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BRINKS HOME SECURITY HOLDINGS INC Reports Operating Results (10-Q)

May 08, 2009 | About:

BRINKS HOME SECURITY HOLDINGS INC (CFL) filed Quarterly Report for the period ended 2009-03-31.

BRINK'S HOME SECURITY HOLDINGS INC. is one of the premier providers of security system monitoring services for residential and commercial properties in North America. Brink's Home Security operates in more than 250 metropolitan areas and services approximately 1.3 million customers across the Unites States and Canada. BRINKS HOME SECURITY HOLDINGS INC has a market cap of $1.26 billion; its shares were traded at around $27.62 with and P/S ratio of 2.4.

Highlight of Business Operations:

Cost of revenues decreased by $4.7 million or 6.7% to $65.2 million in the first quarter of 2009 from $69.9 million in the comparable prior period, which was due primarily to the decline in the royalty rate from approximately 7% of revenues in the first quarter of 2008 to approximately 1.25% of revenues in the first quarter of 2009, and a reduction in field technician staff and related expenses, partially offset by increases in cost of revenues resulting from growth in the subscriber base. Cost of revenues was 47.9% of revenues in the first quarter of 2009 and 54.7% in the comparable prior quarter. Had the royalty rate been approximately 1.25% of revenues in the first quarter of 2008, cost of revenues would have been $7.1 million less, totaling $62.8 million or 49.1% of revenues. Refer to Reconciliation of Non-GAAP Measures section for further analysis on the impact of the change in royalty rate on cost of revenues.

Selling, general and administrative expenses increased by $8.8 million or 24.0% to $45.5 million in the first quarter of 2009 from $36.7 million in the comparable prior period. The increase was primarily due to a $4.0 million accrued litigation charge, approximately $2.5 million of increased spending to support additional corporate functions required as a result of the Spin-off, and $1.1 million of consulting fees incurred for brand development. These increases were partially offset by the elimination of corporate overhead costs allocated to us by BCO prior to the Spin-off, which were $2.0 million for the three months ended March 31, 2008. Selling, general and administrative expenses were 33.5% of revenues in the first quarter of 2009 and 28.7% in the prior comparable period.

Operating profit increased $3.9 million or 18.4% to $25.1 million in the first quarter of 2009 from $21.2 million in the prior comparable period, driven primarily by higher profits from recurring services on our larger subscriber base and the decrease in the royalty rate. These improvements were partially offset by a $4.0 million accrued litigation charge, costs to support additional corporate functions required as a result of the Spin-off, and $1.1 million of consulting fees incurred for brand development. Operating margin was 18.5% in the first quarter of 2009 compared to 16.6% in the first quarter of 2008. Had the royalty rate been approximately 1.25% of revenues in 2008, operating profit in the first quarter of 2008 would have been $28.3 million, a 22.1% operating margin. Refer to Reconciliation of Non-GAAP Measures section for further analysis on the impact of the change in royalty rate on operating profit.

In the first quarter of 2009, we reported net income of $15.2 million, or $0.33 per share, compared to $12.8 million, or $0.28 per pro forma share, for the prior comparable period. As previously discussed, the first quarter 2009 benefited from the decrease in the royalty expense, partially offset by a $4.0 million accrued litigation charge, and $1.1 million of brand development costs. Net income for the three months ended March 31, 2009 decreased $3.4 million after the tax effect of these two incurred costs. The impact on earnings per share was $0.07. Refer to Reconciliation of Non-GAAP Measures section for further analysis on the impact of the change in royalty rate on net income.

We believe that operating profit in 2009 will be impacted by higher cost, primarily marketing in nature, incurred in the new branding effort. Total incremental brand development, brand marketing, and other conversion costs during 2009 are expected to be approximately $25 million, of which $1.1 million was incurred in the first quarter of 2009. We expect to incur about $2 million in brand development costs during the second quarter of 2009 and to introduce our new brand early in the third quarter of 2009. We currently estimate that total incremental costs of the branding effort across a 24-month to 36-month period could range from $70 million to $120 million on a pre-tax basis, a decrease of $30 million from our previous estimated range. The actual level of spending could increase or decrease depending on the level of success of the brand introduction and its recognition and acceptance. We also note that the brand marketing effort will likely increase our installation activity. Notwithstanding the additional $25 million of anticipated expense, we expect that operating profit for 2009 will increase from the $94.0 million in operating profit we generated in 2008. We currently expect that the incremental branding costs will be funded from existing cash balances and future cash flows from operations. See the Liquidity and Capital Resources section for further discussion.

Cash Invested in New Subscribers: Cash invested in new subscribers increased 1.1% to $63.9 million in the first quarter of 2009 from $63.2 million in the prior year comparable period. The increase was primarily the result of $1.1 million of consulting fees incurred for brand development during the first quarter of 2009, partially offset by a decrease in installation volume as compared to the prior year quarter. The average cash investment per new subscriber was $1,484 in the first quarter of 2009, and $1,417 in the prior year comparable period. Excluding the brand development costs, the cash investment per new subscriber in the first quarter of 2009 would have been $1,459. The increase is primarily the result of increased equipment and materials costs, and increased advertising spend per new subscriber.

Read the The complete ReportCFL is in the portfolios of George Soros of Soros Fund Management LLC, John Keeley of Keeley Fund Management.

Rating: 2.8/5 (4 votes)

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