operator

Good afternoon and welcome to the Brightpoint first quarter 2008 earnings conference call. Today’s call is being recorded. At the end of the presentation there will be a question-and-answer session. (Operator Instructions) A replay of today's call will be archived for 15 days on the Company's website beginning approximately two hours after the call has ended. Brightpoint would like to remind its shareholders that there is a toll-free 24-hour Investor Relations line, 1-877-IIR-CELL. That's 1-877-447-2355.

At this time, for opening remarks and introduction, I would like to turn the call over to Brightpoint's Chief Executive Officer and Chairman, Mr. Robert Laikin. Please go ahead, sir.

Robert Laikin

Thank you for taking the time to participate in Brightpoint’s quarterly earnings release conference call to discuss the results of the first quarter ended March 31, 2008. With me today are Tony Boor, the Company's Executive Vice President and Chief Operating Officer; Mark Howell and Michael Koehn, the Company’s Co-Chief Operating officers.

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, 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 disappointed with our results in the first quarter which are a result of a few certain unexpected events. The unexpected events are the following: a pretax non-cash loss of $1.3 million in Slovakia due to our locally branded notebook distribution program which is currently under review, a pretax operating loss of $1.7 million in our recently relaunched Middle East operations, a snowstorm in Southern China in February which delayed product deliveries during the month of February and finally, our product mix shift in Europe and overall weakness in the Western European market that occurred in mid-to-late March.

Our first quarter revenue was $1.2 billion. This represents an increase of 86% over the same quarter in 2007. Our income from continued operations was $759,000 or $0.01 per diluted share. On an adjusted basis our income from continuing operations was $7.3 million or $0.09 per diluted share.

In the first quarter Brightpoint handled 22 million wireless devices. This represented a 50% increase over the units that we handled in the first quarter of 2007. In 2008, we expect to handle over 100 million wireless devices on a global basis. Our goal is to grow faster that the global wireless device industry in terms of unit growth rate and I am very confident that we will achieve this goal again in 2008.

The global demand for wireless devices continues to be healthy, which is reflected in the first quarter with an estimated selling number of 295 million to 300 million wireless devices. This represents an increase of approximately 18% year-over-year. I expect the industry to have a sequential increase from Q1 to Q2 of this year of approximately 3% to 5%. In 2008 I believe the overall strength of the global wireless device industry will continue and therefore I’d continue to reiterate my previous estimate for the selling range this year of 1.25 billion to 1.35 billion units.

I believe that this demand will continue for the next several years with the year 2011, the global selling estimate of 1.65 billion units. 3G and converged devices combined with compiling wireless services will continue to accelerate the replacement cycle in 2008 and beyond. I believe that 15% to 20% of all devices sold in 2008 will be converged devices and this percentage will increase significantly to around 75% in matured markets in the next five years.

I remain confident in our Company’s fundamentals and growth opportunities on a global basis. Our business development pipeline is very strong right now, from both operators and manufactures on a global basis. I’m excited about our two recently announced deals with two industry leaders. The first one with RIM and the second one with HTC and it was based on our re-entry into the UK with HTC support.

Our focus areas for 2008 and beyond include the following: expanding our market position in the US and Europe, we will focus on driving debt down by focusing on managing our balance sheet, we are continuing to align with leading manufacturers in the converged Smartphone space; this includes both hardware and software. As well we are aligning with leaders who are a new entrance in the global wireless industry.

We are focused on growing our presence in both India and Latin America, we will grow our mobile enhancement business globally and finally we are focused on increasing our market share in Africa. I believe that the execution of our growth strategy will enhance long-term shareholder value. Brightpoint remains focused on our commitment to increasing long-term shareholder value and profitability.

I am confident in the entire Brightpoint team’s ability to execute our growth strategy I would like to quickly thank all Brightpoint employees world wide for their dedication and hard work in the first quarter. With that I will now turn it over to Mark Howell.

Mark Howell

Thanks Bob. I will speak for a few moments about our business in the Americas and then I will turn it over to Michael to discuss the activities in our international operations and some of our global initiatives. For the Americas region, we were pleased with our overall performance in the first quarter; despite difficult economic conditions we were able to attain or intended performance objectives.

The Americas region handled 15.6 million wireless devices in Q1, 2008, a 41% increase over the first quarter of 2007. We believe this rate exceeded the industry wide growth rate of wireless devices sold in Q1 and therefore we believe that we continue to increase our market share. Our profitability measure and operating income grew by 51% as a result of a 36% increase of revenue and a 30 basis point expansion in operating margin. This increase in profitability was a result of expanding our gross margins and lowering our spending on a per unit basis.

Growth, profitability and return on capital deployed are the financial metrics by which we measure our success. We have three core lines of business in the Americas: product sales and distribution, logistic services and activation services. We believe we have strong market position in each of these lines of business and we also believe that there is significant expansion in growth opportunities in each of these. 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.

Certain industry trends are driving our growth and distribution. The continued expansion of enterprise sales channels, the increasing importance of the mass retail channel to wireless products distribution, the evolution of product distribution driving the demand for unlocked products in the open market and the proliferation of new handset manufactures entering the wireless market which are some of the trends providing these growth opportunities.

