With the financial services industry under increasing pressure due to the credit crunch, the timing couldn't be worse for BearingPoint Inc. (BE) to be seeking a turnaround in its business.
The management and technology consulting services company has been fighting to return to profitability in recent years, compounded by being late in filing its quarterly financial results since its top management was ousted in 2004 for alleged accounting irregularities.
On Friday, Sept. 7, the McLean, Va., company belatedly reported a net loss of 29 cents a share for the first quarter of 2007, vs. a 34-cent loss a year earlier. Revenues rose 3.9% from a year ago to $866.3 million, but auditing and stock-based employee compensation expenses were also higher.
The government services business grew by 9.2% but financial services revenues dropped 35% from a year ago, hurt by the loss of a large, unnamed client account, Chief Financial Officer Judy Ethell said during a conference call after the market close on Sept. 7.
BearingPoint has also found it hard to secure long-term commitments from new clients partly due to clients' concerns about the company's financial condition since a court ruling last year that found it in technical default of some of its convertible debt, she said.
Shares fell 13.5% on Sept. 10.
The company's first-quarter loss was much larger than the 16-cent loss estimated by Andrew Steinerman, an equities analyst at Bear, Stearns & Co., with narrowing gross margins the problem
In a research note on Sept. 10, Steinerman said that BearingPoint's employee attrition rate remains troublesome and warned of the significant cumulative impact it will have. He also said he saw slim chance of the company being able to spin off its European business by the en d of this year, given the recent upheaval in credit markets. He expanded his loss estimate for 2007 to 55 cents a share and cut his 2008 profit forecast to 20 cents from 35 cents a share.
The biggest challenge for BearingPoint is how it will fare if conditions in the economy worsen considerably, said Moshe Katri, an analyst for Cowen and Company.
"It's not just their exposure to financial services, but when there's a slowdown in the economy, it typically triggers cutbacks in discretionary spending" in information technology, he said.
During the last recession in 2001-2002, the bulk of these cutbacks affected services being offered on-site on clients' premises, while companies that were able to offer the same services offshore at a discount benefited. That puts BearingPoint at a disadvantage, as it has a minimal presence offshore, Katri said.
In addition, the market is beginning to realize that even when the company does become profitable again, its profit margins on the basis of Generally Accepted Accounting Principles are likely to be constrained by the fact that it now has to include the impact of the stock options it's been paying out to employees to retain them.
At its peak, when the company was still known as KPMG Consulting, the margins on its earnings before interest and taxes were 11% to 12%, and that was before dilution from stock options had to be accounted for, Katri said.
"When you look at it on a GAAP basis, I wouldn't be surprised if the EBIT margin would be cut by half," he said. "In terms of earnings power, the stock's really not attractive."