NEW YORK-CellStar Corp., Carrollton, Texas, announced a significant slide in net income for the third quarter ended Aug. 31, to $2.4 million from $16.2 million posted during the same period a year ago.
However, the wireless handset distributor reported a revenue increase of 13.5 percent, to $502 million from $442 million reported in the third quarter 1997.
CellStar attributed the earnings decline to three major factors. First, it had invested $25 million through Aug. 31 in Topp Telecom Inc., a reseller of prepaid wireless services with about 125,000 customers.
“[We] expect Topp to incur pre-tax losses of $10 (million) to $12 million per quarter … near term as it continues to grow its customer base and fund the … costs to acquire new customers,” CellStar said.
Second, the company reported a squeeze on margins.
“Gross profit as a percentage of revenues declined to 8.2 percent from recent historical levels in the 10 percent range, principally due to the impact of lower margins in [China] compared with those in Hong Kong, an increase in European revenues, which have lower margins than [our] other regions and the unsettled economic environment in Latin America, which reduced demand and margins for CellStar products.”
In a related development, Moody’s Investors Service, New York, announced Sept. 24 it was revising its outlook to negative from positive on the B-range speculative-grade ratings of $285 million in CellStar debt. Among the rating agency’s concerns are “the longer term effects of current volume and pricing issues faced by CellStar in high-growth emerging markets.”
Capital investment related to expansion activities worldwide is the third reason for its third-quarter profit decline, CellStar said.
Selling, general and administrative expenses totaled $27.5 million, or 5.5 percent of revenues, vs. $20.4 million, or 4.6 percent of revenues during the third quarter of 1997.
Revenues from its Asia-Pacific operations, primarily in the People’s Republic of China, increased to $152 million, up from $106 million “owing to [our] broadened source of product manufactured within the PRC and the impact of tighter controls, beginning in August, on products entering the PRC,” CellStar said.
“Quarterly revenues in Singapore and the Philippines once again declined year-over-year as demand for wireless products continued to languish as the result of their general economic, financial and currency conditions.”
The company’s European operations earned revenues of $76 million, triple the $25 million posted in the third quarter of last year.
In Latin America, the handset distributor also posted sharply increased sales of $72 million, compared with $43 million in the year-ago quarter.
However, CellStar’s domestic revenues declined to $201 million from $269 million.
“Revenues [from] Pacific Bell Mobile Services were higher in the third quarter of 1997 compared with the third quarter of 1998 due to the (1997) rollout of [personal communications services] product in certain West Coast markets as part of the initial buildout of its systems,” CellStar said.
“(There were) reduced sales from [our] Miami warehouse to customers exporting to South America, primarily to Brazil. Demand for [our] products destined for export to Brazil slackened in August after Brazilian customs authorities imposed tighter import controls.”
In a separate announcement related to domestic distribution, Bosch Telecom Inc. said Sept. 29 that CellStar “holds distribution rights in the United States” for its Bosch World 718 phone, which works on GSM 900 and PCS/GSM 1900 standards.