We are actively engaged in working with our manufacturer network operator and retail partners on portfolio extension opportunities as well as launching new indirect channel management programs. Accelerating migration in technology and product development, a new OEM entrance into wireless in the US and creating new product opportunities in Smartphones, GPS devices, accessories and content and application.

In just the first quarter we announced distribution agreements for markets in the America’s with RIM, Garmin, ZTE USA and Cellatel for Alcatel branded products. Brightpoint’s logistic services business delivers customized services and solutions that enable our customers to maintain a world class supply chain and a purely variable cost model.

We are providing outsource supply chain solutions for some of the more successful companies in the wireless industry and believe that there will continue to be significant growth opportunities within our logistic services line of business. The most recent example of this growth potential was realized in the first quarter, when Zone engaged Brightpoint to provide our logistics and fulfillment solution in support of its Next Generation mobile WiMAX service.

Brightpoint will support Zone's distribution, sales channel, inventory management, order processing, customer care and reverse logistics. In addition to adding new customers such as Zone, we are working to increase our market share with incumbent customers such as Tracfone, Alltel and T -Mobile as well as to deliver new services which we are currently developing such as reverse logistics and transportation management.

We believe that there will continue to be logistic services opportunities in wireless as both network operators and OEMs continue to seek ways to reduce the cost and increase the effectiveness of their supply chain. 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 stream to our retailers.

New business opportunities and activation services are being realized through the addition of new network operator partners and the development of new channels. Examples of these new channels include context center and online driven activations in support of enterprise, e-tailers and for data centric embedded devices.

Brightpoint is currently providing call center, customer support to mission management services and activation services for manufacturers such as Dell and Nokia, network operators such as Verizon and AT&T and enterprises such as Wyeth and Kaiser Permanente. In Q1, we attained our highest level of enterprise activation since launching this program.

We are actively engaged in expanding our activation services business through all channels; retail enterprise and online. The critical component of our growth strategy is to expand our geographic reach. We continue to advance this objective in the first quarter. Brightpoint Latin America is very much in a development stage but we are doing all of those things necessary to build the team, channel, supplier relationships and infrastructure required to achieve the level of success in this important market that we have experienced in Brightpoint's more mature incumbent markets.

We are beginning to deploy our end region, end market strategy and plan to have expanded our footprint into several important Latin American markets by the end of 2008. We are committed to continuous improvement in the efficiency and effectiveness of our business model, margin expansion resulting from improving our cost structure as a key performance metric on which we evaluate our effectiveness.

Initiatives related to process improvement, increased automation and the deployment of next generation information technology solutions has directly resulted in lower cost per unit and contributed to the leverage we have experienced in this period of increasing unit volume. In addition to improving our cost structure, these same initiatives have also contributed to our delivery of continuously improving levels of quality service to our customers.

We provide mission critical services to industry leading equipment manufacturers, network operators and retailers and it's the quality and dependability of these high levels of consistent performance that is our most powerful differentiator in our new business development efforts. Before I turn this over to Michael, I wanted to take a moment to thank all of Brightpoint's employees around the world for their tremendous effort and their focus on exceeding our customers and suppliers expectations.

Now Michael Koehn will provide a brief overview of activities in our international operations and highlight some of Brightpoint's global initiatives.

Michael Koehn

Thanks Mark. While I am pleased with the performance in the Asia Pacific region in the first quarter, I am disappointed with the performance in Europe and the Middle East. Performance was negatively impacted by the unexpected items in Slovakia and the Middle East that Bob discussed earlier.

Lower than expected unit volumes that we believe was largely driven by the early Easter holiday and higher than expected interest costs resulting from higher than anticipated average debt and working capital employed, during the quarter. Despite these challenges, our gross margins were higher than expected due to our favorable mix of business. As Tony will discuss in further detail, we are focused on certain key initiatives that will improve our invested capital and profitability.

During the first quarter of 2008, positive results in key international markets were a contributing factor to our ability to handle approximately 22 million wireless devices globally. We are still on track to handle over 100 million wireless devices on a global basis for 2008. We have substantially completed our integration efforts and we are now focused on realizing synergy opportunities and optimizing our global operations.

In the first quarter, our Austin operations became the first legacy Dangaard operations to be migrated to the ERP platform we chose. In addition, we are making significant progress in the implementation of this ERP platform in our other legacy Dangaard operations which would allow us to streamline operations and manage our business more effectively and efficiently. Geographically, we successfully filled our only hold in the European footprint by entering the United Kingdom with our acquisition Hugh Symons.

Additionally, we entered both the Turkey and South Africa markets with Greenfield operations. With the addition of these operations to our existing footprint, we are now in 27 countries globally. I believe that our global footprint positions us extremely well with current and future manufactures in network operators by allowing global reach and a low cost model to bring their products and service to consumers through our relationship with our over 25,000 business-to-business customers.

We continue to align ourselves with the industrialists in our space and we will continue to focus on expanding our product offerings for our customers as well as develop new channels and points of sales for our suppliers. Our recent global RIM announcement is perfectly aligned with our Smartphone strategy and it’s an excellent example of how we plan to continue to grow our sales and distribution business by expanding our supply relationships.

