Smarter product mix boosting Brightpoint

Bob Laikin “When you look at new phones,” Laikin said, “it’s like saying which one of your children is your favorite.”

Wireless industry analysts would love to know what kind of phone Brightpoint CEO Bob Laikin is using now.

It might be an iPhone, or it could be a Samsung Galaxy SII. One could never guess from the tagline on his e-mail, which is sent from a “wireless device.”

The brand cover-up speaks to Brightpoint’s position as a wireless industry middleman, constantly trying to strike deals with competing manufacturers and carriers. Those deals are important to Laikin as he tries to gain market share in distributing the world’s high-priced smartphones and tablets.

Laikin declined to talk about the distribution business with IBJ because of the wireless industry’s sensitivity to bias.

“When you look at new phones, it’s like saying which one of your children is your favorite,” Laikin told one stock analyst during a July 29 conference call. “New phones are all exciting. New phones are all great.”

Facts about BrightpointTake a look at Brightpoint’s latest financial results, and that certainly seems true. By increasing the number of smartphones it distributes, Brightpoint saw revenue rise 57 percent in the second quarter, to $1.2 billion.

Smartphones drove up the average selling price of all mobile devices to $209, and more of those dollars fell to the bottom line.

Brightpoint’s profit rose from $2.99 million in the second quarter of 2010 to $10.7 million in this year’s second quarter.

Laikin is counting on smartphones to benefit the other business lines, too. The logistics division can charge wireless carriers higher fees because more sophisticated devices require more services.

Now that people are spending hundreds of dollars on their phones, Brightpoint expects increased demand for repair and refurbishing services. That’s why it acquired recycling specialist Touchstone Wireless in December for $75.7 million.

Brightpoint handled nearly 98.8 million devices last year, and about 80 percent of them went through the logistics division. Brightpoint doesn’t own the stuff it handles for carriers like Sprint or T-Mobile, and the business has a high profit margin.

Yet logistics doesn’t bring in the dollars like distribution, which accounted for nearly 89 percent of the second-quarter revenue. Brightpoint wants to expand its distribution market share so it can negotiate better deals with the phone makers and retailers.

“We feel that to be relevant to the manufacturers and to the customers, you have to take market share,” Laikin told investors in April. “You have to be the biggest buyer of products.”

But there’s a risk as the company shells out its own money to fill warehouses with gadgets that could go the way of the Palm Pilot.

“One month it’s a hot Motorola phone at Verizon. Two months later, it’s a hot phone for HTC,” said Mike Walkley, managing director for wireless communications research at Canaccord Genuity in Minneapolis. “The hard thing for Brightpoint is making sure they’re making the right bets.”

Brightpoint grew in 2010 through agreements with Research in Motion to distribute the BlackBerry in Indonesia and Australia. Now Research in Motion, or RIM, is cutting 2,000 jobs and scrambling to keep its products relevant. The company unveiled five new phones on Aug. 3 that will be available later this month.

Brightpoint was forced to clear some inventory in the first quarter, Walkley said. “They never said RIM, but I’m pretty sure that’s who it was,” he said.

RIM’s loss of market share can be offset, as long as it goes to Brightpoint’s other distribution customers, such as Samsung, HTC and Nokia, said Matthew Thornton at Avian Securities in Boston.

The question is how much market share will fall to Apple, which does not use Brightpoint to distribute its iPhone or iPad.

“It’s about Apple versus everyone else,” Thornton said. “I think Apple is a continued share-gainer here at the expense of the all-other pool.”

Brightpoint does distribute Apple’s iPods in Australia and New Zealand, and Laikin has indicated that he’s working on larger deals.

In the meantime, Walkley is bullish on Apple’s competition, and he’s confident in Brightpoint’s ability to handicap the phone makers. He has a buy rating on the stock, which rose 14 percent, to $9.09, after second-quarter results beat Wall Street expectations.

The stock is still trading much lower than it was in March, before AT&T announced plans to buy T-Mobile USA, a Brightpoint logistics customer. The planned merger could take business from Brightpoint because AT&T is not currently a customer.

Brightpoint’s stock closed at $12.63 on March 18, the last day of trading before the AT&T-T-Mobile announcement.

Laikin called Brightpoint’s inventory risk-management methods a “secret sauce,” but Walkley said it’s simply a matter of having managers in each country who know what the locals want.

And that’s not necessarily an iPhone.

“In places like Indonesia, places like China, you’ve got to be price-sensitive,” said Will Stofega, program director for mobile device technology and International Data Corp. in Framingham, Mass. “In India, Apple hasn’t done well at all.”

Although Apple has quickly consumed smartphone market share, its numbers aren’t as dominating as one might think. A report on first-quarter share from Citigroup Global Markets shows Nokia in the top spot with 24 percent, followed by Apple at 18.5 percent.

The much-maligned RIM had 14.8 percent.

Brightpoint recently inked a distribution agreement with ZTE, a Chinese company that makes unbranded, or “white box,” phones. Brightpoint will distribute ZTE’s line of self-branded smartphones in the United Kingdom.

The fact that Brightpoint works with an array of phone makers soothes analyst fears about the inevitable flops. Jeffries analyst Peter Misek said in a July 25 research note that worry over Brightpoint’s exposure to losers Research in Motion and Nokia seem “overdone.”

Samsung represented 23 percent of revenue in 2010, Misek wrote. “We believe Brightpoint should benefit from the global roll-out of Samsung’s new flagship phone, the Galaxy S 2, which we believe will be a blockbuster.”

Citigroup analyst Jim Suva thinks the smartphone wave already has crested for Brightpoint. Though growth will continue in emerging markets, smartphones are already mainstream in North America and Western Europe, where Brightpoint derives the majority of its revenue, he said in a research note.

Laikin is already looking forward to a growing market for tablets, which cost $500 to $700. In April, he talked about driving from RadioShack to Best Buy and finally to Office Depot in search of a PlayBook for his son.

The tale was a defense of PlayBook maker RIM, but Laikin is bullish on tablets as a whole. He noted that 60 percent of tablets being sold are WiFi only, meaning the buyer did not sign a contract with a wireless carrier.

That suggests manufacturers, which often sell directly through wireless carriers, will need to use a company like Brightpoint to reach retail outlets.

“Once you have the customers,” Laikin said, “then they start buying higher-margin products from you, whether it’s an unlocked smartphone, or an accessory or aftermarket warranty-in-a-box, or some other product that you’re offering that is at a higher margin.

So we’re aggressively doing that.”•

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