Fool.com: Black Box Just Beats Street (News) October 14, 1999

Black Box Just Beats Street

By Dave Marino-Nachison (TMF Braden)
October 14, 1999

Shares of private-label computer communications and networking products and services marketer Black Box Corp. (Nasdaq: BBOX) were up nearly 10% today following news of strong fiscal second-quarter results.

Revenues for the quarter increased 49% to $117.9 million from $79.1 million last year. EPS was $0.62, well ahead of the $0.49 for the same period last year, and a penny better than First Call's seven-analyst consensus estimate. Free cash flow for the quarter was $7.9 million.

There were some reasons for caution, however. Gross margins fell to 43.4% from 48.8% while operating margins also moved back slightly, slipping to 16.8% from 18.4%.

What's worth noting is that the slumping profitability numbers appear to be the culprit of the company's fastest-growing division, on-site services. Phone support service revenue was up 20% in Q2, but that figure paled in comparison to the 427% jump in on-site service revenues.

Earnings before interest, taxes, and amortization (EBITA) were 18%, phone support services at 20%, and on-site services coming in at 13%. Black Box believes on-site services will improve to at least 15% over the next 12 months.

That's a good thing, because Black Box today upped its revenue estimates for the on-site division, boosting its fiscal 2000 annualized revenue target for new on-site services from $125 million to $200 million. Current annualized revenue from the division is about $120 million, up from last year's annualized $55 million. (Total fiscal 1999 revenues were $330 million.)

Two acquisitions announced last month -- a Washington, D.C.-area cabling installation and services company and Black Box's joint venture partner in Spain -- stand to boost the reach of the company's on-site service offerings. A March merger with U.K.-based Ohmega Installations was essentially the first to push the company's on-site services overseas, but the aforementioned Spain deal may be the signal of more to come.

Topline growth is nice, but how about profitability? In various public statements, Black Box CEO Fred Young has told investors that profit numbers at the on-site services operation were slated to improve in time. The company just started offering them in fiscal 1999, with the assertion that its market opportunity might eventually rocket to 70% of the worldwide telecommunications market from its current level of approximately 7%. Those are the numbers investors should watch closely.

Investors appear to be behind Young, given today's move and the stock's strong 1999 performance. But that doesn't mean the company's progress shouldn't be carefully monitored as it moves into new business opportunities.

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