In this instance Brightpoint will support the entire range of RIM’s devices, accessories and software solutions into mass retail, mobile operators, mass and system integrators. This will assist retailers, operators and MVNOs in creating exciting new channels in incremental revenue opportunities. We also announced that Brightpoint has signed an agreement with Garmin. On the terms of this agreement, we will distribute the full portfolio of personal navigation devices and accessories throughout India.

In 2008 and beyond we will rollout Garmin products in other Brightpoint markets. We remain committed to executing on our growth strategy. We believe that by execution of our growth strategy, we can continue to improve our market position and in doing so increase long-term shareholder value.

Tony Boor

Thank you, Michael. For further details on the items discussed in this call, please refer to our webcast presentation available on brightpoint.com and today’s earning release. The financial performance in our global operations was mixed in the first quarter of 2008. The Americas and Asia-Pacific divisions performed very well during the quarter; however our performance in Europe was below our expectations. Overall, I’m pleased to report that our gross margins were 7.3% in the first quarter which exceeded our previous estimates.

As I look out over the next quarter or two, I believe our margins will remain near the level we experienced during the current quarter provided that our mix of business does not change significantly. SG&A expenses were inline with our internal expectations; however SG&A as a percentage of sales was higher than anticipated due to lower levels of revenue generated during the quarter.

As a result of the recent changes in our mix of sales between distribution and integrated logistic services which has resulted in slightly lower revenues and slightly higher margins we are updating our expectations for SG&A as a percentage of sales for the year to 4.5% to 4.9% from our previously communicated range of 4.3% to 4.7%.

Our tax rate came in at 44% for the quarter, which was higher than we anticipated. The increased rate for the quarter was a result of certain small discrete tax adjustments. We are still comfortable in our annual estimated tax rate of 32% to 35%. Looking towards the future, we currently anticipate recording an additional one-time restructuring charge during the second quarter of 2008 in connection with the sale of certain assets related to our Columbian operations. We estimate that this primarily non-cash restructuring charge would be in the range of $1.7 million to $2 million pre-tax.

Turning to our balance sheet and cash flow statement, I am very proud of the teams improved working capital management efforts, which generated nearly $100 million in positive cash flow from operations in the first quarter. The positive cash flow allowed us to reduce our debt balances by more than $100 million during the period. As a result, I am raising our target for reported debt reduction to $150 million to $200 million for the year. This is up from our previously stated target of $100 million to $150 million.

Our leverage also improved in the quarter. We successfully reduced our calculated leverage from approximately, three times at December 31, to approximately 2.5 times at March 31. I’d like to spend the remainder of my time with you today; outlining certain of the major initiatives we are pursuing to ensure we meet our targeted debt reduction goals for the year.

The entire global management team is entirely focused on the following initiatives. Our highest priority initiative is to decrease the total amount of inventory on hand by simultaneously making significant improvements in the amount of aged inventory on hand. By aged inventory, I mean inventory that has been on hand in our warehouses for more than 30-days. Another significant initiative is the identification, evaluation, renegotiation and/or termination of our lowest ROIC generating programs.

They have started a program by which, we will continually evaluate our various customer and supplier programs, to identify those programs where the returns do not meet our internal ROIC targets. Such sub-par ROIC performing programs, will be thoroughly analyzed and evaluated and appropriate actions will then be taken to improve specific returns or we will terminate the under performing program.

We are currently at value in our local branded laptop computer program in Slovakia, which contributed to the poor performance in Europe in Q1. We incurred an incremental $1.3 million, an unexpected cost associated with that program and we also experienced a significant fall off in volumes in Q1 as a result of channel or market changes. The results in the first quarter from this program in Slovakia were unacceptable to me.

We also continue in our evaluation of the economic benefits at the early pay discounts currently being offered by vendors in Europe. Based upon our conclusions, we are taking the appropriate course of the action to ensure the best possible impact on shareholder value. Other key initiatives include: the improvement in our management and collection of aged receivables, renegotiation of certain of our vendor’s terms and conditions, renegotiation of certain of our customer’s terms and conditions. Negotiation to eliminate the need for certain standby letters of credit with certain vendors and numerous cost optimization, expense reduction, synergy initiatives including aggregation and renegotiation of spend, centralization and shared services opportunities.

I’m excited about the positive impact these initiatives will have in reducing our debt levels between now and the end of the year, as well as in the increased shareholder value that they will create as a result. I’d like to thank all of our employees worldwide for their continuing contributions to our successful performance and I’d like to thank you for joining in us today. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Ittai Kidron, with Oppenheimer.

Ittai Kidron – Oppenheimer

Thanks for the color guys. Tony, a couple of questions for you, first on the losses, these onetime losses that for some reason, you are not performing out the $1.3 million and $1.7 million, is it safe to assume then that the Slovakia issue since you haven’t terminated it sounds like this business, it will still weigh on the second quarter results?

Tony Boor

No, I think Ittai, it’s going to be depended on how well volumes pick up on that laptop PC business. Those losses were mainly associated with write-downs on inventory that we had in stock and so we are seeing improvement in sales a little bit, I won’t know for certain until we get rid of all of that problem.

