Ringing up big returns: After near collapse in '02, Brightpoint wows Wall St.

December 19, 2005

Three and a half years ago, Plainfield-based cell phone distributor Brightpoint Inc. was on the ropes. Shares were worth less than a dollar. The company had lost $53 million in 2001, and was on pace to lose another $42 million in 2002. Bankruptcy appeared imminent.

But Brightpoint prevailed over the long odds against it.

Today, company shares trade for about $30 each. Adjusted for stock splits, they've soared 125 percent in 2005, and nearly 8,000 percent since bottoming out in the summer of 2002. The company is profitable, Wall Street is enamored, and Brightpoint has regained much of its swagger.

"There were days in 2002 during our discussions with bondholders that we very easily could have gone out of business," said Brightpoint CEO Robert Laikin. "Most companies would have ended up with the bondholders controlling everything. But the naysayers were a bit too premature in believing that we were going to disappear."

"If you look back at a stock chart to the fall of 2002, our market [value] was about $10 million," Laikin added. "Today, we're over $800 million. My guess is there aren't any other public companies that have gone up 80 [times]."

Investors who had the foresight to buy Brightpoint stock at its nadir are understandably giddy. Tim Durham, CEO of locally based Obsidian Enterprises Inc., was once Brightpoint's largest individual investor, scooping up shares throughout the company's toughest times.

Since then, Durham said, he's sold all but a few hundred thousand shares of his stock, but still considers Brightpoint undervalued.

Brightpoint's prospects were never as bleak as outsiders assumed, Durham said, but few observers back then took the time to dig beneath the surface.

These days, a cursory glance at Brightpoint's debt-free balance sheet and income statement confirms the turnaround. Before the recession, Brightpoint routinely carried $200 million or more in debt.

"It always takes Wall Street a long time to believe in a comeback, to believe in the story," Durham said. "Now it's just so self-evident, it's too hard to ignore."

Wooing Wall Street

Founded in 1989, Brightpoint grew up with the cell phone industry. Before the 2001 recession, Brightpoint was approaching annual revenue of $2 billion and expanding around the globe. But when demand for cell phones plummeted, sales dropped more than $700 million. Brightpoint spent most of 2002 settling hundreds of millions in debts it owed bondholders.

All that business is now long behind the company.

"Certainly, it was a tough learning experience for the management team," said Brian Modoff, an analyst with New York-based Deutsche Bank Securities Inc. "But now they have that experience behind them. Hopefully, it will help them avoid repeats in the future."

With 1,264 employees, Brightpoint is still one of the biggest cell phone distributors in the world. About half those employees work in Brightpoint's Plainfield headquarters and distribution center. But today's Brightpoint is smaller and leaner than its pre-recession counterpart.

Back then, Brightpoint operated in more than 30 nations. Today, it operates in just 15. It has assets totaling $468 million, 32 percent less than it had in 2000. Yet its annual sales are once more approaching $2 billion.

And Brightpoint is making money again. It posted profit of $11.7 million in 2003 and $16.3 million last year. This year, it earned just $1.6 million in the first nine months, primarily because of costs stemming from the company's decision to shutter its money-losing French operations, a move analysts endorse.

While worldwide cell phone demand is up, it is economies of scale that fatten Brightpoint's bottom line. This year, Brightpoint will handle 40 million cell phone handsets, Laikin said, a 48-percent increase over the 27 million it handled last year.

"If you're the greatest operator in the world in a dying industry, Wall Street won't reward you. The same is true if you're in a growing industry but not managing well," he said. "We're in the right space at the right time. We've [also] exceeded what we said we'd do, so we're being rewarded with a premium [price-toearnings] ratio."

With the stock up, Brightpoint insiders are cashing in some of their holdings. In the last six months, for instance, Laikin has sold more than $7 million of his company shares, according to regulatory filings. Laikin said he's had a plan in place more than 18 months to divest some of his shares monthly. The rest of his team has similar strategies.

"Insiders historically are damned if they do, damned if they don't," he said of selling company shares. "If they sell low, nobody says anything. If they sell high, they're told they knew something. All our executives have to adhere to our ... policies," which prevent them from making trades on nonpublic information.

Cellular convergence

Wall Street is excited about Brightpoint in part because it's positioning itself to take advantage of cell phone convergence-the increasing complexity of multipurpose wireless devices.

In the early days of the business, Laikin recalled, a handful of wealthy customers paid thousands of dollars for car phones that offered, at best, spotty telephone service. Since then, cell phones have evolved into everyday devices for the masses. And their purpose has stretched far beyond telephone calls.

Already, phones equipped with cameras, games, Internet service and instant messaging are common. Before long, Laikin said, they'll be able to play songs as easily as iPods, display TV shows and more. Each new application shortens the cell phone replacement cycle, Laikin said, which now runs about two years.

"In the coming years, we'll see consumers adopting more data applications," said Hughes de la Vergne, principal analyst for Stamford, Conn.-based technology research firm Gartner Inc. "E-mail and wireless messaging will lead the way."

That's why Brightpoint is moving beyond simple cell phone distribution. As the devices get increasingly complex, they become more difficult to customize and activate for customers.

In the past, Brightpoint was the middleman between cell phone makers like Nokia and consumer companies like Sprint. The Plainfield company purchased cell phone handsets wholesale, warehoused them and shipped them in smaller quantities.

Today, Brightpoint is brokering deals with wireless content providers, such as ESPN. As content providers increasingly enter the wireless market, delivering streams of audio and video, Brightpoint wants to fill the pivotal role of setting up and activating cell phones customized to every individual. That means evolving from a distribution business into mass customizer.

Brightpoint board member Bill Hunt, chairman of locally based Hunt Capital Partners LLC, said he's impressed with the company's ability to juggle the many relationships necessary to fill that role.

"You can trip over your own feet and offend a customer by aligning with another one. The ability [of] that organization to keep its eye on multiple balls they're juggling is really quite remarkable," Hunt said. "If there's a role in the value chain that we can play, these guys are going to find it."

Investor Durham also approves of Brightpoint's strategy.

"They're really becoming more of a logistics company than a distribution company," he said. "As that happens, the market will value them higher."
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