Global Economics

Static for iPhone Supplier Balda


Analysts slam the German touch-screen maker for losses and opaque accounting, but stakeholders laud its China outsourcing and Apple connection

Just as the Apple (AAPL) iPhone launches in Europe, a German company that analysts believe is the major supplier of its unique touch screen is under fire for its financial practices and lagging profitability. Balda (BADG.DE), which makes touch screens in Xiamen, China, via a joint venture with Singapore-based TPK Holding, raised eyebrows on Oct. 31 when it sold $50 million in "convertible profit participation rights" to unnamed institutional investors.

The 8% interest rate on the paper, which is similar to a bond that can be converted to stock, struck analysts as too expensive, and they expressed frustration with the sparse information that Balda management disclosed about the reasoning behind the issue. Analyst Tobias Loskamp of BHF-Bank in Frankfurt, who's normally bullish on Balda, criticized management's "needless lack of transparency." A Balda spokesman said the company, which just hired a new chief financial officer, is striving to improve disclosure.

Downplaying Poor Numbers

Balda's earnings also came in lower than expected. The company's report to shareholders on Oct. 31 headlined earnings before interest and taxes of $3 million in the third quarter on sales of $114 million, vs. a loss of $20 million in the year-earlier period. But including discontinued operations, the company suffered a net loss of $30 million in the third quarter of 2007—a fact not mentioned in the press release though it was contained in the more detailed quarterly report. Balda also suffered from disappointing numbers in the previous quarter (BusinessWeek, 8/2/07).

Another point prompting criticism is that Balda is counting as discontinued operations money-losing units that the company is trying to sell but hasn't yet. The practice doesn't violate accounting rules but has fueled perceptions that Balda management is downplaying negative information. Balda has good prospects of selling the units before the end of the year, company spokesman Clas Röhl said.

The news wasn't all bad. Balda halved its quarterly loss from last year while more than doubling sales, and some major investors remain optimistic. Guy Wyser-Pratte, whose New York-based Wyser-Pratte & Co. owns 7% of Balda, said he continues to believe that Balda has a substantial lead over other touch-technology providers. Wyser-Pratte blames the 36% decline in Balda shares since July on "massive" short selling by rival hedge funds. "You have people wishing bad on the company, trying everything they can to spread bad stories," he says.

Apple Contracts Are Unconfirmed

Neither secrecy-obsessed Apple nor Balda has ever confirmed that Balda is supplying screens for the iPhone, which debuts in Europe Nov. 9. Deutsche Telekom (DT) will be selling the innovative handset in Germany while Telefónica's (TEF) O2 unit is selling it in Britain. The heart of the iPhone is its touch-screen interface, the specs for which closely match Balda technology. Balda boasts that its glass-surfaced screens are supposed to be more sensitive, thinner, and harder to scratch or smudge than conventional plastic touch displays. They offer sharper resolution and can sense several human digits simultaneously.

Balda is probably also supplying touch-screen components to the new iPod Touch, says BHF-Bank's Loskamp, who continues to rate the shares a "strong buy." However Apple, which historically does not like to be too dependent on any one supplier, also is commissioning screens from other companies such as Japan's Sharp (6753.T), industry watchers say.

Balda's future hinges on continuing to remain in Apple's good graces as bigger rivals try to duplicate or beat its technology. But the company isn't totally reliant on touch screens; Balda also makes plastic housings for handsets sold by companies such as Sony Ericsson.

Migrating to Asia

Despite Balda's relatively small size, it has attracted unusual interest from hedge funds and international investors. FMR Corp., better known as Fidelity Investments, owns 9.7%, according to Balda. The largest outside shareholder is London-based Audley Capital with a stake of more than 10%. Along with Wyser-Pratte, Audley has urged Balda Chief Executive Officer Joachim Gut to shift almost all the company's operations to Asia, where costs are lower and where most other suppliers are located.

Michael Treichl, managing partner of Audley, expressed some frustration at the pace of restructuring at Balda and the time it has taken for the company to profit from its iPhone work. But he added, "They're finally doing what we have told them to do, which is essentially turn into an Asian business."

Ewing is BusinessWeek's European regional editor .

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