Ittai Kidron – Oppenheimer

And with regards to your Middle East business, does this is imply that you’ve terminated that business at this point?

Robert Laikin

On which business, I’m sorry.

Ittai Kidron – Oppenheimer

That’s the one generated the $1.7 million operating loss?

Robert Laikin

No, that’s actually a re-launch of the Middle East business. We had a non-compete until August of last year, if you may recall and so this is actually re-lunching Middle East and Africa business.

Ittai Kidron – Oppenheimer

Okay. So, from here -- from there you’ll manage your Africa growth, I would assume.

Robert Laikin

Yes, that’s a -- it’s a ramp up period for that business.

Ittai Kidron – Oppenheimer

Okay, so that loss though will continue until you start generating more and more revenue from it?

Robert Laikin

Yes and I would be hopeful that we would be generating better revenues in margin in the near-term, in the next couple of quarters to help decrease that. So, maybe somewhere in the range of 50% that where we are for Q1 and then obviously work its way down from there.

Ittai Kidron – Oppenheimer

Very good. Now with regards to your -- you’ve listed a long list of areas of focus, cutting inventory, termination law or return on investment projects and so on and so forth; can you go through those and tell us which you think you can make progress on more on the near-term and which ones will take a little bit longer for you to get too?

Robert Laikin

Yes. I’m trying to go off the cut on some of these, so I miss all of them, but I feel really confident that we will make headway on the inventory reduction efforts in the near-term and that’s really just a matter of selling through viable product and one other things we will most likely do is we look at the levels of margin that we are getting on that product and I think that we might accept a bit lower margins on some product to more quickly move through it because its age and it’s costing the interest. We are very focused on cash flow and paying down the debt, so I think the inventory is probably the easiest quickest yet because it’s again just aged inventory not problem inventory for the most part. The early paid discounts, we have working on that one. Michael and I and a team in Europe have been working with the manufactures to renegotiate those for some months now; if we are successful, that’s something that will be able to make a change on almost immediately. So that just depends on how those negotiations go. I’m hopeful we will see something in those early on and then I think the ROIC improvement is probably of any of them is the longer term kind of program, because that’s reevaluation of programs and possible renegotiation and that’s something that won’t happen over night, so I look at those a little longer-term. I think the key focus is that we upped our forecast in debt reduction for the year, so I had previously said last quarter it was $100 million to $150 million debt reduction in ’08. We have now taken that up because of the good performance rate in Q1, $150 million to $200 million reduction in reported debt by the end of the year.

Ittai Kidron – Oppenheimer

And you are still sticking to margin -- it sounds like part of the inventory as you mentioned lower margin as debt flows through, you are still comfortable that your margin can stay roughly plus or minus where it was in this past quarter?

Robert Laikin

Yes, well as I stated the margin was strong again in Q1 and then we talked about in Q4, is that going to hold and I think if the mix, current mix stays the same, I feel pretty comfortable with the margin because we did have a couple of charges that hit cost of goods this quarter, that actually brought margins down a bit and what I’m a little hesitant is to say that margin could be stronger than Q1, is because I think we probably will sell some product at lower margins to get rid of it and generate the cash flow.

Ittai Kidron – Oppenheimer

Bob, congratulations on two great announcements this quarter; HTC and RIM. Can you give us a little bit more color on how do you expect the ramps with those two to go through the year, sort of when does it start making any impact on your P&L and also if you could discuss your pipeline -- you kind of alluded to the fact that it’s very strong. If you can give us some more color on whether it be geographic or the type of customers, OEM and carriers and magnitude of the impacts that you see out there in the channel opportunities.

Robert Laikin

Sure. The pipeline is very active right now. I would say we are seeing more request for our services on a global basis than we ever have seen and I think it’s a reflection or a result of the merger with Dangaard. Now we have a global footprint in 27 countries globally and we don’t have a competitor that has a footprint that is that large as well as the services that we now have to offer in a lot of the Dangaard operations are being well received by customers and manufactures in those markets. The HTC deal, we are very excited about. HTC was a clear leader in the Microsoft OS products and there was a nice article today in Forbes Online about their new diamond product there. I have seen -- it’s a very exciting product, it’s revolutionary and I think there is going to be a lot of buzz, similar to the buzz that was created with the Apple iPhone launch. Once the operators and the consumers get that product in their hands and there is a whole family of products coming behind those, so our relationship with HTC is we are their largest customers in the world. We announced an exclusive deal with them in the UK and Ireland market and we -- I was in Taiwan last week and our relationship is very good with HTC and we look forward to growing with them in the future. As it relates to RIM, we expect that we will be developing the model in doing a lot of planning with RIM in the second quarter. We most likely will ship products starting in the third quarter. RIM is one of the jewels of our industry, one of the few relationships that we did not have previously. The relationship will be in all geographic markets that we operate in today, so it will be in the Americas, in Latin America, North America, all through Europe and Asia Pacific as well as Asia. So we are very excited about that. What exactly it is, it will be dependant on the channels that we go after, but we anticipate we will sell product and services to carriers in certain markets, retailers, VARS, independent dealers, a whole variety of different channels that we have today.

Operator

We'll go next to Brian Modoff with Deutsche Bank

Brian Modoff - Deutsche Bank

Good. You commented earlier about the similar results in Q2. Were you talking about some of your -- how you see your business trends in the quarter. Was that more around operative expenses?

Robert Laikin

I am not sure which -- whose comments you are referring to.

Brian Modoff - Deutsche Bank

Tony made that comment, from your results in Q2.

Tony Boor

I think that was when I was referring to the margin on Ittai’s comment, Brian.

Brian Modoff - Deutsche Bank

It was during your prepared remarks actually

Tony Boor

Yes, which was margin also; I made a comment in my prepared remarks Brian that I expect the industry to be up 3% to 5 % sequentially in Q2.

Brian Modoff - Deutsche Bank

Okay and can you kind of give us some color on the softening demand in Europe and what you saw there and where was that specifically and how is that looking in April?

Tony Boor

Q1 is typically the slowest quarter in the year in Europe. Europe has more of a -- building up of more of a hockey stick demand, the Christmas season is the strongest in Europe every year. In March there were more holidays this year; in the month of March in Europe than there have been in a long time. So the work days were limited, the industry in April certainly picked up, which wasn't difficult to do just because there were a variety of reason why the first quarter in Europe was soft for a lot of customers and companies.

Brian Modoff - Deutsche Bank

And when you talk about the rest of the world, how do you see things Bob and kind of by just using April, I know it’s still early but using that as a yardstick, but how is it looking on a region by region if you wouldn’t mind?

Robert Laikin

I would say Europe definitely will be up sequentially in the industry in Q2. I would expect similar performance in Latin America, in the US and in Asia. So typically the second quarter is stronger than the first quarter. The first quarter was strong with about 295 to 300 million units sold globally and I think it will be up 3% to 5% which is pretty standard.

Brian Modoff - Deutsche Bank

How do you see carrier information activity?

Robert Laikin

I would say its heavy and a lot of the plans that have been shared with us show for a very heavy promotion and subsidy model in Q2. The manufacturers that are launching, whether it’s the Diamond product in Q2 or the 3G iPhone, there are some exciting products that are coming into the industry that there is going to be a lot of promotional activity around.

Brian Modoff - Deutsche Bank

Okay. So kind of looking at your margins it would look perhaps Q2 having gross margins similar to Q1, obviously those are a little variable and then SG&A maybe being going at a higher rate in Q2 than for the year than you had previously made by.

Tony Boor

Yes margin percentage, I would expect are going to hold as long as the mix holds, because as it builds a tie -- we had a couple of charges in the quarter that impacted margins negatively and so I think that you could have an improvement in margins overall at the same mix assuming we didn’t have similar charges, however I think we will take a bit of a hit move and through some of this inventory just because we want to generate the cash. I think SG&A was actually really inline with our expectation from a dollar perspective. We were actually down on a constant currency basis compared to Q4 by 4% and you know a lot of our SG&A is relatively fixed and we talked about that I think last quarter as well, so I think SG&A, we are really inline on a cash basis. The real issue is as a percentage depended on where the revenue mix comes out, that’s why we raise our guidance a little bit on a percentage, but that’s not really impacting us on an actual dollar basis. Obviously, it depended on what happens with the US dollar. We may still have some impact from currency exchange and we will continue to gain some real operating leverage towards the end of the year as it unfolds and its volumes increase because you know how we always get hit when volumes are down and lose that leverage, but latter part of the year we gain a significant amount of leverage.

Brian Modoff - Deutsche Bank

And so in terms of Q2 it will somewhat depend on whether you regained something in terms of what you have to do in the inventory; any types of concessions on the inventory to move through?

Robert Laikin

Correct. And I don’t expect big concessions we are at it. It’s just a matter of -- we are balancing a fine line there paying 6% on debt versus selling through the inventory and…

Brian Modoff - Deutsche Bank

Plus you have [Inaudible] on the product you won’t sell it if you don’t. Last question, can you give us -- it’s just housekeeping actually; if you would mind giving us kind of your vendors as a percent of revenue? Nokia, Motorola etc.

Robert Laikin

Yes and so we have -- what we have is by units handled and it was fairly close to a third Nokia, a third Mot and then all the other guys and again on units handled, not necessary units we own, that’s units distribution.

Brian Modoff - Deutsche Bank

I understand, understand.

Tony Boor

And I think Brian, as you have asked in the past, who is gaining and who is losing? We are seeing HTC and I’m talking now year-over-year -- we are seeing HTC gaining market share, we are seeing LG and Samsung gaining market share and we are seeing Motorola losing market share and Nokia flat just slightly down.

Brian Modoff - Deutsche Bank

Anything on Sony Ericsson?

Tony Boor

Sony Ericsson, we are seeing slightly improved.

Brian Modoff - Deutsche Bank

In terms of going forward.

Tony Boor

No, no. Q1-over-Q1 and I think all you have to do is look at the US market with Samsung and LG and the success they are having.

Brian Modoff - Deutsche Bank

Any – can you give any color on Motorola and how they might be looking later in the year?

Tony Boor

No.

Operator

We’ll go next to Mattew Hoffman, with Cowen & Company.

Matthew Hoffman - Cowen & Company

Hey, Bob and Tony, nice job lowering the debt and receivables and of course that -- better cash flow. Question for you on the HTC Diamond, which is obviously making a lot of news today; do you anticipate having that product during 2Q in your distribution numbers or will that be more of a carrier direct product for 2Q and maybe helping the logistic side of the equation a bit more in 2Q or do we actually have the product in your topline on the distribution. Then on Nokia, we are starting to hear a bit more noise. I know you said Nokia was kind of flattish in the 1Q or about where you expected it. They seem to be making some more noise, especially in CDMA for the back half, does that help your outlook at all with rural and those guys going away a little and not a lot of Verizon exposure, but you might have it the Sprint. Talk to us through the Nokia equation in the back half, thanks

Robert Laikin

Sure. I’ll start with the Nokia question, and Michael, will answer the HTC question. So Nokia we think has nothing but upside in the US with CDMA because they’re coming off of a base is virtually nothing and we have a very large market share in the US with the CDMA players. We deal with everyone today except for Verizon and we think that if Nokia does well in CDMA, it should help our business as it relates to HTC.

Michael Koehn

Yeah. It’s Mick Koehn speaking. So, both Bob and I, we spent over the last 14 days significant time in Taipei together with our partner HCT, also reviewing our business all over the world and what you will see is a good mix of off springing deep the products that we speak about the Diamond directly to retail, but also was helping our carrier partners and other partners in them helping the product out to retail and to end-users.

Matthew Hoffman - Cowen & Company

So -- and so the Diamond does show up on the income statement in 2Q, assuming everybody executes?

Michael Koehn

Assuming everybody executes and assuming that we have the product which we are pretty certain about than you will see it show up here.

Matthew Hoffman - Cowen & Company

Okay. Tony I would like to drill down a couple more. I know you have taken a bunch of questions on operating margins and I want to drill down just a little bit more there. so I have got SG&A up about 140 basis points quarter-on-quarter and as I look through the model to get down to the 4.3 to 4.7 guidance should I model more of an increase in sales or are we looking for the cost to continue to come down as some of these one-time items, come through or we’re got to be out of the income statement? Thanks.

Tony Boor

Yes, I think it’s -- the cost piece, the one-time stuff in nature is going to be more or so up in cost of goods, other unusual items. Now obviously SG&A is impacted now-a-days with all of the Dangaard and CellStar acquisitions, but it’s more so an issue of revenue versus SG&A spending and so I would expect that we will continue to gain some synergy but SG&A was not one of those. We expected to gain a lot of short term synergies, those will be longer-term. As we look forward to '09 and '10 and consolidate facilities and look at aggregating functionality and shared services centers and those kind of things, so right now I'd expect SG&A to be as you are trying to model it out, to be more of an issue of revenue than spending.

Matthew Hoffman - Cowen & Company

Alright last question for Mark; you mentioned unlocked phones as the driver here in the US; how much of that business are you seeing right now -- is there a way to estimate your market share or as a percentage of sales or it -- should we think of it more as something that’s a helper for the back half?

Mark Howell

It certainly a helper for the back half and it’s a helper everyday, so I mean it's not latent growth. I mean we are seeing it sequentially in each month and it's also something that’s being now embraced by the equipment manufactures and network operators and I think that’s what's allowing it to grow. I think the reason it’s difficult for us to measure in terms of market share is because historically the unlocked part has come from outside the US and now because of stabilized pricing and OEM support, those channels are now a little bit formalized which is fantastic for us since we are the distributor of these products in the markets, this demand that’s existing there and this increasing demand will now be for our products and not necessarily for import products. We think that this is a trend that is going to continue to grow for a fairly long period of time as the US market begins to look more like some of the European markets in terms of how overall handset distribution takes place.

Operator

We will go next to Mike Walkley with Piper Jaffray.

Thomas Walkley - Piper Jaffray

Great, thanks. Just a couple of follow-up questions for Tony on -- now that you've had Dangaard for a while, can you share with us your targeted cash collection cycle as you go throughout the year?

Tony Boor

Well, I wish I could tell you right now. It's really going to be depended on the success of all of the initiatives that we have implemented and are implementing. I will tell you that it will improve and if we are going to generate the cash flow I guess I will leave that to you to model out if we are going to generate the cash sort of paying down $150 to $200 million of debt by the end of the year. We are obviously going to have an improvement in the cash conversion cycle, but it's really a bit tough to model because what we are really focused on is not so much reducing our total inventory number although I would like to see it down a little bit from where it was within the Q1 going to Q2 but it's more or so the mix of the inventory. I would like to see more inventory that’s been on hand less than 30 days and less inventory that’s been on hand more than 30 days because I pay in for the inventory after 30 days, so it’s really a mix issue if that makes sense to you and it’s the same kind of thing, what they are and some of these low ROIC programs, but I would expect cash conversion to come down. I am just not comfortable yet till I know how all these negotiations go with manufacturers etc to state what that number will be.

Thomas Walkley - Piper Jaffray

That’s fair and then on the other income expense line is that mainly currency or is there anything else running through there? How should we think about that line item going forward?

Robert Laikin

Yes mainly currency, mainly FX and we are obviously being hit pretty hard from an FX standpoint in Q1 and then I guess to make sure I know -- the low ROIC programs that won’t be a long-term issue and I want to make sure we are clear on that. We are chasing those things currently and we will make some decision very quickly. I am confident we will get some positive results on those in 2008, but I think it goes back to Ittai’s question; I think the impact of that is a bit longer term than the impact we will have on inventory which could happen in a matter of a few months whereas this may take four to six months.

Thomas Walkley - Piper Jaffray

Great thanks and then one last question for Bob; you have a lot of initiatives in place whether it’s expanding logistics in US or GSM in India. On your 100 unit handle does it include some of these items hitting or is that kind of on your current mix of business?

Robert Laikin

I would say that’s the base one model and it has very little of the opportunities that we see in the pipeline and then we believe that we have one -- at lease 9 out of 10 bids that have gone out in the last several years and I think that given the size of the Brightpoint Dangaard global operations our success rate will go up from 9 out of 10 to something higher.

Operator

We will go next to Bill Choi with Jefferies.

Robin - Jefferies

Hi guys this is Robin for Bill. I had a few quick housekeeping items if I might first. When you spoke about that aged inventory, can you give us a sense of what percentage that is of the -- or was of the 470 in the quarter?

Robert Laikin

I am sorry Rob, could you repeat that again real quick.

Robin - Jefferies

Sure, the aged inventory that you mentioned that was older than 30 days; can you give us a sense of what percentage that is of the total 470 million in inventory?

Robert Laikin

No, it’s not something we disclose. Just that there is some good opportunity and it’s not so much of an issue that it’s worse than historically. I think it’s more of an opportunity we identified with the Dangaard business. They being a private company had a different approach to the business in Europe than what we as a US public company did as to how we managed the balance sheet and they had a different debt structure in place. There’s a lot of reasons for it including the early paid discounts, but we are really working through some culture changes as we bring these two large companies together and so I am not so worried about it. Maybe to try to get to your point it’s not really an ageing issue, it’s an ageing opportunity. We are trying to model the legacy Dangaard business as more so like how we manage the Brightpoint balance sheet over the last several years. I think without any question at this point we are adequately reserved, so it’s not a excess or obsolete issues, it’s truly an ageing issue. Inventory -- to give everybody just a little bit of update on inventory debt. Inventory looks like -- and we don’t have all of the numbers closed but we have had some soft numbers right, but it looks like we are down $30 million to $35 million as of the end of April versus March on inventory which is good news and then our debt preliminary numbers looks like we ended April with roughly $415 million worth of debt and our average daily debt for April was down to $449 million which is about a $64 million improvement on where our average daily debt was for Q1, because a lot of the gains in our improvement in debt came towards the latter few weeks of Q1 and the nice thing is we are seeing that continue into Q2 and I hope to keep building progress from that point on and that’s just in the month of April. So, if we continue with our efforts and these kind of results, I am very optimistic we will have some positive feedback for everybody than in Q2.

Robin - Jefferies

Okay and then looking at the cash from operation, I noticed in the Q that was boosted a little bit from the deal that slipped into Q1. Can you kind of give us a sense of how that should flow throughout the year?

Robert Laikin

Well, I wish I could tell you, because I think it’s going to come back as well to how well we do on our initiatives. Now we have got a lot of growth built into our business plan and so kind of how I have looked at it and the management team has look at it is that -- we view that all the cash we will generate from operations will be reinvested in the growth in the business and what we obtained for cash flow from these initiatives of reducing aged inventory or low ROIC programs or better collection of aged receivables, whatever all of those various initiatives maybe, but that’s what we will be using to pay down debt. Does that give you enough clarity on kind of what we are looking at?

Robin - Jefferies

Yes, that’s helpful and then I guess more broadly looking at the industry as a whole, I have seen some recent announcements that some of the Chinese manufacturers are obviously looking to grow their business this year [Huvave] and VTE. I think I might have seen 15 million units they are each targeting this year. Can you give us a sense of whether or not you’re seeing them out there more I guess on the international front?

Robert Laikin

Sure I think that ZTE and others are having good traction in certain markets. We do business with these companies. Any new entrance in the wireless space or any existing large player in the marketplace typically has discussions with Brightpoint if before Brightpoint had 10 conversations and Dangaard had 10 conversations; today we are having more than 20 combined conversations, so more people are coming to us now that we have this -- the only global footprint and we are talking to all of them. So, whether there are big technology companies entering this space or navigation companies entering this space or Chinese companies or Korean companies or Japanese companies or European companies, we are seeing -- we are having meetings with all of these companies, because we have the low cost model in the industry with the highest customization services levels. As products become more converged over the next five years there are very few companies in the world that know how to customize these products, how to activate these products, how to repair these products and we think we are very well positioned and I think that the results of our market position or the opportunities with all new entrance into the wireless space.

Robin - Jefferies

Okay perfect and just to clarify; earlier -- I know you mentioned the percentage of handset this year that were converged devices going to 75% over the next five years, what was that percentage in ’08?

Robert Laikin

15% to 20%.

Operator

We will go next to Marianne Godwin with Octagon Capital Corporation.

Marianne Godwin - Octagon Capital Corporation

I was just curious also looking at the move of content on mobile and wondered whether you could talk about any opportunities that you see that bringing to the table at Brightpoint either logistically or otherwise and just turn it to media and advertising on mobile.

Robert Laikin

Sure. We see a tremendous amount of opportunities with the content providers. They are all good, whether its a logistics company programming these devices as the hundred million units go through our facilities in cooperation with network operators and manufacturers or we think that the Google announcement that we made in the last quarter I think was the most high profile content player out there and that was just the beginning. Multimedia devices, as they become a higher percentage of total devices sold require software loading in content and applications added to these whether they are business applications or consumer applications. We work very closely with Nokia as well and I think that as their acquisition goes through with Navtech I think it will expand our opportunities with Nokia in the contest based. We work closely with HTC, we work closely now with RIM, your friends in Canada, we are focused and have been on the enterprise side and we think we are very well positioned for that clear trend that is happening. It is in certain cases a completely different economic business model than what we are use to. It’s not a 46% onetime fee. It’s completely different in this space and it’s more of a reoccurring type residual model as well as a logistics fee model, so we are pretty excited about it.

Operator

We will go next to Robin Nazarzadeh with Weiss Multi-Strategy.

Robin Nazarzadeh - Weiss Multi-Strategy

Hi, thanks very much for taking my question. I have two for Tony and two for Bob. If that’s okay; first Tony I was wondering if you can help us with what interest expense is going to look like in the second quarter. Also if you can help us with what the euro, dollar exchange assumption is for your OpEx guidance and for Bob, you mentioned that Europe slowed down towards the end of the quarter, we are in one month into 3Q. I was wondering if you could tell us how the quarter started in Western Europe and also you kind of alluded to this earlier on the call, but you mentioned you’re focusing on North America; can you maybe give us an update on how things are going within the larger carriers that you’ve been in discussions with? Thanks very much.

Tony Boor

Okay. I’ll start here with interest expense. We haven’t given specific guidance on interest expense. From a rate perspective I don’t foresee that changing to our determent for the remainder of the year. We are paying down debt. I hope our leverage will improve and that may actually result in a lower rate for us right now, we are roughly at about 6% for Q1 and then from an actual expense standpoint, again that’s going to depend on how successful and how quickly we deliver on these initiatives and so I think from a modeling standpoint I have to leave that to you guys to do, but again look for the fact that we increased our guidance on debt reduction from $100 million, $150 million up to $150 million to $200 million on reported debt by the end of the year, so I think I have to leave that to you to model, because we’ve not provided any additional guidance. CapEx wise our exchange rate in the US dollar was strengthening -- weakening right now. Any of the numbers that I presented saying that SG&A percentages are margin and the rough kind of idea on SG&A as a dollar spend -- those all obviously take into account our assumptions of what currency is going to do. We typically don’t disclose that. Now I would tell you we are not planning on the US dollar getting significantly weaker, but we have some bit of natural hedge in place because we have so much in euro now as well as other currencies around the globe and so we have a bit less of an impact here in the US, but obviously it’s hard to say how our currency is going to change mix wise or around the world through the rest of the year.

Robert Laikin

I think it relates to West Europe and Europe in general. Europe has a hockey stick type of year. There is a Christmas holiday season in Europe, unlike with the rest of the world in the last five years. I would say March was year-over-year significantly different just because of the holidays they have in the fall this year in March, in Europe. So, I would say it really fell off the last two weeks of March. January and February and the beginning of March was normal and I think April started off back to what we expected? I mean what the market has expected. I don’t have enough time on this call and we are by the other time to go over every opportunity that we have, because we have so many opportunities globally in the logistics and the distributions space. So, whether that’s new operators, new manufacturers, MVNOs, content players etc, there is so many -- if I went through every opportunity generally in all of the different markets, we would be on for another 20 minutes and we just don’t have that much time planned today. So, I will say we like our market position, the US market; we are the number one player in the US market in logistics and distribution and our market position is because we have the most sophisticated customized logistic services at the lowest price, as well as on the distribution side, we are -- we know where all the customers are, we have been dealing with them for 20 years, we have opened accounts with them and they value the service that we provide them in the US and the US is one of our strongest market shares of the markets that we are in, so when operates or new entrant manufacturers enter the US market, typically Brightpoint is the one who wins that business, so we are very confident in the US market.

Operator

Thank you everyone. Due to the time constraints that concludes the question and answer session. Brightpoint would like to thank you for your participation in the first quarter 2008 earnings conference call. A replay of today’s call will be archived for 15 days on the Company’s website beginning approximately two hours after the call has ended. Brightpoint would like to remind its shareholders, that there is a toll free 24 hour Investor Relations phone line; 1877-IIR-CELL; that’s 1877-447-2355. That concludes today’s conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!